LIQTECH INTERNATIONAL, INC. Overview
We are aNevada corporation, formerly namedBlue Moose Media, Inc. InOctober 2011 , we changed our name toLiqTech International, Inc. For more than two decades we have developed and provided state-of-the-art technologies for gas and liquid purification using silicon carbide ceramic 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, the Company has developed a new standard of water filtration technology to meet the ever-increasing demand for higher water quality. By incorporatingLiqTech's SiC liquid membrane technology with its long-standing systems design experience and capabilities, the Company offers solutions to the most difficult water pollution problems. Acquisition of BS Plastic OnAugust 31, 2019 , the Company, through its subsidiary,LiqTech Holding , completed the acquisition of all of the issued and outstanding capital stock (the "Shares") of BS Plastic A/S, from JS Holding Risskov A/S, a Danish company ("JS Holding ") controlled bySteen Simonsen . In consideration for the Shares,JS Holding received cash consideration in the amount ofDKK 9,000,000 , or approximately$1,332,090 (at the exchange rate onAugust 31, 2019 ).Further JS Holding was entitled to an additionalDKK 6,000,000 or$888,060 (at the exchange rate onAugust 31, 2019 ) if certain financial targets are met withDKK 2,000,000 ($296,020 ) for the periodJuly 2019 toJune 2020 ,DKK 2,000,000 ($296,020 ) for the periodJuly 2020 toJune 2021 andDKK2,000,000 ($296,020 ) for the periodJuly 2021 toJune 2022 . InJuly 2020 it was agreed betweenLiqTech Holding andJS Holding that the contingent earn-out was replaced by fixed and final agreement to payDKK 2,000,000 inJuly 2020 andDKK 2,000,000 inJuly 2021 without any conditions. 2020 Developments OnJanuary 2, 2020 the Company announced the successful installation of a new customized furnace for use in the manufacture of the Company's proprietary silicon carbide membrane filters. The new furnace has throughput that will more than triple the Company's existing furnace capacity due to its size and efficiency. OnMay 21, 2020 the Company announced that it had entered into a definitive securities purchase agreement with certain institutional investors. The Private Placement consisted of common stock and pre-funded warrants totaling 1.6 million shares issued to the investors at$5.00 per share, resulting in aggregate gross proceeds of$8 million to the Company.
On
On
23--------------------------------------------------------------------------------
Table of Contents Results of Operations
Results of Operations for the Year Ended
The following table sets forth our revenues, expenses and net income for the year endedDecember 31, 2020 and 2019 inU.S. dollars, except for percentages. For the Year Ending December 31, Period to Period Change As a % As a % 2020 of Sales 2019 of Sales $ Percent % Revenue 22,526,201 100.0 32,637,484 100.0 % (10,111,283 ) (31.0 )% Cost of Goods Sold 20,379,519 90.5 25,475,170 78.1 (5,095,651 ) (20.0 ) Gross Profit 2,146,882 9.5 7,162,314 21.9 (5,015,632 ) (70 ) Operating Expenses Selling expenses 2,918,418 13.0 2,426,971 7.4 491,447 20.2 General and administrative expenses 6,205,040 27.5 4,563,216 14.0 1,641,824 36.0 Research and development expenses 1,278,331 5.7 749,249 2.3 529,082 70.6 Total Operating Expenses 10,401,789 46.2 7,739,436 23.7 2,662,353 34.4
Loss from Operations (8,255,107 ) (36.6 ) (577,122 )
(1.8 ) (7,677,985 ) 1,330.4
