What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-03-22 compared with 2022-03-31 · 100 added, 86 removed, 184 unchanged (50% of the section changed)

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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.

Our common stock is quoted on the Nasdaq Capital Market under the symbol LIQT.

As of December 31, 2022, there were approximately 31 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”).

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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.

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 in the future.

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:

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2022 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.

On March 18, 2022 the Company announced that Sune Mathiesen, Chief Executive Officer, had taken a medical leave of absence.

Buehler, a member of the Board of Directors, was appointed to serve as Interim Chief Executive Officer, effective immediately.

In May 2022, the Company issued 22,535,850 shares of Common Stock and 30,425,000 prefunded warrants in a public offering to fund working capital, general corporate purposes, and partial repayment of its Senior Convertible Note.

The total net proceeds from the offering and exercise of the over-allotment option was $24,453,528, which includes $1,996,472 in discounts, commissions and offering expenses paid by the Company.

On June 23, 2022, the Company completed a private placement of Senior Notes in an aggregate principal amount of $6,000,000 and warrants to purchase 4,250,000 shares of common stock of the Company to affiliates of Bleichroeder L.P., 21 April Fund, L.P., and 21 April Fund, Ltd.

(together, the "Purchasers"), pursuant to a note and warrant purchase agreement.

Additionally, as part of the transaction, the Company issued 230,000 warrants to the placement agent.

All warrants issued in this transaction have an exercise price of $0.65 per share, a term of five years, and are exercisable for cash at any time. 

On July 29, 2022, the Company announced the appointment of Fei Chen as President & Chief Executive Officer, and a member of the Company’s Board of Directors.

On November 17, 2022, the Company entered into a new distribution agreement with NESR for commercialization of produced water treatment solution for re-injection.

On December 20, 2022, the Company entered into a cooperation agreement with Ecolotron Wasterwater Solutions on a combined solution for Phosporic acid purification

Results of Operations

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Research and development expenses

Restructuring costs

Total Operating Expenses

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Other Income (Expense)

Gain on modification of earn-out liability

Interest and other income

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Amortization discount on Convertible Note

Fair value adjustment of warrants

Gain (Loss) on currency transactions

Gain (Loss) on lease termination

Gain (Loss) on sale of fixed assets

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Income Taxes Provision (Benefit)

Net Income/(Loss)

Revenue for the year ended December 31, 2022 was $15,982,438 compared to $18,273,442 for the same period in 2021, representing a decrease of $2,291,004, or 13%.

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.

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.

The decline in revenue was primarily due to lower system sales and currency headwinds due to weakening of the EUR and DKK compared to the USD, partly offset by growth in sales of DPFs and plastics products measured in local currency.

For the years ended December 31, 2022 and 2021, sales of systems, spare parts and related services were $5,297,286 and $7,196,465, respectively, and accounted for 33% and 39% of our total sales.

For the years ended December 31, 2022 and 2021, sales of DPFs and ceramic membranes were $6,844,861 and $7,183,868, respectively, and accounted for 43% and 39% of our total sales.

For the years ended December 31, 2022 and 2021, plastics revenues were $3,528,606 and $3,615,681, respectively, and accounted for 22% and 20% of our total sales.

The decrease in sales of systems and related services of $1,899,179, reflecting a year on year decline of 26%, was a result of the negative impact of the uncertain macroeconomic environment and prolonged inflationary pressure, but also increased supply chain restrictions and general market volatility, which has resulted in significant restrictions and business limitations including a substantial decline in the demand and delivery of water treatment systems for the global marine scrubber industry.

The demand for our ceramic membranes and DPFs reflects continued interest in advanced environmental filtration solutions with a focus on the reduction of global CO2 emissions amid increased political and regulatory efforts, resulting in a year-on-year constant currency increase of 7%, offset by the negative impact of the currency headwinds from the weakening of the EUR compared to the USD, resulting a year-on-year decline of 5% to $6,844,861.

The sale of plastic products benefitted from a year-on-year increase of 10% measured in local currency predominantly in the first half of the year underpinned by a diversified customer base, stable order intake, and delivery of large orders for the Asia Pacific marked, followed by increased uncertainty and reduced activity levels amid the European energy crisis in the second half of the year.

