Overview





We are a Nevada corporation, formerly named Blue Moose Media, Inc. In October
2011, we changed our name to LiqTech International, Inc. For more than a decade
we have developed and provided state-of-the-art technologies for gas and liquid
purification using ceramic silicon carbide filters, particularly highly
specialized filters for the control of soot exhaust particles from diesel
engines and for liquid filtration. Using nanotechnology, LiqTech develops
products using proprietary silicon carbide technology. LiqTech's products are
based on unique silicon carbide membranes that facilitate new applications and
improve existing technologies. In particular, LiqTech Systems A/S, the Company's
subsidiary, has developed a new standard of water filtration technology to meet
the ever-increasing demand for higher water quality. By incorporating LiqTech's
SiC liquid membrane technology with its long-standing systems design experience
and capabilities, the Company offers solutions to the most difficult water
pollution problem.

Acquisition of LiqTech Systems





On July 29, 2014, the Company, through its subsidiary, LiqTech Int. DK,
completed the acquisition of all of the issued and outstanding capital stock
(the "Shares") of Provital Solutions A/S, a Danish company (now known as LiqTech
Systems) from Masu A/S, a Danish company ("MASU") controlled by Sune Mathiesen.
In consideration for the Shares, MASU received cash consideration in the amount
of DKK12,600,000, or approximately $2,300,000 (at the exchange rate on July 28,
2014), and 4,044,782 shares of the Company's common stock (the "Payment
Shares"). Two-thirds (2/3) of the Payment Shares were held in escrow and subject
to achievement of certain milestones. The milestones were not achieved, and such
Payment Shares were forfeited and returned to treasury on December 31, 2016.



Acquisition of BS Plastic



On August 31, 2019, the Company, through its subsidiary, LiqTech Int. DK,
completed the acquisition of all of the issued and outstanding capital stock
(the "Shares") of BS Plastic A/S, a Danish company (now known as BS Plastic)
from JS Holding Risskov A/S, a Danish company ("JS Holding") controlled by Steen
Simonsen. In consideration for the Shares, JS Holding received cash
consideration in the amount of DKK9,000,000, or approximately $1,332,090 (at the
exchange rate on August 31, 2019). Further JS Holding is entitled to an
additional DKK6,000,000 or $888,060 (at the exchange rate on August 31, 2019) if
certain financial targets are met with DKK2,000,000 ($296,020) for the period
July 2019 to June 2020, DKK2,000,000 ($296,020) for the period July 2029 to June
2021 and DKK2,000,000 ($296,020) for the period July 2021 to June 2022.



2019 Developments



On January 14, 2019, we provided an update to the market that we currently had
confirmed orders for more than 110 of our standardized water filtration systems.
In addition to the confirmed orders, we expected to deliver a significant amount
of systems in 2019 under the Framework Agreement announced on October 1, 2018.
Positive visibility to order flow delivery affirmed expectations for the second
quarter of 2019 revenue to surpass the first quarter of 2019, setting another
new record for the Company.



On March 28, 2019 the Company preannounced a record quarter with revenue of $7
million and profitability for the first quarter of 2019. Further, the Company
announced that the current order backlog continued to grow, increasing from the
110 standardized systems reported on January 14, 2019. The Company also
announced its intention to move the trading of its common stock to the Nasdaq
Capital Market.



On May 21, 2019 the Company announced that it had commenced an underwritten
registered public offering of its common stock. The Company intended to use the
net proceeds from the offering to fund the growth of the business, including
adding manufacturing capacity through equipment purchases, funding continued
research and development efforts, for general corporate purposes, and the
potential insourcing of currently outsourced manufacturing.



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On May 22, 2019 the Company announced the upsizing and pricing of the previously
announced underwritten public offering of 1,931,035 shares of its common stock
at a public offering price of $7.25 per share. As part of the offering, LiqTech
granted the underwriters a 30-day option to purchase at the public offering
price up to an additional 284,827 shares of its common stock to cover
over-allotments, if any. All shares of common stock to be sold in the offering
were offered by LiqTech. The offering was closed on May 24, 2019 with the sale
of 2,215,862 shares of $7.25 granting a total gross proceeds of $16,065,000.

On August 20, 2019, the Company announced the signing of a Share Purchase Agreement (SPA) to acquire BS Plastic A/S, a specialized plastics manufacturer based in Denmark.