Other Income (Expense) Gain on modification of earn-out liability 306,073 1.4 - - 306,077 - Interest and other income 139,513 0.6 73,635 0.2 65,878 89.5 Interest expense (120,903 ) (0.5 ) (18,831 ) (0.1 ) (102,072 ) 542.0 Fair value adjustment of warrants (901,250 ) (4.0 ) - - (901,250 ) - Gain (Loss) on currency transactions (1,469,607 ) (6.5 ) 285,742 0.9 (1,755,349 ) (614.3 ) Gain (Loss) on sale of fixed assets 27,772 0.1 (21,060 ) (0.1 ) 48,832 (231.9 ) Total Other Income (Expense) (2,018,398 ) (9.0 ) 319,486
1.0 (2,337,884 ) (731.8 )
Loss Before Income Taxes (10,273,505 ) (45.6 ) (257,636 ) (0.8 ) (10,015,869 ) 3,887.6 Income Taxes Provision (Benefit) (465,145 ) (2.1 ) (297,252 )
(0.9 ) (167,893 ) 56.5
Net Income/(Loss) (9,808,360 ) (43.5 ) 39,616 0.1 (9,847,976 ) (24,858.7 ) Revenues Revenue for the year endedDecember 31, 2020 was$22,526,201 compared to$32,637,484 for the same period in 2019, representing a decrease of$10,111,283 , or 31%. The change in revenue consists of a decrease in sales of liquid filters and water treatment systems of$11,316,772 and in sales of DPFs of$520,794 , offset by an increase in sales of plastics of$1,752,162 . 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 caused a substantial decline in the demand and delivery of water treatment systems for the marine scrubber industry. The demand for our DPFs also decreased in the period, but we see increased interest in environmental solutions to reduce global CO2-emissions. The increase in sales of plastic components is related to the business acquired inSeptember 2019 . Gross Profit Gross profit for the year endedDecember 31, 2020 was$2,146,682 compared to$7,162,314 for the same period in 2019, representing a decrease of$5,015,632 , or approximately 70%. 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. Gross profit was further impaired by increased costs related to decisions made prior to the impact of COVID-19, where the Company had invested in the expansion and improvement of production facilities along with additional employees. Further the initial effect of closing our activities inNorth America has resulted in a write-off of inventory, equipment, and other items in the amount of$450,000 , which has been expensed in the current period. Included in the gross profit for the year endedDecember 31, 2020 is depreciation of$2,204,917 compared to$1,131,008 for the same period in 2019, reflecting the increased investment in production capacity. 24
--------------------------------------------------------------------------------
Table of Contents Expenses
Total operating expenses for the year ended
Selling expenses for the year endedDecember 31, 2020 were$2,918,418 compared to$2,426,971 for the same period in 2019, representing an increase of$491,477 or approximately 20%. This change is attributable to the pre COVID-19 decision to hire new sales employees and average number of sales employees therefore increased from 9 in 2019 to 13 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 year endedDecember 31, 2020 were$6,205,040 compared to$4,563,216 for the same period in 2019, representing an increase of$1,641,824 , or 36%. The increase in general and administrative expenses is attributable to the addition of administrative employees, for which the number of employees increased from 16 in 2019 to 22 in 2020. The increase in the number of employees also created additional IT and office costs. As part of the cost reductions implemented after the impact of COVID-19, several employees have exited the Company, and at the end of 2020, the number of administrative employees was back to 16. Included in general and administrative expenses is non-cash compensation expenses of$343,780 and$197,945 for the years endedDecember 31, 2020 andDecember 31, 2019 , representing an increase of$145,835 , or 74%, attributable to stock grants to members of the Board and management.
