Item 5. Market for Registrant’s Common Equity
Item 5.
Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is currently quoted on the Nasdaq Capital Market under the symbol LIQT.
 
As of December 31, 2021, there were approximately 32 stockholders of record of our common stock as reported by our transfer agent, one of which is Cede & Co., a nominee for Depository Trust Company (“DTC”). All of the shares of common stock held by brokerage firms, banks, and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC and are therefore considered to be held of record by Cede & Co. as one stockholder.
 
We have not paid any cash dividends on our common stock and have no intention of paying any dividends on the shares of our common stock. Subject to Nevada law, our Board of Directors will determine the payment of future dividends on our common stock, if any, and the amount of any dividends subject to:
 
 
●
any contractual restrictions limiting our ability to pay dividends that may be applicable at such time;
 
●
our earnings and cash flow;
 
●
our capital requirements;
 
●
our financial condition; and
 
●
other factors that our Board of Directors deems relevant.
 
Since the beginning of our fiscal year ended December 31, 2021, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in a quarterly report on Form 10-Q or in a current report on Form 8-K.
 
Since the beginning of our fiscal year ended December 31, 2021, we have not repurchased any of our equity securities.
 
Item 6.
Selected Financial Data
 
Not applicable. 
 
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Item 7.
Management ’ s Discussion and Analysis of Financial Condition and Results of Operations
 
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 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 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 problems.
 
2021 Developments
 
On March 24, 2021 the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with an institutional investor pursuant to which the Company agreed to issue and sell a $15.0 million principal amount Senior Convertible Note due 2023 (the “Note”) and an aggregate of 80,000 shares of commons stock (together with the Note, the “Securities”). The Securities Purchase Agreement provides that the net proceeds from the sale of the Securities shall be used for general corporate purposes, including working capital and potential acquisitions.
 
On August 20, 2021, the Company entered into a new agreement regarding the provision of LiqTech’s water filtration system for an offshore deep-sea drilling application within the European oil & gas market.
 
On September 23, 2021, the Company entered into a Lease Agreement through its wholly-owned subsidiary LiqTech Emission Control, for a minimum term of eight years, with Plainvim (Taicang) in China, pursuant to which LiqTech agreed to lease a 91,752 square feet property used primarily for the production, warehousing and storage of filtration supplies, products, and equipment and for ancillary office purposes.
 
On October 6, 2021, the Company announced its first oil and gas order in the Middle East with one of the major oil field services companies in the world. Under the terms of the contract, the customer will be deploying LiqTech's water filtration systems.
 
On November 23, 2021, the Company announced the appointment of Simon S. Stadil as Chief Financial Officer of LiqTech International.
 
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Results of Operations
 
Results of Operations for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020  
 
The following table sets forth our revenues, expenses and net income for the years ended December 31, 2021 and 2020 in U.S. dollars, except for percentages.  
 
 
 
For the Year Ending December 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period to Period
Change
 
 
 
2021
 
 
As a %
of Sales
 
 
2020
 
 
As a %
of Sales
 
 
 
$ 
 
 
Percent %
 
Revenue
 
 
18,273,442
 
 
 
100.0
%
 
 
22,526,201
 
 
 
100.0
%
 
 
(4,252,759
)
 
 
(18.9
)%
Cost of Goods Sold
 
 
16,697,296
 
 
 
91.4
 
 
 
20,379,519
 
 
 
90.5
 
 
 
(3,682,223
)
 
 
(18.1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Profit
 
 
1,576,146
 
 
 
8.6
 
 
 
2,146,882
 
 
 
9.5
 
 
 
(570,536
)
 
 
(26.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling expenses
 
 
4,564,188
 
 
 
25.0
 
 
 
2,918,418
 
 
 
13.0
 
 
 
1,645,770
 
 
 
56.4
 
General and administrative expenses
 
 
5,836,629
 
 
 
31.9
 
 
 
6,205,040
 
 
 
27.5
 
 
 
(368,411
)
 
 
(5.9
)
Research and development expenses
 
 
1,862,653
 
 
 
10.2
 
 
 
1,278,331
 
 
 
5.7
 
 
 
584,322
 
 
 
45.7
 
Total Operating Expenses
 
 
12,263,470
 
 
 
67.1
 
 
 
10,401,789
 
 
 
46.2
 
 
 
1,861,681
 
 
 
17.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from Operations
 
 
(10,687,324
)
 
 
(58.5
)
 
 
(8,255,107
)
 
 
(36.6
)
 
 
(2,432,217
)
 
 
29.5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on modification of earn-out liability
 
 
 
 
 
 
0.0
 
 
 
306,073
 
 
 
1.4
 
 
 
(306,077
)
 
 
(100.0
)
Interest and other income
 
 
371,467
 
 
 
2.0
 
 
 
139,513
 
 
 
0.6
 
 
 
231,954
 
 
 
166.3
 
Interest expense
 
 
(708,176
)
 
 
(3.9
)
 
 
(120,903
)
 
 
(0.5
)
 
 
(587,273
)
 
 
485.7
 
Amortization discount on Convertible Note
 
 
(835,331
)
 
 
(4.6
)
 
 
 
 
 
 
 
 
 
 
(835,331
)
 
 
 
 
Fair value adjustment of warrants
 
 
 
 
 
 
0.0
 
 
 
(901,250
)
 
 
(4.0
)
 
 
(901,250
)
 
 
(100.0
)
Gain (Loss) on currency transactions
 
 
668,225
 
 
 
3.7
 
 
 
(1,469,607
)
 
 
(6.5
)
 
 
2,137,862
 
 
 
(145.5
)
Gain (Loss) on sale of fixed assets
 
 
1,113
 
 
 
0.0
 
 
 
27,772
 
 
 
0.1
 
 
 
26,659
 
 
 
96.0
 
Total Other Income (Expense)
 
 
(502,672
)
 
 
(2.8
)
 
 
(2,018,398
)
 
 
9.0
 
 
 
1,515,726
 
 
 
(75.1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss Before Income Taxes
 
 
(11,189,996
)
 
 
(61.2
)
 
 
(10,273,505
)
 
 
(45.6
)
 
 
(916,491
)
 
 
8.9
 
Income Taxes Provision (Benefit)
 
 
(63,036
)
 
 
(0.3
)
 
 
(465,145
)
 
 
(2.1
)
 
 
402,109
 
 
 
(86.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income/(Loss)
 
 
(11,126,960
)
 
 
(60.9
)
 
 
(9,808,360
)
 
 
(43.5
)
 
 
(1,318,600
)
 
 
13.4
 
 
Revenues
 
Revenue for the year ended December 31, 2021 was $18,273,442 compared to $22,526,201 for the same period in 2020, representing a decrease of $4,252,759, or 19%. The change in revenue mainly consists of a decrease in sales of liquid filters and systems partly offset by an increase in sales of DPFs and plastics.
 
 
●
For the years ended December 31, 2021 and 2020, our sales of liquid filters, services and systems were $7,196,465 and $14,147,842, respectively, and accounted for 39% and 63% of our total sales, respectively
 
●
For the years ended December 31, 2021 and 2020, our sales of DPFs were $7,183,868 and $5,131,891, respectively, and accounted for 39% and 22% of our total sales, respectively.
 
●
For the years ended December 31, 2021 and 2020, our plastics revenues were $3,615,681 and $2,647,366, respectively and accounted for 20% and 12% of our total sales, respectively.
 
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The decrease in sales of liquid filters and water treatment systems is a result of the negative impact of the ongoing COVID-19 pandemic, but also increased supply chain restrictions and general market volatility, 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 reflects a continued interest in environmental solutions to reduce global CO2 emissions amid increased political and regulatory efforts.
 
Furthermore, for the years ended December 31, 2021 and 2020, LiqTech received revenue from government grant projects of $277,428 and $599,102, respectively.
 
Gross Profit
 
Gross profit for the year ended December 31, 2021 was $1,576,146 compared to $2,146,682 for the same period in 2020, representing a decrease of $570,536, or approximately 27%. The decrease in gross profit is due to the decline in sales of liquid filters and water treatment systems, for which sales command a higher gross margin. Gross profit was further impacted 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. Furthermore, increased cost related to the China project ramp-up and changes in sales mix negatively impacted the 2021 gross profit. Included in the gross profit for the year ended December 31, 2021 is depreciation of $1,957,357 compared to $2,204,917 for the same period in 2020.
 
Expenses
 
Total operating expenses for the year ended December 31, 2021 were $12,263,470, representing an increase of $1,861,681, or approximately 18%, compared to $10,401,789 for the same period in 2020.
 
Selling expenses for the year ended December 31, 2021 were $4,564,188 compared to $2,918,418 for the same period in 2020, representing an increase of $1,645,770 or approximately 56%. This change is attributable to the pre-COVID-19 decision to hire new sales employees, for which the average number of sales employees increased from 13 in 2020 to 19 in 2021. 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 ended December 31, 2021 were $5,836,629 compared to $6,205,040 for the same period in 2020, representing a decrease of $368,411, or 6%. The decrease in general and administrative expenses is attributable to the reduction of administrative employees, for which the average number of employees decreased from 22 in 2020 to 13 in 2021. Included in general and administrative expenses is non-cash compensation expenses of $481,105 and $343,780 for the years ended December 31, 2021 and December 31, 2020, respectively, representing an increase of $137,327, or 40%, attributable to stock grants to members of the Board and management. 
 
The following is a summary of our non-cash compensation:
 
 
 
2021
 
 
2020
 
Compensation for vesting of restricted stock awards issued to the Board of Directors
 
$
197,500
 
 
$
163,224
 
Compensation for vesting of restricted stock awards issued to management
 
 
283,604
 
 
 
180,556
 
Total Non-Cash Compensation
 
$
481,105
 
 
$
343,780
 
 
Research and development expenses for the year ended December 31, 2021 were $1,862,653 compared to $1,278,331 for the same period in 2020, representing an increase of $584,322, or 46%. This change is attributable to an increase in the average 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 engaged in research and development activities increased from 14 in 2020 to 17 in 2021.
 
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Table of Contents
 
Other income (expenses)
 
Total Other income (expense) for the year ended December 31, 2021 was $(502,672) compared to $(2,018,398) for the comparable period in 2020, representing a decrease of $1,515,726, or 75%. Included in the Other income (expenses) for the year ended December 31, 2020 is the negative effect of $901,250 resulting from the fair value remeasurement of the prefunded warrants issued in May 2020. Additionally, the gain on currency transactions from the USD/DKK exchange rate impacted Other income as a gain by $668,255 in 2021 compared to a loss of $(1,469,607) in 2020, representing an increase of $2,137,862. Further, in 2021 interest expenses was $(708,176) compared to $(120,903) in 2020, which together with the Amortization discount of $(835,331), reflects the issuance of the Convertible Note in 2021.
 
Income taxes provision
 
The income tax benefit for the year ended December 31, 2021 was $63,036 compared to a benefit of $465,145 for the comparable period in 2020, representing a decrease of $402,109 mainly driven by a reduction in tax credits associated with the Danish research and development activities.
 
Net Income/(Loss)
 
Net income/(loss) for the year ended December 31, 2021 was $(11,126,960) compared to $(9,808,360) for the comparable period in 2020, representing an increased loss of $1,318,600.
 
This change was primarily attributable to the decrease in revenue due to diminished demand for marine scrubbers, higher relative costs of goods sold as a percentage of revenue due to investments in production capacity across our Danish manufacturing facilities and inflationary pressure on both raw materials, electricity and salary related to hourly paid workers. The year-on-year development also reflects continued investments in the global sales organization and the research and development efforts leading to an overall increase in spend compared to 2020.
 
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Table of Contents
 
Liquidity and Capital Resources
 
Based on the prolonged 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. Our compliance with the measures implemented to avoid the spread of the virus had a material adverse impact on our financial results since March 2020. 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, might not be sufficient to cover our capital requirements for the next 12 months from the issuance of this report as we consider further investments to generate revenue growth. In addition, as a result of the reduced order intake, continued supply chain disruptions, 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 and continued supply chain disruptions, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2022.
 
While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect and how our business may be adversely affected as a result of the pandemic’s global economic impact and associated supply chain disruptions. In the future, the pandemic may cause reduced or changed demand characteristics for our products, especially if it results in a global recession or structural shifts in the demand for our products across our end markets. 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 along with disruptions in the global supply chain.
 
We have historically satisfied our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. At the filing date, the Company had a line of credit amounting to DKK 20,000,000 ($3,000,000), which is used for a leasing arrangement pertaining to deliveries of high-temp furnaces.
 
On December 31, 2021, we had cash of $17,489,380 and net working capital of $11,199,258, and on December 31, 2020, we had cash of $13,264,449 and net working capital of $15,839,992. On December 31, 2021, our net working capital decreased by $4,640,734 compared to December 31, 2020, mainly as a result of the current portion of the Convertible Note and lower Accounts payable. This was partly offset by lower Accounts receivable and an increase in cash due to the proceeds from the issuance of a Convertible Note in April 2021.
 
In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or a security bond. For that purpose, we maintain a guaranteed credit line of DKK13,000,000 (approximately $2,000,000). The credit line is secured by a cash deposit of $2,000,000.
 
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Cash Flows
 
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
 
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 ended December 31, 2021 was $7,203,843 compared to cash used by operating activities of $2,598,865 for the year ended December 31, 2020, representing a reduction of $4,604,978. The cash used by operating activities for the year ended December 31, 2021 consists mainly of the net loss for the year of $(11,126,960) adjusted by depreciation and other non-cash related items of $3,992,529. Further, changes in assets and liabilities include decreased Accounts receivables of $971,460, a decline in Contract assets/liabilities of $455,185, and an increase in Accrued expenses of $798,543, offset by a decrease in Accounts payable of $532,718.
 
Net cash used in investing activities was $1,450,139 for the year ended December 31, 2021 as compared to $4,008,521 for the year ended December 31, 2020, representing a reduction of $2,558,382, or 64%. The investing activities include the purchase of property and equipment, especially related to the Danish manufacturing facilities. For the year ended December 31, 2020, the investments mainly related to the new furnaces in Ballerup.
 
Cash provided by financing activities was $13,902,999 for the year ended December 31, 2021 as compared to $7,216,902 for the year ended December 31, 2020. This change of $6,686,097 was mainly attributable to the net cash proceeds of $14,283,333 related to the Convertible bond issuance in March 2021 compared to the capital raise in May 2020 of $7,237,127.
 
 
 
2021
 
 
2020
 
Net Cash Used in Operating Activities
 
$
(7,203,843
)
 
$
(2,598,865
)
Net Cash Used in Investing Activities
 
 
(1,450,139
)
 
 
(4,008,521
)
Net Cash Provided by Financing Activities
 
 
13,902,999
 
 
 
7,216,902
 
Net Change in Cash and Cash Equivalents
 
 
4,224,931
 
 
 
3,480,517
 
Cash and Cash Equivalents at End of Period
 
$
17,489,380
 
 
$
13,264,449
 
 
Off-Balance Sheet Arrangements
 
As of December 31, 2021, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in our consolidated financial statements.
 
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 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. 
 
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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, 2021 and December 31, 2020 was as follows:
 
 
 
2021
 
 
2020
 
Allowance for doubtful accounts at the beginning of the period
 
$
498,044
 
 
$
612,434
 
Bad debt expense
 
 
(28,499
)
 
 
320,270
 
Receivables written off during the periods
 
 
(24,415
)
 
 
(484,265
)
Effect of currency translation
 
 
(36,054
)
 
 
49,605
 
Allowance for doubtful accounts at the end of the period
 
$
409,076
 
 
$
498,044
 
 
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.
 
The Company did not record an impairment charge on goodwill during the years ended December 31, 2021 and 2020, as management's estimated fair value of the reporting unit exceeded its carrying value determined during impairment testing in the fourth quarters of 2021 and 2020.
 
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 of December 31, 2021 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 ended December 31, 2021 and 2020, no impairment charge of long-lived assets has been recorded. 
 
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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 Company sells products throughout the world; sales by geographical region are as follows:
 
 
 
% Distribution
 
 
For the Year Ended December 31
 
 
 
2021
 
 
2020
 
 
2021
 
 
2020
 
North America
 
 
17
%
 
 
3
%
 
$
3,121,797
 
 
$
656,032
 
Australia
 
 
2
%
 
 
2
%
 
 
401,485
 
 
 
524,255
 
Asia
 
 
23
%
 
 
15
%
 
 
4,256,585
 
 
 
3,372,286
 
Europe
 
 
58
%
 
 
80
%
 
 
10,493,574
 
 
 
17,973,628
 
 
 
 
100
%
 
 
100
%
 
$
18,273,442
 
 
$
22,526,201
 
 
The Company’s sales by product line are as follows for the years ended December 31, 2021 and 2020:
 
 
 
% Distribution
 
 
For the Year Ended December 31
 
 
 
2021
 
 
2020
 
 
2021
 
 
2020
 
Liquid filters and systems
 
 
39
%
 
 
63
%
 
$
7,196,465
 
 
$
14,147,842
 
Diesel particulate filters
 
 
39
%
 
 
22
%
 
 
7,183,868
 
 
 
5,131,891
 
Plastics components
 
 
20
%
 
 
12
%
 
 
3,615,681
 
 
 
2,647,366
 
Development projects
 
 
2
%
 
 
3
%
 
 
277,428
 
 
 
599,102
 
 
 
 
100
%
 
 
100
%
 
$
18,273,442
 
 
$
22,526,201
 
 
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.
 
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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 when 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 periods ended December 31, 2021 and December 31, 2020 is as follows: 
 
 
 
December 31,
2021
 
 
December 31,
2020
 
Cost incurred
 
$
3,381,994
 
 
$
3,997,161
 
Unbilled project deliveries
 
 
454,158
 
 
 
1,015,977
 
VAT
 
 
542,255
 
 
 
446,608
 
Other receivables
 
 
60,158
 
 
 
75,010
 
Prepayments
 
 
(2,947,736
)
 
 
(3,112,118
)
Deferred Revenue
 
 
(499,146
)
 
 
(866,680
)
 
 
$
991,682
 
 
$
1,555,958
 
 
 
 
 
 
 
 
 
 
Distributed as follows:
 
 
 
 
 
 
 
 
Contract assets
 
$
1,906,510
 
 
$
2,708,136
 
Contract liabilities
 
 
(914,828
)
 
 
(1,152,178
)
 
 
$
991,682
 
 
$
1,555,958
 
 
Income Taxes
 
We must make estimates and judgments in determining the provision for income 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.
 
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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, 2021, we had total furnace parts and supplies of $213,224, raw materials of $2,144,076, work-in-process inventory of $1,671,290, total finished goods inventory of $1,660,907 and a reserve for excess and obsolescence of $268,470. 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, competitors’ 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 or increase our allowance, 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. 
 
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
 
We are not required to provide quantitative and qualitative disclosures about market risk because we are a smaller reporting company.
 
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.