On August 26, 2019, the Company announced the receipt of the largest single order to date ($8.4 million) for its proprietary ceramic silicon carbide water filtration systems for marine scrubber applications.

On September 4, 2019 the Company announced the closure of the announced agreement to acquire BS Plastic A/S.





2020 Developments



On January 2, 2020 the Company announced the successful installation of a
brand-new customized furnace for use in the manufacture of the Company's
proprietary silicon carbide membrane filters. The new furnace has throughputs
that is more than triple the Company's existing furnaces due to its size and
efficiency.



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Results of Operations

Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018





The following table sets forth our revenues, expenses and net income for the
year ended December 31, 2019 and 2018 in U.S. dollars, except for percentages.



                                                      For the Year Ending December 31,
                                                                                              Period to Period
                                                                                                   Change
                                           As a %                          As a %
                            2019          of Sales          2018          of Sales           $            Percent %
Revenue                   32,637,484          100.0 %     12,232,088          100.0 %     20,405,396           166.8 %
Cost of Goods Sold        25,475,170           78.1       11,165,944           91.3       14,309,226           128.2

Gross Profit               7,162,314           21.9        1,066,144            8.7        6,096,170           571.8

Operating Expenses
Selling expenses           2,426,971            7.4        1,703,327           13.9          723,644            42.5
General and
administrative
expenses                   4,378,444           13.4        3,187,311           26.1        1,191,133            37.4
Research and
development expenses         749,249            2.3          661,014            5.4           88,235            13.3
Total Operating
Expenses                   7,554,664           23.1        5,551,652           45.4        2,003,012            36.1

Profit/(Loss) from
Operating                   (392,350 )         (1.2 )     (4,485,508 )        (36.7 )      4,093,158           (91.3 )

Other Income
(Expense)
Interest and other
income                        73,635            0.2           28,401            0.2           45,234           159.3

Interest (expense) (203,603 ) (0.6 ) (71,781 ) 

    (0.6 )       (131,822 )         183.6
Gain/(Loss) on
currency transactions        285,742            0.9          344,023            2.8           58,281           (16.9 )
Gain/(Loss) on sale
of fixed assets              (21,060 )         (0.1 )          4,907            0.0          (25,962 )        (529.2 )
Total Other Income
(Expense)                    134,714            0.4          305,550

2.5 (170,836 ) (55.9 )



Income/(Loss) Before
Income Taxes                (257,636 )         (0.8 )     (4,179,958 )        (34.2 )      3,922,322           (93.8 )
Income Taxes Expense
(Benefit)                   (297,252 )         (0.9 )       (365,430 )         (3.0 )         68,178           (18.7 )

Net Income/(Loss)             39,616            0.1       (3,814,528 )        (31.2 )      3,854,144          (101.0 )




Revenues



Revenue for the year ended December 31, 2019 were $32,637,484 compared to
$12,232,088 for the same period in 2018, representing an increase of
$20,405,396, or 166.8%. The change in sales consists of an increase in liquid
filters of $20,199,951, an increase in plastics of $895,203, an increase in
development projects of $193,641 and a decrease in DPFs of $883,400. The
increase in demand for our liquid filters and systems is due to the ramp-up in
delivery of water treatment systems for the marine scrubber industry. The
decrease in demand for our DPFs is mainly due to the diminished market activity
globally compared to the same period of last year. The increase in sales of
plastic components is related to the newly acquired business in 2019.



Gross Profit



Gross profit for the year ended December 31, 2019 was $7,162,314 compared to
$1,066,144 for the same period in 2018, representing an increase of $6,096,170,
or 571.8%. The increase in gross profit is due to a positive mix shift toward
liquid filters and systems, where sales command a higher gross margin. Included
in the gross profit is depreciation of $1,131,008 and $819,070 for the years
ended December 31, 2019 and 2018, respectively.



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Expenses



Total operating expenses for the year ended December 31, 2019 were $7,554,664,
representing an increase of $2,003,012 or 36.1%, compared to $5,551,652 for the
same period in 2018.



Selling expenses for the year ended December 31, 2019 were $2,426,971 compared
to $1,703,327 for the same period in 2018, representing an increase of $723,644
or 42.5%. This change is attributable to an increase in sales activities and the
addition of new sales employees from an average of seven in 2018 to an average
of nine in 2019. Further the participation in tradeshows and exhibitions
increased in 2019 compared to the same period in 2018.



