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 31, 2021 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 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 inDenmark and through local representatives and distributors. The products are shipped directly to customers from our production facilities inDenmark . 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 inLiqTech Holding 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 subsidiariesLiqTech 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") and LiqTech Emission Control A/S ("LiqTech Emission Control"), all Danish limited companies organized under the Danish Act on Limited Companies of the Kingdom ofDenmark , andLiqTech NA, Inc. , aDelaware corporation ("LiqTech NA "). Collectively,LiqTech USA ,LiqTech Holding , LiqTech Ceramics,LiqTech Water, LiqTech Plastics, LiqTech Water Projects,LiqTech Emission Control and LiqTech NA 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, membranes, and water treatment solutions through our focus on discrete applications in key end markets. Essential features of our strategy include:
? Retain and acquire new customers in the marine industry. We currently
provide water filtration systems for scrubber technology providers,
shipowners, and ship operators. We are expanding our range of marineproducts to better leverage existing customer relationships and develop new
relationships.
? Enter new geographic markets and expand existing markets. We plan to
continue to manufacture and sell our products from our manufacturing center
in
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
where we intend to advance our efforts to maintain our market position in
this area. Furthermore, we intend to leverage our OEM market experience by
expanding our presence with new products and markets 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 of 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 the company significant opportunities.
? 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 membranes, and we will also combine the ceramic membranes
with other technologies to offer our customers complete filtration
solutions. Moreover, we will continue developing smaller standard systems,
like those for groundwater treatment and residential swimming pools.
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Table of Contents 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 income for the
three months ended
Three Months Ended June 30,
Period to Period Change
As a % As a % Percent
2021 of Sales 2020 of Sales Variance %
Revenue 4,016,563 100.0 % 4,641,483 100.0 % (624,920 ) (13.5 )%
Cost of Goods Sold 3,695,853 92.0 4,147,020 89.3 (451,167 ) (10.9 )
Gross Profit 320,710 8.0 494,463 10.7 (173,753 ) (35.1 )
Operating Expenses
Selling expenses 1,202,586 29.9 605,947 13.1 596,639 98.5
General and administrative
expenses 1,247,132 31.0 1,509,772 32.5 (262,640 ) (17.4 )
Research and development
expenses 434,629 10.8 316,559 6.8 118,070 37.3
Total Operating Expenses 2,884,347 71.8 2,432,278 52.4 452,069 18.6
Loss from Operation (2,563,637 ) (63.8 ) (1,937,815 ) (41.7 ) (625,822 ) 32.3
Other Income (Expense)
Interest and other income - - 247 0.0 (247 ) (100.0 )
Interest (expense) (215,598 ) (5.4 ) (36,047 ) (0.8 ) (179,551 ) 498.1
Amortization discount,
Convertible Note (251,804 ) (6.3 ) - - (251,804 ) -
Fair value adjustment of
warrants - - (236,900 ) (5.1 ) 236,900 (100.0 )
Gain (loss) on currency
transactions (83,696 ) (2.1 ) (368,561 ) (7.9 ) 284,865 (77.3 )
Gain (loss) on sale of
fixed assets 1,134 0.0 - - 1,134 -
Total Other Income
(Expense) (549,964 ) (13.7 ) (641,261 ) (13.8 ) 91,297 (14.2 )
Loss Before Income Taxes (3,113,601 ) (77.5 ) (2,579,076 ) (55.6 ) (534,525 ) 20.7
Income Tax Benefit (15,493 ) (0.4 ) (15,265 ) (0.3 ) (228 ) 0.0
Net Loss (3,098,108 ) (77.1 ) (2,563,811 ) (55.2 ) (534,297 ) 20.8
Revenues
Revenue for the three months ended June 30, 2021 was $4,016,563 compared to
$4,641,483 for the same period in 2020, representing a decrease of $624,920 , or
13%. The change in sales mainly consists of a decrease in liquid filters and
water treatment systems of $1,471,707 , offset by an increase in sale of plastic
components of $253,986 and DPFs and membranes of $650,048 . The decrease in sales
of liquid filters and water treatment systems is a result of the negative impact
of the ongoing COVID-19 pandemic, which has resulted in significant restrictions
and business limitations across the globe and has caused a substantial decline
in the demand and delivery of water treatment systems for the marine scrubber
industry. The demand for our DPFs and membranes increased by 56% based on the
favorable customer interest in environmental solutions to reduce global CO2
emissions. The increase in sales of plastic components is related to the onset
of more programmatic sales efforts that started in 2020 and realized favorable
effects in 2021.
