Item 9A. Controls and Procedures
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and effectiveness of our internal controls over financial reporting and disclosure controls and procedures (pursuant to Rule 13a-15(b) and (c) under the Exchange Act) as of the end of the period covered by this Annual Report. A weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a misstatement of the registrant's financial statements will not be prevented or detected on a timely basis.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2023 were not effective due to material weaknesses in internal controls over financial reporting, described below
Notwithstanding this finding, we concluded that the consolidated financial statements included in this Report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States. During the year ended December 31, 2023, the Company was not subject to the requirements of Section 404(b) of the Sarbanes-Oxley Act. As such, our independent registered public accounting firm was not required to, and thus did not, audit our internal control structure.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.
Internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting is defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the audited consolidated financial statements.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the Company's management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the criteria set forth in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commissions (2013).
Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2023 were not effective due to material weaknesses in internal controls over financial reporting.
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Material weaknesses as of December 31, 2023
A material weakness is a deficiency, or combination thereof, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses we identified related to the following:
1)
Ineffective information technology general controls (ITGC’s) in the areas of user access and program change-management over certain information technology systems that support the Company’s financial reporting processes Additionally, management has identified a material weakness in its internal control over financial reporting related to information technology general controls in the areas of service organization control report review.;
2)
The lack of formal documentation of the design, and related execution of, certain transactional level controls related to disbursements, procurement, and inventory management and valuation; and
3)
Ineffective design and operation of process level controls over the existence and accuracy of revenue transactions.
Management's Remediation Initiatives
In response to the identified material weaknesses, our management, with oversight from the Company’s Audit Committee, has been and will continue to dedicate necessary resources to enhance the Company’s internal control over financial reporting and remediate the identified material weaknesses. As an example of such remediation, the Company in 2023 hired additional employees into the finance department, and we plan to continue to work on remediating the material weaknesses during 2024 by improving competencies and processes. Further, the Company implemented a new ERP system along with other IT programs to help reinforce its controls and processes, and these investments are an important step in the remediation of the material weaknesses. During 2022, the Company introduced an updated Delegation of Authority, with the overall purpose to provide clarity for all employees on the extent to which they can commit the Company and at the same time provide the Company with assurance that decisions about agreements are made by the appropriate functions and employees. Lastly, the Company has started the process of redesigning and ensuring documentation of all processes and procedures related to the financial reporting process to ensure the effective design and operation of process-level controls.
While management believes that the steps that we have taken and plan to take will improve the overall system of internal control over financial reporting and will remediate identified material weaknesses, the material weaknesses cannot be considered remediated until the applicable relevant controls operate for a sufficient period of time.
Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we completed substantive procedures for the year ended December 31, 2023. Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP. Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the periods presented in this Form 10-K.
Changes in Internal Control
During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Limitations on the Effectiveness of Internal Controls
An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
While management believes that the steps that we have taken and plan to continue to take will improve the overall system of internal control over financial reporting and will remediate identified material weaknesses, the material weaknesses cannot be considered remediated until the applicable relevant controls operate for a sufficient period of time.
Item 9B.
Other Information
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
On March 19, 2024, the board of directors of the Company appointed Phillip Massie Price as Interim Chief Financial Officer of the Company, effective April 1, 2024. Mr. Price, 32, has served the Company as its Head of Finance since January 2022. Prior to serving the Company, from April 2021, Mr. Price was the Chief Accountant and Administration Manager at Vektus A/S. a consultancy firm that sells and supports Dynamics NAV/Dynamics 265 Business Central, Microsoft’s comprehensive business management solution. Prior to his time with Vektus, from June 2020, Mr. Price was the Business Controller at K.W. Bruun Import A/S, one of the largest car importers in the Nordic region. Prior to K.W. Bruun, from 2013, Mr. Price was an auditor at inforevision, an accounting and consultancy firm. Mr. Price holds a Bsc. in Economics and Business Administration and a Msc. in Business Economics and Auditing from Copenhagen Business School.
On January 28, 2022, the Company (through its wholly owned Danish subsidiary) and Mr. Price entered into an Employment Contract, effective January 3, 2022 ( as amended, the “Employment Contract”). In connection with Mr. Price’s appointment as Interim Chief Financial Officer, the Company and Mr. Price entered into an addendum to his Employment Contract (the “Addendum”) which provides that for so long as Mr. Price serves as Interim Chief Financial Officer, he shall be paid a salary of 100,000 DKK (appr. $14,660 ) per month and will be eligible to receive an annual bonus of up to 300,000 DKK (appr. $43,980 ).
The foregoing descriptions of the Employment Contract and the Addendum are not complete and are in summary form only and are qualified in their entirety by reference to the full text of the Employment Contract and Addendum, which are filed as Exhibits 10.16, and 10.17 to this Annual Report on Form 10 -K, respectively.
Mr. Price does not have any family relationships with any of the Company’s other officers or directors and he has no direct or indirect material interest in any transaction required to be disclosed pursuant to Item 404 (a) of Regulation S-K.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this Item 10 is incorporated herein by reference to our Definitive Proxy Statement relating to our 2024 Annual Meeting of Stockholders or alternatively will be included, by amendment to this Form 10-K under cover of Form 10-K/A no later than 120-days after the end of our fiscal year covered by this report.
Item 11.
Executive Compensation
The information required by this Item 11 will be included in the Definitive Proxy Statement referenced above in Item 10 and is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be included in the Definitive Proxy Statement referenced above in Item 10 and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 will be included in the Definitive Proxy Statement referenced above in Item 10 and is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information required by this Item 14 will be included in the Definitive Proxy Statement referenced above in Item 10 and is incorporated herein by reference.
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PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a)
Financial Statements and Schedules
The financial statements are set forth under Item 8 of this Annual Report. The following financial statement schedule for the years ended December 31, 2023 and December 31, 2022 is included in this Annual Report on Form 10 -K:
a.
Valuation and Qualifying Accounts for the years ended December 31, 2023 and December 31, 2022.
2023
2022
Bad debt expense
82,066 ( 24,534 )
Reserve for obsolete inventory
177,953 404,160
Balance
Beginning
of Year
Charges to
Costs and
Expenses
Deductions
(1)
Balance
End of
Year
Year Ended December 31, 2023
Allowance for inventory obsolescence
$ 663,227 $ 177,953 $ 26,278 $ 867,458
Allowance for doubtful accounts
59,559 82,066 ( 6,713 ) 134,912
Totals
$ 722,786 $ 260,019 $ 19,565 $ 1,002,370
Year Ended December 31, 2022
Allowance for inventory obsolescence
$ 268,470 $ 404,160 $ ( 9,403 ) $ 663,227
Allowance for doubtful accounts
409,076 ( 24,534 ) ( 324,983 ) 59,559
Totals
$ 677,546 $ 379,626 $ ( 334,386 ) $ 722,786
2023
2022
Allowance for doubtful accounts at the beginning of the period
$ 59,559 $ 409,076
Bad debt expense
82,066 ( 24,534 )
Receivables written off during the periods
( 10,298 ) ( 295,778 )
Effect of currency translation
3,585 ( 29,205 )
Allowance for doubtful accounts at the end of the period
$ 134,912 $ 59,559
( 1 ) Includes write-offs, the impact of foreign currency exchange rates.
Schedules other than that listed above are omitted because the conditions requiring their filing do not exist or because the required information is provided in the Consolidated Financial Statements, including the Notes thereto. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.
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(b)
Exhibits
Exhibit
No.
Description
Location
3.1
Articles of Incorporation, as amended as of November 13, 2023
Filed herewith
3.2
Amended and Restated Bylaws
Incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q as filed with the SEC on May 15, 2012
4.1
Form of Pre-Funded Warrant
Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K as filed with the SEC on June 2, 2020
4.2
Form of Amendment to Pre-Funded Warrant
Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q as filed with the SEC on November 9, 2020
4.3
Description of our Common Stock
Incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K as filed with the SEC on March 30, 2020
4.4
Form of Pre-Funded Warrant
Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the SEC on August 20, 2021
4.5
Form of Pre-Funded Warrant
Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the SEC on May 17, 2022
4.6
Form of Warrant
Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the SEC on June 27, 2022
4.7
Form of Warrant
Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the SEC on October 19, 2023
10.1
Lease Agreement for Industriparken 22C, 2750 Ballerup, Denmark
Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K/A as filed with the SEC on November 15, 2011 (translated in English)
10.2
Form of Securities Purchase Agreement, by and among the Company and the purchasers named therein
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on June 2, 2020
10.3
Form of Registration Rights Agreement, by and among the Company and the investors named therein
Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K as filed with the SEC on June 2, 2020
10.4
Lease Contract for Benshoej Industrivej 24, 9500 Hobro
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on December 5, 2019
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10.5
Form of Exchange Agreement
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on August 20, 2021
10.6*
Executive Service Agreement by and between Liqtech Holding A/S and Simon Stadil
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on November 30, 2021
10.7*
LiqTech International, Inc. 2013 Share Incentive Plan
Incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 as filed with the SEC on January 27, 2014
10.8
Note and Warrant Purchase Agreement, by and among the Company and the Purchasers
Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K as filed with the SEC on June 27, 2022
10.9
Form of Note
Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K as filed with the SEC on June 27, 2022
10.10
Registration Rights Agreement, by and among the Company and the Purchasers
Incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K as filed with the SEC on June 27, 2022
10.11
First Amendment to Note and Warrant Purchase Agreement
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 19, 2023
10.12
Form of Allonge No. 1
Included in Exhibit 10.11
10.13*
Executive Service Agreement, dated July 26, 2022, by and between LiqTech Holdings A/S and Fei Chen
Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K as filed with the SEC on August 1, 2022
10.14*
LiqTech International, Inc. 2022 Equity Incentive Plan
Incorporated by reference to Annex A to the Company’s Proxy Statement pursuant to Section 14(a) of the Exchange Act filed with the SEC on October 3, 2022
10.15
Exclusivity Agreement for Collaboration, Marketing and Deployment of Products and Associated Services, dated November 11, 2022, by and between the Company and NESR
Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K as filed with the SEC on November 17, 2022
10.16
Employment Contract, dated January 28, 2022, by and between LiqTech Holdings A/S and Phillip Massie Price
Filed herewith
10.17
Addendum to Employment Contract, dated March 20, 2024, by and between LiqTech Holdings A/S and Phillip Massie Price
Filed herewith
21.1
List of Subsidiaries
Filed herewith
23.1
Consent of Sadler, Gibb
Filed herewith
31.1
Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2
Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.1
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
Furnished herewith
32.2
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
Furnished herewith
97.1
Clawback Policy
Filed herewith
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101. INS
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
Provided herewith
101. CAL
Inline XBRL Taxonomy Extension Calculation Link base Document
Provided herewith
101. DEF
Inline XBRL Taxonomy Extension Definition Link base Document
Provided herewith
101. LAB
Inline XBRL Taxonomy Label Link base Document
Provided herewith
101. PRE
Inline XBRL Extension Presentation Link base Document
Provided herewith
101. SCH
Inline XBRL Taxonomy Extension Scheme Document
Provided herewith
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
Provided herewith
*
Denotes a management contract or compensatory plan or arrangement.
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Item 16.
Form 10-K Summary
Not Applicable.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIQTECH INTERNATIONAL, INC.
Date: March 22, 2024
By:
/s/ Fei Chen
Fei Chen
Chief Executive Officer and Principal Executive Officer
In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated.
Signatures
Title
Date
/s/ Alexander Buehler
Chairman of the Board of Directors
March 22, 2024
Alexander Buehler
/s/ Fei Chen
President, Chief Executive Officer, Principal Executive Officer and Director
March 22, 2024
Fei Chen
/s/ Simon Stadil
Chief Financial Officer, Principal Financial and Accounting Officer
March 22, 2024
Simon Stadil
/s/ Peyton Boswell
Director
March 22, 2024
Peyton Boswell
/s/ Richard Meeusen
Director
March 22, 2024
Richard Meeusen
/s/ Martin Kunz
Director
March 22, 2024
Martin Kunz
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