General and administrative expenses for the year ended December 31, 2019 were
$4,378,444 compared to $3,187,311 for the same period in 2018, representing an
increase of $1,191,133, or 37.4%. This change is attributable to the addition of
administrative employees, where the number of employees increased from 11 in
2018 to 16 in 2019. The increase in the number of employees also created
additional IT-expenses and office costs. Included in general and administrative
expenses is Non-cash compensation expenses, that were $197,945 and $116,434 for
the years ended December 31, 2019 and December 31, 2018, representing an
increase of $81,511 or 70.0%, attributable to increased non-cash compensation
expense for stock options granted to employees.

The following is a summary of our non-cash compensation:





                                                              2019

2018

Compensation upon vesting of stock options granted to employees

                                                  $         -

$ 15,767 Compensation for common shares issued to the Board of Directors and Management for services

                          112,500

60,000

Compensation for vesting of restricted stock awards issued to the board of directors

                                85,445          40,667
Total                                                      $   197,945     $   116,434




Research and development expenses for the year ended December 31, 2019
were $749,249 compared to $661,014 for the same period in 2018, representing an
increase of $88,235, or 13.3%. This change is attributable to an increase in the
number of employees in the Research and Development area as the Company focuses
on the further development of existing and new products for the marine industry.



Other income/(expense)



Total Other income/(expenses) for the year ended December 31, 2019 was
$134,714 compared to $305,550 for the comparable period in 2018, representing a
decrease of $170,836. This change is attributable to increased interest expenses
as a consequence of the adoption of Leases (Topic 842) and ASU 2016-19 which
resulted in an increase in interest expenses and decrease in Operating expenses.



Net Income taxes

Net income taxes for the year ended December 31, 2019 was a benefit of $297,252 compared to $365,430 for the comparable period in 2018, representing a decrease in benefit of $68,178.





Net Income/(Loss)



Net income/(loss) attributable to the Company for the year ended December 31,
2019 was $39,616 compared to a loss of $3,814,528 for the comparable period in
2018, representing a change of $3,854,144.



This improvement was primarily attributable to increased Revenue that drove a
similar increase in Gross Profit and higher gross profit margin caused by a
favorable mix shift toward marine scrubber systems, offset by higher operating
expenses caused primarily by the growth in headcount to support additional sales
and production.



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Liquidity and Capital Resources

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.





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. At December 31, 2019, we had cash
of $9,783,932 and net working capital of $17,155,126, and at December 31, 2018,
we had cash of $3,776,111 and net working capital of $6,753,593. At December 31,
2019, our net working capital had increased by $10,401,533 compared to December
31, 2018. Total current assets were $27,487,257 and $11,373,206 at December 31,
2019 and December 31, 2018, respectively, and total current liabilities were
$10,332,131 and $4,619,613 at December 31, 2019 and December 31, 2018,
respectively.



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 $2,700,000. Further, we have a guarantee
for a specific project delivered in 2016 of DKK 94,620 (approximately $14,186 at
December 31, 2019) 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

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018





Cash provided (used) by operating activities is net income (losses) adjusted for
certain non-cash items and changes in assets and liabilities. Cash used by
operating activities for the year ended December 31, 2019 was $4,546,761,
representing an increase of $632,587 compared to cash used by operating
activities of $3,914,174 for the year ended December 31, 2018. The change in
cash used by operating activities for the year ended December 31, 2019 was
mainly due to an increase in accounts receivables of $4,180,917, increase in
other receivables of $2,098,896, and increase in inventory of $683,405, off-set
by an increase in accounts payable of $1,769,852 and an increase in accrued
expenses of $2,164,358.



Net cash used in investing activities was $3,700,675 for the year ended December
31, 2019 as compared to net cash used in investing activities of $170,890 for
the year ended December 31, 2018, representing an increase of $3,529,785. This
increase was due to the initial payment for the acquisition of BS Plastic A/S of
$1,154,902 and a period-over-period increase of $2,363,885 for the purchase of
property and equipment especially related to the installation of new furnaces in
Ballerup to increase production capacity in the context of a growing demand.



Cash provided by financing activities was $14,627,470 for the year ended
December 31, 2019, as compared to cash provided by financing activities of
$6,017,280 for the year ended December 31, 2018. This change of $8,610,190 was
mainly due to cash received in connection with a registered public offering in
May 2019 that generated net proceeds of $14,650,039, which was greater than cash
received in connection with a registered public offering in April 2018.