Gross Profit
Gross profit for the three months ended June 30, 2021 was $320,710 compared to
gross profit of $494,463 for the same period in 2020, representing a decrease of
$173,753 , or 35%. The decrease in gross profit is due largely to the decline in
sales of liquid filters and water treatment systems, where sales command a
higher gross margin. Additionally, gross profit in the water treatment business
has been negatively impacted by more competitive market pricing during the
COVID-19 economic downturn. Gross profit was further impaired by increased costs
related to decisions made prior to the impact of COVID-19, when the Company had
invested in the expansion and improvement of production facilities along with
the hiring of additional employees. Included in the gross profit is depreciation
of $512,736 and $491,374 for the three months ended June 30, 2021 and 2020,
respectively.
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Table of Contents Expenses
Total operating expenses for the three months ended
Selling expenses for the three months endedJune 30, 2021 were$1,202,586 compared to$605,947 for the same period in 2020, representing an increase of$596,639 , or 98%. This change is attributable to the hiring of additional sales employees to implement our growth strategy, increasing from an average of 11 in 2020 to an average of 20 in 2021. Further the company has invested in additional marketing activities to help increase future sales. General and administrative expenses for the three months endedJune 30, 2021 were$1,247,132 compared to$1,509,772 for the same period in 2020, representing a decrease of$262,640 , or 17%. This change is attributable to various cost saving initiatives, including a reduction of the number of administrative employees from an average of 24 in 2020 to an average of 13 in 2021. Included in general and administrative expenses is non-cash compensation of$125,076 and$82,335 for the three months endedJune 30, 2021 and 2020, respectively, representing an increase of$42,741 , or 52%, 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,
2021 2020Compensation for vesting of restricted stock awards issued to the Board of Directors
$ 49,375 $ 40,668 Compensation for vesting of restricted stock awards issued to management 75,701 41,667 Total Non-Cash Compensation$ 125,076 $ 82,335 Research and development expenses for the three months endedJune 30, 2021 were$434,629 compared to$316,559 for the same period in 2020, representing an increase of$118,070 , or 37%. This change is attributable to an increase in the number of employees engaged in research and development activities as the Company focuses on the further development of existing and new products for the marine industry and other markets. Other Income (Expenses) Other Income (Expenses) for the three months endedJune 30, 2021 was$(549,964) compared to$(641,261) for the comparable period in 2020, representing a favorable variance of$91,297 . The decrease in Other Income (Expenses) is mainly caused by a reduction in loss on currency transactions as a result of a less volatile development in the DKK/USD currency rate during the period. Included in Other Income (Expenses) is an expense of$251,804 related to the amortization of discount and interest expenses of$170,834 related to the Convertible Note issued inApril 2021 . Net Loss
Net loss for the three months ended
This change was primarily attributable to the decrease in revenue due to reduced
demand for marine scrubbers, higher relative costs of goods sold as a percentage
of revenue due to investments in production capacity, and the increase in
operating expenses caused primarily by the growth in headcount to support
additional sales and production.
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Table of Contents
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
2021 Sales 2020 Sales $ %
Revenue 8,014,440 100.0 % 14,923,327 100.0 % (6,908,887 ) (46.3 )%
Cost of Goods Sold 7,579,115 94.6 11,789,788 79.0 (4,210,673 ) (35.7 )
Gross Profit 435,325 5.4 3,133,539 21.0 (2,698,214 ) (86.1 )
Operating Expenses
Selling expenses 2,212,084 27.6 1,282,747 8.6 929,337 72.4
General and administrative
expenses 2,721,802 34.0 3,059,530 20.5 (337,728 ) (11.0 )
Research and development
expenses 872,236 10.9 627,513 4.2 244,723 39.0
Total Operating Expenses 5,806,122 72.4 4,969,790 33.3 836,332 16.8
Loss from Operations (5,370,797 ) (67.0 ) (1,836,251 ) (12.3 ) (3,534,546 ) 192.5
Other Income (Expense)
Interest and other income - - 4,737 0.0 (4,737 ) (100.0 )
Interest expense (256,017 ) (3.2 ) (61,538 ) (0.4 ) (194,479 ) 316.0
Amortization discount,
Convertible Note (251,804 ) (3.1 ) - - (251,804 ) -
Fair value adjustment of
warrants - - (236,900 ) (1.6 ) 236,900 (100.0 )
Loss on currency
transactions 287,988 3.6 (160,934 ) (1.1 ) 448,922 (278.9 )
Gain (loss) on sale of
fixed assets 1,134 0.0 - - 1,134 -
Total Other Income
(Expense) (218,699 ) (2.7 ) (454,635 ) (3.0 ) 235,936 (51.9 )
Loss Before Income Taxes (5,589,496 ) (69.7 ) (2,290,886 ) (15.4 ) (3,298,610 ) 144.0
Income Tax Benefit (31,959 ) (0.4 ) (30,574 ) (0.2 ) (1,385 ) 4.5
Net Loss (5,557,537 ) (69.3 ) (2,260,312 ) (15.1 ) (3,297,225 ) 145.9
Revenues
Revenue for the six months ended June 30, 2021 was $8,014,440 compared to
$14,923,327 for the same period in 2020, representing a decrease of $6,908,887 ,
or 46%. The change in revenue consists of a decrease in sales of liquid filters
and water treatment systems of $8,294,657 , offset by an increase of sales in
DPFs and membranes of $1,021,050 and an increase in sales of plastic components
of $486,601 . 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 demand for our DPFs and membranes increased by 38%
based on favorable customer interest in environmental solutions to reduce global
CO2 emissions. The increase in sales of plastic components is related to the
onset of more programmatic sales efforts that started in 2020 and realized
favorable effects in 2021.
Gross Profit
Gross profit for the six months ended June 30, 2021 was $435,325 compared to
gross profit of $3,133,539 for the same period in 2020, representing a decrease
of $2,698,214 , or 86.1%. The decrease in gross profit is largely due to the
decline in sales of liquid filters and water treatment systems, where sales
command a higher gross margin. Additionally, gross profit in the water treatment
business has been negatively impacted by more competitive market pricing during
the COVID-19 economic downturn. Included in the gross profit is depreciation of
$967,055 and $907,639 for the six months ended June 30, 2021 and 2020,
respectively.
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Table of Contents Expenses Total operating expenses for the six months endedJune 30, 2021 were$5,806,122 , representing an increase of$836,332 , or 17%, compared to$4,969,790 for the same period in 2020. Selling expenses for the six months endedJune 30, 2021 were$2,212,084 compared to$1,282,747 for the same period in 2020, representing an increase of$929,337 , or 72.4%. This change is attributable to the addition of new sales employees from an average of 12 in 2020 to an average of 19 in 2021. Further the Company has invested significantly in other sales and marketing activities including increased on-line advertising, a new CRM software, additional sales agents in various countries, and other measures. General and administrative expenses for the six months endedJune 30, 2021 were$2,721,802 compared to$3,059,530 for the same period in 2020, representing a decrease of$337,728 , or 11%. This change is attributable to the various cost saving programs introduced as a result of the COVID-19 impact on the business. The primary impact is from the reduction in the number of administrative employees that decreased from 25 in 2020 to 13 in 2021. Included in general and administrative expenses is Non-cash compensation expenses, that were$227,464 and$223,557 for the six months endedJune 30, 2021 andJune 30, 2020 , respectively, representing an increase of$3,907 or 2%, attributable to increased stock grants to members of the management, offset by reduced stock grants to the Board.
The following is a summary of non-cash compensation:
For the Six Months Ended
June 30 , June 30,
2021 2020Compensation for vesting of restricted stock awards issued to the Board of Directors
$ 98,750 $ 126,334 Compensation for vesting of restricted stock awards issued to management 128,714 97,223 Total Non-Cash Compensation$ 227,464 $ 223,557 Research and development expenses for the six months endedJune 30, 2021 were$872,236 compared to$627,513 for the same period in 2020, representing an increase of$244,723 , or 39%. 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 and other activities. Net Loss
Net loss for the six months ended
This change was primarily attributable to the significant decrease in revenue and the related decrease in gross profit. Further the increase in operating expenses caused primarily by the growth in headcount to support additional sales and production exacerbated the increased loss for the six months endedJune 30, 2021 compared to the same period in 2020. 30
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Liquidity and Capital Resources
Based on the still ongoing negative effects of the global pandemic, we are unable to 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. Our compliance with the measures implemented to avoid the spread of the virus had a material adverse impact on our financial results sinceMarch 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 along with 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 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 2021. 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 how our business may be adversely affected 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 limitations in our ability to produce and ship products caused by governmental actions and regulations to contain the spread of the virus. 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 toDKK 20,000,000 ($3,000,000 ), which is used for a leasing arrangement and guarantees issued to customers for prepayments and for warranties after delivery. OnJune 30, 2021 , we had cash of$25,116,746 and net working capital of$21,671,773 , and onDecember 31, 2020 , we had cash of$13,264,449 and net working capital of$15,839,992 . OnJune 30, 2021 , our net working capital had increased by$5,831,781 compared toDecember 31, 2020 as a result of an increase in cash and cash equivalents due to the proceeds from the issuance of a Convertible Note inApril 2021 and an increase in accrued expenses. This was offset by a decrease in account receivables and contract assets/liabilities as well as a decrease in account payables. 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 ofDKK10,000,000 (approximately$1,500,000 ). The credit line is secured by a cash deposit of$1,500,000 . Cash Flows
Six months ended
Cash provided by (used in) operating activities is net loss adjusted for certain non-cash items and changes in assets and liabilities. Cash used in operating activities for the six months endedJune 30, 2021 was$(910,259) , representing a decrease of$(2,140,195) compared to cash provided by operating activities of$1,229,936 for the six months endedJune 30, 2020 . The cash used in operating activities for the six months endedJune 30, 2021 consists mainly of the net loss for the period of$(5,557,537) adjusted for depreciation and other non-cash related items of$1,744,990 . Further, changes in assets and liabilities include decreased accounts receivables of$633,533 , a decline in net contract assets/liabilities of$1,658,635 , an increase in accrued expenses of$1,754,808 and tax benefits of$336,395 , offset by increased inventories of$231,899 and a decrease in accounts payable of$504,841 . Net cash used in investing activities was$717,232 for the six months endedJune 30, 2021 as compared to net cash used in investing activities of$2,194,618 for the six months endedJune 30, 2020 , representing a decrease of$1,477,386 . The investing activities include the purchase of equipment primarily related to the installation of new furnaces in Ballerup to increase production capacity and an amount of$180,045 for new machinery in Plastics to support customer needs for additional production capabilities. Cash provided from financing activities was$14,090,829 for the six months endedJune 30, 2021 as compared to net cash provided from financing activities of$7,302,075 for the six months endedJune 30, 2020 . Cash provided from financing activities for the period endedJune 30, 2021 consisted primarily of the net funding from the Convertible Note issued inApril 2021 . The amount was$15,000,000 reduced by costs of$716,667 related to the agreement. Further, financing activities has been negatively impacted by the payment of$192,504 mainly related to the furnace lease agreement.
Off Balance Sheet Arrangements
As of
31
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Table of Contents
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
None.
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