In addition, the adverse impact of the USD appreciation against the DKK-denominated revenue base resulted in the year-on-year decline of 2% to $3,528,606.

For the years ended December 31, 2022 and 2021, revenue from R&D projects was $311,685 and $277,428, respectively, an increase of 12%.

Gross profit for the year ended December 31, 2022 was $567,144 compared to $1,576,146 for the same period in 2021, representing a decrease of $1,009,002, or approximately 64%.

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.

The decrease in gross profit was largely the result of lower overall market activity and a lower relative mix of filtration system sales in our product mix, which typically command higher average gross margins.

Gross profit was further negatively impacted by the European energy crisis amid the Russia and Ukraine conflict and corresponding high electricity costs that also negatively impacted our competitive positioning as compared to companies operating outside of Europe, where the energy crisis has been less pronounced.

Proactive measures such as the reduction in capacity and the implementation of electricity price surcharges were implemented by the company to defend profitability to the extent possible.

Furthermore, gross profit also included higher provisions for obsolescence and certain non-recurring costs associated with a strategic review of inventories.

Included in the gross profit for the year ended December 31, 2022 is depreciation of $1,822,402 compared to $1,957,357 for the same period in 2021.

Total operating expenses for the year ended December 31, 2022 were $13,100,898, representing an increase of $837,428, or approximately 7%, compared to $12,263,470 for the same period in 2021.

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.

Excluding restructuring charges of approximately $1.9 million, 2022 operating expenses were 9% lower than 2021.

More importantly the fourth quarter operating expenses were approximately 34% lower compared to the same period in 2021.

Selling expenses for the year ended December 31, 2022, were $3,669,887 compared to $4,564,188 for the same period in 2021, representing a decrease of $894,301 or approximately 20%.

The decrease is explained by the cost reduction and reorganization efforts initiated in 2022, including headcount reductions and organizational streamlining, partly offset by increased costs associated with increasing direct sales efforts, consulting service engagements, direct marketing activities, and bad debt provisions.

General and administrative expenses for the year ended December 31, 2022, were $5,701,955 compared to $5,836,629 for the same period in 2021, representing a decrease of $134,674, or 2%.

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 decrease for the year ended December 31, 2022, reflects the benefits of the cost reduction and restructuring efforts implemented in the first half of 2022 and fully implemented by the end of the year with favorable currency tailwinds from the weakening of the DKK compared to USD.

However, these savings were partly offset by non-recurring costs related to the CEO transition (increased non-cash compensation and recruitment expense) and consultancy costs associated with the now closed Chinese factory.

Included in general and administrative expenses is non-cash compensation expense of $934,423 and $481,105 for the years ended December 31, 2022 and December 31, 2021, respectively, representing an increase of $453,318, or 94%, attributable to stock grants to management in the context of the CEO transition. 

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

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Total Non-Cash Compensation

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.

Research and development expense for the year ended December 31, 2022 was $1,835,890 compared to $1,862,653 for the same period in 2021, representing a decrease of $26,763, or 1%.

The change is attributable to increased spending on materials used for ongoing development projects and patent applications, offset by the benefit of the USD appreciation and a decrease in the average number of employees engaged in research and development activities, as the Company streamlined and centralized the R&D function.

Restructuring costs for the year ended December 31, 2022, were $1,893,166 compared to $0 for the same period in 2021 fully attributable to the restructuring program that was executed in the second quarter (See Note 3).

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.

Total Other income (expense) for the year ended December 31, 2022 was $(1,872,763) compared to $(502,672) for the comparable period in 2021, representing an increase of $(1,370,091), or 273%.

The change is mainly related to the lower gain on currency transactions and the early repayment of the Convertible Note issued in April 2021, reflecting the full recognition of the repayment premium and amortization cost in the second quarter.

Other income for the year benefited from the decrease in interest expenses due the repayment of the Convertible Note, receipt of COVID-19 grants to the Danish entities, and a gain associated with lease terminations. 

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.

The income tax benefit for the year ended December 31, 2022 was $237,410 compared to a benefit of $63,036 for the comparable period in 2021, representing an increase of $174,374, or 277%, mainly driven by an increase in tax credits associated with research and development activities in Denmark.