Off Balance Sheet Arrangements





As of December 31, 2019, 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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Operating Leases

The Company leases office and production facilities under operating lease agreements.





The future minimum lease payments for non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 2019 is reflected in
Note 4.

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
    margin;
  ? 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

margin 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 margin; and

? the recognition and measurement of loss contingencies, which impact gross

margin or operating expenses when we recognize a loss contingency, revise the


    estimate for a loss contingency, or record an asset impairment.

We discuss these policies further below, as well as the estimates and judgments involved.

Accounts Receivable / Long Term Receivable / Allowance for Doubtful Accounts / Bad Debt





We assess the collectability of accounts receivable and long-term receivable on
an ongoing basis and establish an allowance for doubtful accounts when
collection is no longer reasonably assured. In establishing the allowance, we
consider factors such as known troubled accounts, historical experience, age of
receivables, financial and liquidity information that is publicly accessible,
and other currently available evidence.

The roll forward of the allowance for doubtful accounts for the year ended December 31, 2019 and December 31, 2018 was as follows:





                                                              2019

2018

Allowance for doubtful accounts at the beginning of the period

$   971,772     $   660,581
Bad debt expense                                                25,044

353,562


Receivables written off during the periods                    (362,244 )

-


Effect of currency translation                                 (22,138 )

(42,371 ) Allowance for doubtful accounts at the end of the period $ 612,434 $ 971,772






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Goodwill and Definite-life intangible assets





The Company accounts for Goodwill and definite-life intangible assets in
accordance with provisions of the Statement of Financial Accounting Standards
Board ("FASB") Accounting Standards Codification ("ASC") Topic 350, Intangibles,
Goodwill and Other. Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are not
amortized, but instead are tested for impairment at least annually in accordance
with the provisions of Topic 350. Impairment losses arising from this impairment
test, if any, are included in operating expenses in the period of impairment.
Topic 350 requires that definite intangible assets with estimable useful lives
be amortized over their respective estimated useful lives and reviewed for
impairment in accordance with Topic 360, criteria for recognition of an
impairment of Long-Lived Assets.



Goodwill



Goodwill is evaluated for impairment annually in the fourth quarter of the
Company's fiscal year, and whenever events or changes in circumstances indicate
the carrying value of goodwill may not be recoverable. Triggering events that
may indicate impairment include, but are not limited to, a significant adverse
change in customer demand or business climate that could affect the value of
goodwill or a significant decrease in expected cash flows. The Company recorded
an impairment charge of $0 on goodwill during the years ended December 31, 2019
and 2018, as management's estimated fair value of the reporting unit exceeded
its carrying value determined during impairment testing in the fourth quarters
of 2019 or 2018.



Long-Lived Assets



We assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets or the asset
grouping may not be recoverable. Factors that we consider in deciding when to
perform an impairment review include significant under-performance of a business
or product line in relation to expectations, significant negative industry or
economic trends, and significant changes or planned changes in our use of the
assets. We measure the recoverability of assets that will continue to be used in
our operations by comparing the carrying value of the asset grouping to our
estimate of the related total future undiscounted net cash flows. If an asset
grouping's carrying value is not recoverable through the related undiscounted
cash flows, the asset grouping is considered to be impaired. The impairment is
measured by comparing the difference between the asset grouping's carrying value
and its fair value. Long-lived assets such as goodwill, intangible assets, and
property, plant and equipment are considered non-financial assets and are
recorded at fair value only if an impairment charge is recognized.



Impairments of long-lived assets are determined for groups of assets related to
the lowest level of identifiable independent cash flows. Due to our asset usage
model and the interchangeable nature of our ceramic filter manufacturing
capacity, we must make subjective judgments in determining the independent cash
flows that can be related to specific asset groupings. In addition, as we make
manufacturing process conversions and other factory planning decisions, we must
make subjective judgments regarding the remaining useful lives of assets,
primarily process-specific filter manufacturing tools and building improvements.
If we determine that the useful lives of assets are shorter than we had
originally estimated, we accelerate the rate of depreciation over the assets'
new, shorter useful lives. During the years ended December 31, 2019 and 2018, no
impairment charge of long-lived assets has been recorded.