The following is a summary of our non-cash compensation:
2020 2019
Compensation for vesting of restricted stock awards issued to the Board of Directors
$ 163,224 $ 122,945 Compensation for vesting of restricted stock awards issued to management 180,556 75,000 Total Non-Cash Compensation$ 343,780 $ 197,945 Research and development expenses for the year endedDecember 31, 2020 were$1,278,331 compared to$749,249 for the same period in 2019, representing an increase of$529,082 , or 71%. This change is attributable to an increase in the number of employees engaged in research and development activities as the Company focuses on the further development of existing and new products for the marine industry. The average number of employees in Research and development is 14 in 2020 compared to 11 in 2019. Other income (expenses) Total Other income (expense) for the year endedDecember 31, 2020 was$(2,018,398) compared to$319,486 for the comparable period in 2019, representing a decrease of$2,337,884 . Included in the net other income (expenses) for the year endedDecember 31, 2020 is the negative effect of$901,250 resulting from the fair value measurement of the prefunded warrants issued inMay 2020 . Additionally, the loss on currency transactions due to the negative impact of the USD/DKK exchange rate has impacted net other income (expenses) by$(1,469,607) compared to income of$285,742 in the comparable period, representing a decrease of$1,755,349 . Further, net income (expenses) is positively affected by$306,077 relating to the gain on modification of the earn-out agreement with the former owner of LiqTech Plastics A/S (former BS Plastic A/S), where the former owner has agreed to reduce the earn-out consideration from a total ofDKK 6 million over three years to a fixed earn-out ofDKK 4 million over a period of two years. Net Income taxes
Net income taxes for the year ended
Net Income/(Loss) Net income/(loss) attributable to the Company for the year endedDecember 31, 2020 was$(9,808,360) compared to income of$39,616 for the comparable period in 2019, representing a decline of$9,847,976 . This change was primarily attributable to the significant decrease in revenue due to decreased 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. Further losses on currency translations due to the negative impact of the USD/DKK exchange rate and the negative fair value adjustment related to the prefunded warrant liability have exacerbated the net loss for the period. 25
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
InMarch 2020 , theWorld Health Organization declared the outbreak of novel coronavirus ("COVID-19") a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments inmid-March 2020 , we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who must work at our production facilities. Otherwise, most of our employees worked remotely during the shutdown. At the beginning ofMay 2020 , businesses inDenmark began re-opening as the effect of COVID-19 had largely been contained and the number of infections and fatalities decreased significantly. SinceAugust 2020 , however, we again experienced a resurgence in the number of infections and fatalities and the re-introduction of tight restrictions in many countries. Since the start ofSeptember 2020 , we re-introduced limitations in the number of employees working directly at our production sites. All employees who can work from home are encouraged to do so. We are unable to predict the full impact that COVID-19 will have on our long-term financial condition, results of operations, liquidity and cash flows due to uncertainties. Our compliance with the measures implemented to avoid the spread of the virus have had a material adverse impact on our financial results 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 and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for at least the next 12 months from the issuance of this 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. Additionally, onMay 21, 2020 , the Company completed a private placement with certain accredited investors pursuant to which the Company issued and sold an aggregate of 1,085,000 shares of common stock, par value$0.001 per share, at a purchase price of$5.00 per share for gross proceeds of$4,662,125 , including costs of$762,875 for placement fees, legal fees, auditor fees and other cost related to the capital raise, and a prefunded warrant to purchase an aggregate of 515,000 shares of Common Stock, at a purchase price of$5.00 per share, for gross proceeds of$2,575,000 , which together represents total gross proceeds of$7,237,125 .
On
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 . Further, we have a guarantee for a specific project delivered in 2016 ofDKK 94,620 (approximately$15,620 atDecember 31, 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. 26
--------------------------------------------------------------------------------
Table of Contents Cash Flows
Year Ended
Cash 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 endedDecember 31, 2020 was$2,598,865 , representing an improvement of$1,947,896 compared to cash used by operating activities of$4,546,761 for the year endedDecember 31, 2019 . The cash used by operating activities for the year endedDecember 31, 2020 consists mainly of the net loss for the year of$(9,808,360) adjusted by depreciations and other non-cash related items of$3,675,322 . Further changes in assets and liabilities include decreased accounts receivables of$3,143,651 , a decline in contract assets/liabilities of$2,253,077 , and an increase in accrued expenses of$1,355,846 , off-set by a decrease in accounts payable of$2,006,919 . Net cash used in investing activities was$4,008,521 for the year endedDecember 31, 2020 as compared to net cash used in investing activities of$3,700,675 for the year endedDecember 31, 2019 , representing an increase of$307,846 . The investing activities include the purchase of property and equipment especially related to the installation of new furnaces in Ballerup to increase production capacity. For the year endedDecember 31, 2019 , the investing activities was mainly the initial payment for the acquisition of LiqTech Plastics A/S of$1,154,902 and investments of$2,542,757 made to prepare the installation of new furnaces in Ballerup. Cash provided by financing activities was$7,216,902 for the year endedDecember 31, 2020 , as compared to cash provided by financing activities of$14,627,470 for the year endedDecember 31, 2019 . This change of$7,410,568 was mainly due to net cash proceeds of$7,237,125 related to the capital raise inMay 2020 compared to net proceeds of$14,601,554 from the capital raise inMay 2019 .
Off Balance Sheet Arrangements
As ofDecember 31, 2020 , we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in our consolidated financial statements.
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 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
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 profit; 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.
27
--------------------------------------------------------------------------------
Table of Contents
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
2020 2019
Allowance for doubtful accounts at the beginning of the period
$ 612,434 $ 971,772 Bad debt expense 320,270
25,044
Receivables written off during the periods (484,265 ) (362,244 ) Effect of currency translation 49,605
(22,138 )
Allowance for doubtful accounts at the end of the period
The Company accounts forGoodwill and definite-life intangible assets in accordance with provisions of the Statement ofFinancial 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. The Company did not record an impairment charge on goodwill during the years endedDecember 31, 2020 and 2019, as management's estimated fair value of the reporting unit exceeded its carrying value determined during impairment testing in the fourth quarters of 2020 and 2019. 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. 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. Management has analyzed the impact of the COVID-19 pandemic on its financial statements as ofDecember 31, 2020 and has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets. During the years endedDecember 31, 2020 and 2019, no impairment charge of long-lived assets has been recorded. 28
--------------------------------------------------------------------------------
Table of Contents Revenue Recognition OnJanuary 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 ofJanuary 1, 2018 . The new revenue standard did not have a material impact on revenue recognition. The Company sells products throughout the world; sales by geographical region are as follows: For the Year Ended December 31 2020 2019 United States and Canada$ 656,032 $ 1,600,298 Australia 524,255 425,560 Asia 3,372,286 5,991,440 Europe 17,973,628 24,620,186$ 22,526,201 $ 32,637,484 The Company's sales by product line are as follows for the years endedDecember 31, 2020 and 2019: For the Year Ended December 31 2020 2019 Liquid filters and systems$ 14,147,842 $ 25,464,614 Diesel particulate filters 5,131,891 5,652,686 Plastics components 2,647,366 895,203 Development projects 599,102 625,981$ 22,526,201 $ 32,637,484 For membranes, diesel particulate filters and plastic components, revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied, which occurs when control of the product transfers to the customer or when services are rendered by the Company. The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and 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 is 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 for 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 a Contract liability. Given the insignificant days between revenue recognition and receipt of payment, financing components 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, which typically occurs upon shipment of the system in accordance with the terms of the contract. In connection with the system sale, 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 our production facility in Hobro. As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer), and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of provision of the commissioning services together with the cost incurred. Part of the invoicing to the customer is also attributed to the commissioning, and at transfer of the control of the system (i.e. the first performance obligation), some of the invoicing will still be awaiting commissioning and is therefore recognized as Contract assets. 29
--------------------------------------------------------------------------------
Table of Contents
Aftermarket sales represent parts, 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. 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. The Company has received long-term contracts for grants from government entities for the 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 sheet 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 sheet as Contract liabilities. Contract assets are the Company's rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract liabilities are payments received from customers prior to satisfaction of performance obligations, and these balances are typically related to prepayments for third-party expenses that are incurred shortly after billing. Contract liabilities also include deferred revenue related to the second performance obligation stated under Revenue Recognition, where the obligation is attributed to the commissioning of the water treatment system.
The roll-forward of Contract assets / liabilities for the period ended
December 31, December 31,
2020 2019
Cost incurred $ 3,997,161 $ 3,960,199
Unbilled project deliveries 1,015,977 1,971,106
VAT 446,608 862,368
Other receivables 75,010 58,397
Prepayments (3,112,118 ) (1,732,231 )
Deferred Revenue (866,680 ) (876,286 )
$ 1,555,958 $ 4,243,553
Distributed as follows:
Contract assets $ 2,708,136 $ 5,664,929
Contract liabilities (1,152,178 ) (1,421,376 )
$ 1,555,958 $ 4,243,553
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.
30--------------------------------------------------------------------------------
Table of Contents
The calculation of our tax liabilities involves uncertainties in the application of complex tax regulations inDenmark andthe 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 ofDecember 31, 2020 , we had total furnace parts and supplies of$471,622 , raw materials of$1,955,713 , work-in-process inventory of$2,394,481 , total finished goods inventory of$1,424,171 and a reserve for obsolescence of$723,949 . 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. 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.
© Edgar Online, source