Net Income/Loss

Net income/loss for the year ended December 31, 2022 was $(14,169,107) compared to $(11,126,960) for the comparable period in 2021, representing an increased loss of $3,042,147.

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.

The change was primarily attributable to non-recurring restructuring costs, early repayment of the Convertible Note issued in April 2021, the increase in non-cash compensation, the closure of the production facility in China, and the CEO transition.

Furthermore, the change was also impacted by a decline in gross margin, caused largely by inflationary cost pressures on raw materials and electricity, lower overall sales activity levels and an unfavorable revenue mix with a lower share of higher margin systems sales.

Increased costs were partly offset by the benefits from the USD appreciation against the EUR/DKK-denominated cost base, general cost reductions and reorganization activities.

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.

Based on the continued market volatility and geopolitical unrest pertaining to the Russia and Ukraine conflict, European energy crisis, and macro-economic uncertainty, the Company is unable to predict the full impact this will have on our long-term financial condition, results of operations, liquidity, and cash flows.

The Company has planned and executed on decisive measures in 2022 to help safeguard the business and its financial position by reducing cost, headcount, and overall capex commitments, which together with the successful completion of the $26.5 million public offering of common stock and pre-funded warrants, substantially improved the near-term liquidity position of the Company.

Furthermore, in June 2022, the Company completed the refinancing of its $15 million Convertible Note due in 2023, partly funded by the issuance of the new $6 million Senior Promissory Notes due in June 2024 along with the proceeds from the public offering.

The Senior Promissory Notes are interest-free, with full redemption after 24 months.

Based on current projections, which are subject to significant uncertainties, including the duration and severity of global macroeconomic issues, commodity volatility, and continued global supply chain disruptions, the Company believes the cash on hand, as well as ongoing cash generated from operations, will be sufficient to cover its capital requirements and committed investments for the next 12 months.

Continued market uncertainty and reduced order intake caused by weakening global macroeconomic conditions, recession, or a resurgence of the COVID-19 pandemic, however, could unfavorably impact the Company’s ability to generate positive cash flow and thereby significantly reduce its profitability and liquidity position.

While the Company anticipates that its proactive measures will be sufficient to protect the business over the coming 12 months, the Company cannot predict the specific duration and severity of the unfavorable market dynamics that may adversely affect the business.

In the future, the Company may experience reduced or changed demand for its products and services, especially if there is a global recession, structural shift in regulation, or the continuation of escalating interest rates that adversely impacts the investment decisions of our customers.

The Company has historically satisfied its capital and liquidity requirements through offerings of equity instruments, cash from operations, and our available lines of credit.

On December 31, 2022, the Company had net working capital of $21,581,287, including cash of $16,597,371, and on December 31, 2021, the Company had net working capital of $11,199,258, including cash of $17,489,380.

The increase in net working capital of $10,382,029 compared to December 31, 2021 is mainly a result of the capital raise and repayment of the Convertible Note.

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.

For that purpose, we maintain a guaranteed credit line of EUR 1,350,000 (approximately $1,440,000), which is secured by a cash deposit.

Going Concern and Management ’

The financial statements included elsewhere herein for the year ended December 31, 2022, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business.

As of December 31, 2022, we had cash and cash equivalents of $16,597,371, an accumulated deficit of $67,351,035, and total liabilities of $16,816,283.

We have incurred losses from continuing operations, have used cash in our continuing operations, and are dependent on additional financing to fund operations.

These conditions raise substantial doubt about our ability to continue as a going concern for one year after the date the financial statements are issued.

The financial statements included elsewhere herein do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

The Company has initiated substantial cost reductions and profitability improvement measures in order to right size the business and develop a clear and sustainable path to profitability, further underpinned by an updated strategy and onboarding of key management resources.

However, there can be no assurance that the Company will be able to obtain any sources of funding.

Such additional funding may not be available or may not be available on reasonable terms, and, in the case of equity financing transactions, could result in significant additional dilution to our stockholders.

If we do not obtain required additional equity or debt funding, our cash resources will be depleted and we could be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained.

If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that could result in our stockholders losing some or all of their investment in us.