Revenue Recognition



On January 1, 2018, the Company adopted Accounting Standards Codification Topic
606, "Revenue from Contracts with Customers," which includes clarifying ASUs
issued in 2015, 2016 and 2017 ("new revenue standard"). The new revenue standard
was applied to all open revenue contracts using the modified-retrospective
method as of January 1, 2018. The new revenue standard did not have a material
impact on revenue recognition. The Company does not expect the impact of the
adoption of the new standard to be material to sales or net income on an ongoing
basis.



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For membrane, DPF and plastic product sales, revenue is recognized when
performance obligations under the terms of a contract with the customer are
satisfied which occurs when control of the membrane, DPF or plastic product is
transferred to the customer. The majority of the Company's sales contracts
contain performance obligations satisfied at a point in time when title and the
risks and rewards of ownership have transferred to the customer. This generally
occurs when the product is shipped or accepted by the customer.  Revenue for
service contracts are recognized as the services are provided. Revenue is
measured as the amount of consideration expected to be received in exchange for
transferring the goods or providing services. The satisfaction of performance
obligations under the terms of a revenue contract generally gives rise to the
right of payment from the customer. The Company's standard payment terms vary by
the type and location of the customer and the products or services offered.
Generally, the time between when revenue is recognized and when payment is due
is not significant. Pre-Payments received prior to satisfaction of performance
obligations are recorded as contract liabilities. Given the insignificant days
between revenue recognition and receipt of payment, financing arrangements do
not exist between the Company and its customers.



For contracts with customers that include multiple performance obligations,
judgment is required to determine whether performance obligations specified in
these contracts are distinct and should be accounted for as separate revenue
transactions for recognition purposes. For such arrangements, revenue is
allocated to each performance obligation based on its relative standalone
selling price. Standalone selling prices are generally determined based on the
prices charged to customers or using expected cost-plus margin.



System sales are recognized when the Company transfers control based upon signed
acceptance of the system by the customer upon shipment of the system in
accordance with the terms of the contract. For the majority of Systems, the
Company transfers control and recognizes revenue when products are shipped to
the customer according to the terms of the contract or purchase order. In
connection with the system it is normal procedure to issue a FAT (Factory
Acceptance Test) stating that the customer has accepted the performance of the
system as it is being shipped from the production facility in Hobro. As part of
the delivery performance, the customer is normally offered a commissioning (a
final assembly and configuration at a place designated by the customer) and this
commission is therefore considered a second performance obligation and is valued
at cost plus a standard margin based on the contractual performance. This second
performance obligation is recognized as revenue at the time of delivery of the
commissioning together with the cost incurred. The portion of the invoicing that
is attributable to commissioning is recognized as Non-invoiced as part of
Unbilled receivable while the revenue related to the commissioning is recognized
as Deferred Income.



Aftermarket sales represent part sales, extended warranties and maintenance
services. For the sale of aftermarket parts, the Company transfers control and
recognizes revenue when parts are shipped to the customer or services are
provided. When customers are given the right to return eligible parts and
accessories, the Company estimates the expected returns based on an analysis of
historical experience. The Company adjusts estimated revenues at the earlier of
when the most likely amount of consideration expected to be received changes or
when the consideration becomes fixed. The Company recognizes revenue for
extended warranty and maintenance agreements based on the standalone selling
price over the life of the contract, which reflects the costs to perform under
these contracts and corresponds with, and thereby depicts the transfer of
control to the customer. For invoicing to customers where the transfer of
control has not occurred (prepayments), the invoiced amount is recognized as
Contract assets / Contracts liabilities.



The Company has received long-term contracts for grants from government entities
for development and use of silicon carbide membranes in various water filtration
and treatment applications and historically in the installation of various water
filtrations systems. We measure transfer of control of the performance
obligation on long-term contracts utilizing the cost-to-cost measure of
progress, with cost of revenue including direct costs such as labor and
materials. Under the cost-to-cost approach, the use of estimated costs to
complete each performance obligation is a significant variable in the process of
determining recognized revenue and a significant factor in the accounting for
such performance obligations. The timing of when we bill our customers is
generally dependent upon advance billings terms, milestone billings based on
completion of certain phases of the work or when services are provided or
products are shipped. Projects with performance obligations recognized over time
that have costs and estimated earnings recognized to date in excess of
cumulative billings are reported on our Balance Sheets as Contract assets.
Projects with performance obligations recognized over time that have cumulative
billings in excess of costs and estimated earnings recognized to date are
reported on our Balance Sheets as Contract liabilities.



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Income Taxes



We must make estimates and judgments in determining the provision for taxes for
financial statement purposes. These estimates and judgments occur in the
calculation of tax credits, benefits, and deductions and in the calculation of
certain tax assets and liabilities that arise from differences in the timing of
recognition of revenue and expense for tax and financial statement purposes.
Significant changes in these estimates may result in an increase or decrease to
our tax provision in a subsequent period.



We must assess the likelihood that we will be able to recover our deferred tax
assets. If recovery is not likely, we must increase our provision for taxes by
recording a valuation allowance against the deferred tax assets that we estimate
will not ultimately be recoverable. We believe that we will ultimately recover
the deferred tax assets recorded on our consolidated balance sheets. Should
there be a change in our ability to recover our deferred tax assets, however,
our tax provision would increase in the period in which we determined that the
recovery was not likely. Recovery of a portion of our deferred tax assets is
impacted by management's plans and methods of allocating research and
development costs to the underlying reporting units.



The calculation of our tax liabilities involves uncertainties in the application
of complex tax regulations in Denmark and the United States. When a tax position
is determined uncertain, we recognize liabilities based on a two-step process.
The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals
or litigation processes, if any. If we determine that a tax position will more
likely than not be sustained on audit, the second step requires us to estimate
and measure the tax benefit as the largest amount that is more than 50% likely
to be realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as we must determine the probability of
various possible outcomes. If uncertainties arise, we re-evaluate the tax
positions on a quarterly basis. This evaluation is based on factors such as
changes in facts or circumstances, changes in tax law, new audit activity, and
effectively settled issues. Determining whether an uncertain tax position is
effectively settled requires judgment. Such a change in recognition or
measurement would result in the recognition of a tax benefit or an additional
charge to the tax provision.



Inventory



The valuation of inventory requires us to estimate excess or obsolete inventory
as well as inventory that is not of saleable quality. The determination of
excess or obsolete inventory requires us to estimate the future demand for our
products. The estimate of future demand is compared to work-in-process and
finished goods inventory levels to determine the amount, if any, of excess or
obsolete inventory. As of December 31, 2019, we had total furnace parts and
supplies of $631,865, raw materials of $2,087,020, work-in-process inventory of
$1,624,499, total finished goods inventory of $1,521,161 and a reserve for
obsolescence of $665,307. The estimated future demand is included in the
development of our short-term manufacturing plans to enable consistency between
inventory valuation and production decisions. Product-specific facts and
circumstances reviewed in the inventory valuation process include a review of
the customer base, acceptance of the product by the customer and the various
environmental authorities, competitor's products, as well as an assessment of
the selling price in relation to the product cost. If our demand forecast for
specific products is greater than actual demand, and we fail to reduce
manufacturing output accordingly, we could be required to write off inventory,
which would negatively impact our gross profit.



In order to determine what costs can be included in the valuation of inventory,
we must determine normal capacity at our manufacturing, assembly and test
facilities, based on historical production, compared to total available
capacity. If the factory production is below the established normal capacity
level, a portion of our manufacturing overhead costs would not be included in
the cost of inventory, and therefore would be recognized as cost of sales in
that period, which would negatively impact our gross profit. We refer to these
costs as excess capacity charges. The Company has been operating below capacity
and excess capacity charges have been recognized as cost of sales.



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Loss Contingencies



We are subject to various legal and administrative proceedings along with
asserted and potential claims, accruals related to product warranties and
potential asset impairments (loss contingencies) that arise in the ordinary
course of business. An estimated loss from such contingencies is recognized as a
charge to income if it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. Disclosure of a loss contingency
is required if there is at least a reasonable possibility that a loss has been
incurred. The outcomes of legal and administrative proceedings and claims, and
the estimation of product warranties and asset impairments, are subject to
significant uncertainty. Significant judgment is required in both the
determination of probability and the determination as to whether a loss is
reasonably estimable. To estimate the losses associated with repairing and
replacing parts in connection with product warranty, we make judgments with
respect to customer claim rates. At least quarterly, we review the status of
each significant matter, and we may revise our estimates. These revisions could
have a material impact on our results of operations and financial position.

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