Funding that we may receive during fiscal 2023 is expected to be used to satisfy existing and future obligations and liabilities and working capital needs, as well as future operating losses.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

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 used by operating activities for the year ended December 31, 2022 was $12,039,020 compared to cash used by operating activities of $7,203,843 for the year ended December 31, 2021, representing an increase of $4,835,177.

The cash used by operating activities for the year ended December 31, 2022 consists mainly of the net loss for the year of $(14,169,107) adjusted by depreciation and other non-cash items of $5,705,351.

Further, changes in assets and liabilities include an increase of Accounts receivables of $460,837, an increase in Contract assets/liabilities of $695,616, and a decrease in Accrued expenses of $1,632,896, offset by a decrease in Inventory of $984,130.

Net cash used in investing activities was $1,689,986 for the year ended December 31, 2022 as compared to $1,450,139 for the year ended December 31, 2021, representing an increase of $239,847, or 17%.

The investing activities include the purchase of property and equipment to satisfy earlier commitments made for the production facility in China, with select equipment re-directed to the manufacturing facility in Ballerup as part of the strategic negotiation with vendors.

Cash provided by financing activities was $13,696,551 for the year ended December 31, 2022 as compared to $13,902,999 for the year ended December 31, 2021.

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.

For the year ended December 31, 2022, the change is mainly explained by the equity capital raise in the second quarter, generating net proceeds of $24,418,612 from the issuance of common stock and prefunded warrants, combined with the $6,000,000 proceeds from the issuance of the new Senior Promissory Notes, and offset by the full repayment of the Convertible Note issued in April 2021 of $16,800,000.

For the year ended December 31, 2021, the change was mainly attributable to the net cash proceeds of $14,283,333 related to the Convertible bond issuance in March 2021.

Net Cash Used in Operating Activities

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We are not aware of any material transactions that are not disclosed in our consolidated financial statements.

Critical Accounting Estimates

Critical Accounting Policies

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.

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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 allowance for product warranties, which impacts cost of sales;

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;

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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;

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.

The valuation of inventory, which impacts cost of sales;

The recognition and measurement of loss contingencies, which impact cost of sales 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.

We assess the collectability of accounts receivable and long-term receivables 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.

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Allowance for doubtful accounts at the end of the period

The receivables written off during the period 2022 mainly relates to legacy marine scrubber contracts and partnerships, renegotiated and terminated amid the COVID disruptions and general slowdown in the marine scrubber market.

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.

The Company accounts for Goodwill and definite-life intangible assets in accordance with the 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.

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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.

In addition, as we make manufacturing process changes 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.

Management has analyzed the impact of the current economic climate on its financial statements as of December 31, 2022 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, 2022 and 2021, no impairment charge of long-lived assets has been recorded. 

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For the Year Ended December 31

North America

The Company’s sales by product line are as follows for the years ended December 31, 2021 and 2020:

Middle East & Africa

The Company’s sales by product and service are as follows for the years ended December 31, 2022 and 2021:

% Distribution

For the Year Ended December 31

Liquid filters and systems

Diesel particulate filters

Plastics components

Development projects

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. 

For Water (systems and aftermarket), Ceramics (diesel particulate filters and membranes), and Plastics (components), revenue is recognized when performance obligations specified within 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 along with 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 satisfaction of performance obligations under the terms of a revenue contract generally gives rise to the right to receive 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.

1 unchanged sentence

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.

Considering the relatively short time 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.

1 unchanged sentence

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.

System sales are recognized when the Company transfers control to the customer based upon sales and delivery conditions specified in the sales contract.

This typically occurs upon shipment of the system from the production facility but can also occur upon other agreed delivery terms.

In connection with the completion of the system, it is normal procedure to issue a FAT (Factory Acceptance Test) asserting that the customer has accepted the performance of the system as it is being shipped from our production facility in Hobro.

This second performance obligation is recognized as revenue at the time of the commissioning services being rendered 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), this portion is recognized as Contract liabilities. 

Aftermarket sales represent parts, extended warranties, and maintenance services.

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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.

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.

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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.

To estimate the losses associated with repairing and replacing parts in connection with product warranties, 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.

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity