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 quoted on the Nasdaq Capital Market under the symbol LIQT.
As of December 31, 2024, there were approximately 42 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 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:
●
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, 2024, we have not sold any equity securities that were not registered under the Securities Act of 1933 and 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, 2024, we have not repurchased any of our equity securities.
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Item 6.
[Reserved]
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.
2024 Developments
On January 10, 2024, Simon Stadil tendered his resignation as Chief Financial Officer of the Company, effective as of April 10, 2024.
On February 14, 2024, the Company entered into a distribution agreement with Razorback Direct for produced water treatment solutions in the U.S.
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.
On May 7, 2024, the Company entered into a distribution agreement with Dan Marine Group for marine water treatment solutions for the Chinese market.
On May 14, 2024, the Company entered into a distribution agreement with Franman for marine water treatment solutions for the Greek Market.
On July 25, 2024, the Company entered into a distribution agreement with Danbee Marine Co. for marine water treatment solutions for the South Korean market.
On September 27, 2024, the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to issue and sell an aggregate of 3,630,129 shares of Common Stock, 1,369,871 pre-funded warrants to purchase shares of Common Stock, and warrants to purchase up to an aggregate of 5,000,000 shares of Common Stock for gross proceeds of approximately $10 million. The combined purchase price of one share of Common Stock and one accompanying warrant to purchase one share of Common Stock is $2.00. The combined purchase price of one pre-funded warrant and one accompanying warrant to purchase one share of Common Stock under the Purchase Agreement is $1.999.
The Company agreed to issue the Common Stock, warrants, and pre-funded warrants in two tranches: (i) a first tranche comprised of 29,227 shares of Common Stock, 555,302 pre-funded warrants, and warrants to purchase an aggregate of 584,529 shares of Common Stock, which closed on September 27, 2024; and (ii) a second tranche comprised of 3,600,902 shares of Common Stock, 814,569 pre-funded warrants, and warrants to purchase an aggregate of 4,415,471 shares of Common Stock, which closed on November 12, 2024.
On November 7, 2024, the Company announced the establishment of a joint venture in China for the marine water treatment market.
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Results of Operations
Results of Operations for the Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023
The following table sets forth our revenues, expenses, and net income for the years ended December 31, 2024, and 2023 in U.S. dollars, except for percentages.
Year Ended December 31,
Period to Period Change
As a %
As a %
Percent
2024
of Sales
2023
of Sales
Variance
%
Revenue
$
14,604,618
100.0
%
$
18,001,652
100.0
%
$
(3,397,034
)
(18.9
)%
Cost of goods sold
14,353,713
98.3
$
15,226,176
84.6
(872,463
)
(5.7
)
Gross Profit
250,905
1.7
2,775,476
15.4
(2,524,571
)
(91.0
)
Operating Expenses
Selling expenses
2,725,239
18.7
4,298,905
23.9
(1,573,666
)
(36.6
)
General and administrative expenses
5,661,455
38.8
4,856,779
27.0
804,676
16.6
Research and development expenses
1,352,060
9.3
1,418,842
7.9
(66,782
)
(4.7
)
Total Operating Expenses
9,738,754
66.7
10,574,526
58.7
(835,772
)
(7.9
)
Loss from Operation
(9,487,849
)
(65.0
)
(7,799,050
)
(43.3
)
(1,688,799
)
21.7
Other Income (Expense)
Interest and other income
178,834
1.2
366,365
2.0
(187,531
)
(51.2
)
Interest expense
(167,556
)
(1.1
)
(151,670
)
(0.8
)
(15,886
)
10.5
Amortization of debt discount
(615,552
)
(4.2
)
(400,903
)
(2.2
)
(214,649
)
53.5
Gain (loss) on foreign currency transactions
164,310
1.1
(359,960
)
(2.0
)
524,270
(145.6
)
Gain (loss) on disposal of property and equipment
(456,282
)
(3.1
)
7,254
0.0
(463,536
)
(6,390.1
)
Loss on assets held for sale
-
-
(439,388
)
(2.4
)
439,388
(100.0
)
Total Other Expense
(896,246
)
(6.1
)
(978,302
)
(5.4
)
82,056
(8.4
)
Loss Before Income Taxes
(10,384,095
)
(71.1
)
(8,777,352
)
(48.8
)
(1,606,743
)
18.3
Income Tax Benefit
(38,837
)
(0.3
)
(206,207
)
(1.1
)
167,370
(81.2
)
Net Loss
$
(10,345,258
)
(70.8
)%
$
(8,571,145
)
(47.6
)%
$
(1,774,113
)
20.7
%
Revenues
Revenue for the year ended December 31, 2024, was $14,604,618 compared to $18,001,652 for the same period in 2023, representing a decrease of $3,397,034, or 18.9%. The decline was mainly due to reduced deliveries of liquid filtration systems, plastics products, ceramic membranes, and aftermarket sales, partly offset by increased sales of DPFs.
The decrease in deliveries of liquid filtration systems was mainly driven by reduced deliveries of pool filtration systems and marine scrubber systems. The decline in aftermarket sales was primarily due to remediation work carried out in the same period of 2023, which did not recur in 2024. The reduction in sales of plastic products was largely due to a significant one-time sale recorded in 2023 that did not recur in the current period. The increase in sales of DPFs was primarily driven by the effective execution of strategies designed to capitalize on the increased demand for DPFs.
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Gross Profit
Gross profit for the year ended December 31, 2024, was $250,905 (or a gross profit margin of 1.7%), compared to $2,775,476 (or a gross profit margin of 15.4%) for the same period in 2023, representing a decrease of $2,524,571, or approximately 91.0%. This decline in gross profit can be attributed to the decrease in revenue, resulting in lower overall activity levels and underutilization of our manufacturing capacity, as well as an unfavorable sales mix, which resulted in a lower proportion of high-margin products such as liquid filtration systems and ceramic membranes. Specifically, the deliveries of containerized oil and gas pilot systems to the Middle East and the U.S. contributed to lower-than-usual margins, reflecting a strategic decision aimed at demonstrating and validating the value proposition associated with our technology and seeding the market for future growth. This approach has proven successful, securing an order for a full-scale system scheduled for delivery in 2025. Additionally, a thorough inventory review led to necessary adjustments for obsolescence and slow-moving items. The decline in gross profit was partly offset by decreased depreciation as well as continued initiatives aimed at optimizing manufacturing processes, which have improved profitability within DPF and ceramic membrane production. Included in the gross profit was depreciation of $1,830,553 and $2,598,095 for the years ended December 31, 2024, and 2023, respectively.
Operating Expenses
Total operating expenses for the year ended December 31, 2024, were $9,738,754, representing a decrease of $835,772, or 7.9%, compared to $10,574,526 for the same period in 2023.
Selling expenses for the year ended December 31, 2024, were $2,725,239, compared to $4,298,905 for the same period in 2023, representing a decrease of $1,573,666, or 36.6%. This decline was primarily driven by a reduction in executive officers, along with reductions in bonus payouts, travel costs, marketing expenses, and expenditures related to external sales consultancy services. The decrease was partially offset by increased bad debt expenses.
General and administrative expenses for the year ended December 31, 2024, were $5,661,455 compared to $4,856,779 for the same period in 2023, representing an increase of $804,676, or 16.6%. The increase was primarily due to newly created positions in supply chain and project management, as well as higher legal expenses, insurance costs, and recruitment costs associated with the resignations of our CFO and VP of Sales. Additionally, one-time expenses were incurred for the relocation of our plastics production facility. The increase was also partially attributable to the release of bonus provisions in the comparable period of 2023. Included in general and administrative expenses was non-cash compensation of $664,434 and $627,904 for the years ended December 31, 2024, and 2023, respectively.
The following is a summary of our non-cash compensation:
2024
2023
Compensation for vesting of restricted stock awards issued to the Board of Directors
$
202,125
$
203,708
Compensation for vesting of restricted stock awards issued to management
462,309
424,196
Total Non-Cash Compensation
$
664,434
$
627,904
Research and development expense for the year ended December 31, 2024, was $1,352,060 compared to $1,418,842 for the same period in 2023, representing a decrease of $66,782, or 4.7%. The decrease was primarily due to a more focused R&D strategy with fewer ongoing projects and a reduced average number of employees engaged in external research and development activities, as the Company streamlined and centralized its R&D function. This was partially offset by one-time exit costs associated with a loss-making external development project.
Other income (expense)
Total Other expense for the year ended December 31, 2024, was $896,246 compared to $978,302 for the comparable period in 2023, representing decreased expense of $82,056, or 8.4%. The decrease was primarily attributable to a gain on currency transactions resulting from the EUR/DKK decline against the USD during the period and a loss on assets held for sale in the comparable period in 2023. This decrease in other expenses was partially offset by a non-cash loss related to the disposal of property and equipment, decreased interest income, and higher debt discount amortization costs due to the extension of the maturity date for the senior promissory notes, with additional warrants issued as consideration for the extension.
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Table of Contents
Income taxes provision
The income tax benefit for the year ended December 31, 2024, was $38,837 compared to a benefit of $206,207 for the comparable period in 2023, representing a decrease of $167,370, or 81.2%, mainly driven by a decrease in tax credits associated with research and development activities in Denmark.
Net Loss
As a result of the cumulative effect of the factors described above, we had a net loss for the year ended December 31, 2024, of $10,345,258 compared to $8,571,145 for the comparable period in 2023, representing an increase in net loss of $1,774,113, or 20.7%.
Cash Flows
Year Ended December 31, 2024, Compared to Year Ended December 31, 2023
Cash used by operating activities is net loss adjusted for certain non-cash items and changes in assets and liabilities. Cash used by operating activities for the year ended December 31, 2024, was $7,534,072 compared to cash used by operating activities of $4,183,918 for the year ended December 31, 2023, representing an increase of $3,350,154. The cash used by operating activities for the year ended December 31, 2024, consists mainly of the net loss for the year of $(10,345,258) adjusted by depreciation and other non-cash items of $4,432,671. Further, changes in assets and liabilities included a decrease in accounts payable of $1,050,406, a decrease in accrued expenses of $908,607, and an increase in inventories of $587,806, partly offset by a decrease in contract assets of $1,102,791 and a decrease in accounts receivable of $620,116.
Net cash used in investing activities was $424,036 for the year ended December 31, 2024, as compared to $2,886,036 for the year ended December 31, 2023, representing a decrease of $2,462,000. The investing activities include general purchases of production equipment to continue optimizing production throughput and the internal production of rental assets, partly offset by proceeds from the disposition of production equipment in our Ballerup facility.
Cash provided by financing activities was $8,493,300 for the year ended December 31, 2024, as compared to $580,645 for the year ended December 31, 2023, representing an increase of $7,912,655. The increase was mainly driven by the equity raise, generating net proceeds of $9,922,063 from the issuance of common stock and prefunded warrants, partly offset by the repayment of lease agreements in connection with the sales of production equipment in Ballerup as mentioned above.
2024
2023
Net Cash Used in Operating Activities
$
(7,534,072
)
$
(4,183,918
)
Net Cash Used in Investing Activities
(424,036
)
(2,886,036
)
Net Cash Provided by Financing Activities
8,493,300
580,645
Net Change in Cash and Cash Equivalents
446,547
(6,175,190
)
Cash and Cash Equivalents at End of Period
$
10,868,728
$
10,422,181
Off-Balance Sheet Arrangements
As of December 31, 2024, 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 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, which have been prepared in accordance with U.S. GAAP. 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:
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Table of Contents
●
The assessment of revenue recognition, which impacts revenue and cost of sales;
●
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;
●
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 cost of sales; and
●
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 and Allowance for Current Expected Credit Losses
Accounts receivable consist of trade receivables arising from credit sales to customers in the normal course of business. These receivables are recorded at the time of sale, net of an allowance for current expected credit losses. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 326, “ Financial Instruments – Credit Losses ,” the Company estimates expected credit losses based on historical bad debt experience, the aging of accounts receivable, the current creditworthiness of customers, prevailing economic conditions, and reasonable and supportable forward-looking information. Accounts receivable balances are written off when they are determined to be uncollectible.
The roll-forward of the allowance for current expected credit losses for the year ended December 31, 2024, and December 31, 2023 were as follows:
December 31,
December 31,
2024
2023
Allowance for current expected credit losses at the beginning of the period
$
134,912
$
59,559
Bad debt expense
578,423
82,066
Receivables written off during the periods
(49,577
)
(10,298
)
Effect of exchange rate changes
(26,202
)
3,585
Allowance for current expected credit losses at the end of the period
$
637,556
$
134,912
Inventories
Inventories directly purchased are carried at the lower of cost or net realizable value, as determined on the first-in, first-out (“FIFO”) method. For inventories produced, standard costs that approximate actual cost on the FIFO method are used to value inventories. Standard costs are reviewed at least annually by management or more often if circumstances indicate a change in cost has occurred. Work in process and finished goods include material, labor, and production overhead costs.
The Company adjusts the value of its inventories to the extent management determines that the cost cannot be recovered due to obsolescence or other factors. Inventory valuation adjustments for excess and obsolete inventories are calculated based on current inventories levels, movement, expected useful lives, and estimated future demand for our products.
Goodwill and Intangible assets
The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business, with the residual purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
Acquired intangible assets with determinable useful lives are amortized on a straight-line or accelerated basis over the estimated periods benefited, ranging from one to ten years. Customer relationships and other non-contractual intangible assets with determinable lives are amortized over periods of five years.
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Table of Contents
The Company evaluates the recoverability of long-lived assets by comparing the carrying amount of an asset to estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. The evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not limited to, revenue growth rates, gross profit margins, and operating expenses over the expected remaining useful life of the related asset. A shortfall in these estimated operating cash flows could result in an impairment charge in the future.
Goodwill is not amortized but is evaluated annually for impairment at the reporting unit level or when indicators of a potential impairment are present. The Company estimates the fair value of the reporting unit using the discounted cash flow and market approaches. Forecasts of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, using primarily expected category expansion, pricing, market segment fundamentals, and general economic conditions. During the years ended December 31, 2024, and 2023, no impairment charge for goodwill was recorded.
Long-Lived Assets
The Company assesses 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 the Company considers 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 its use of the assets. The Company measures the recoverability of assets that will continue to be used in its operations by comparing the carrying value of the asset grouping to its 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 the Company’s asset usage model and the interchangeable nature of its ceramic filter manufacturing capacity, the Company must make subjective judgments in determining the independent cash flows that can be related to specific asset groupings. In addition, as the Company makes manufacturing process changes and other factory planning decisions, it must make subjective judgments regarding the remaining useful lives of assets, primarily process-specific filter manufacturing tools and building improvements. If the Company determines that the useful lives of assets are shorter than it had originally estimated, the Company accelerates the rate of depreciation over the assets’ new, shorter useful lives.
Management has analyzed the impact of the current economic climate on its financial statements as of December 31, 2024, 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, 2024, and 2023, no impairment charge of long-lived assets has been recorded.
Revenue Recognition
The Company records revenue in accordance with FASB ASC Topic 606, “ Revenue from Contracts with Customers .” Revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the Company applies the following five-step approach: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as a performance obligation is satisfied.
The Company sells products throughout the world. Sales by geographical region for the years ended December 31, 2024, and 2023 were as follows:
% Distribution
For the Year Ended December 31
2024
2023
2024
2023
Americas
18
%
12
%
$
2,693,002
$
2,125,460
Asia-Pacific
5
%
14
%
645,044
2,506,215
Europe
71
%
65
%
10,440,040
11,820,674
Middle East & Africa
6
%
9
%
826,532
1,549,303
Totals
100
%
100
%
$
14,604,618
$
18,001,652
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Table of Contents
The Company’s sales by product line for the years ended December 31, 2024, and 2023 were as follows:
% Distribution
For the Year Ended December 31
2024
2023
2024
2023
Water
38
%
42
%
$
5,538,741
$
7,705,080
Ceramics
39
%
35
%
5,634,973
6,232,628
Plastics
23
%
21
%
3,381,408
3,736,529
Corporate
0
%
2
%
49,496
327,415
Totals
100
%
100
%
$
14,604,618
$
18,001,652
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 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. 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. 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. 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 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. 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 profit. 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.
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Table of Contents
Aftermarket sales represent parts, extended warranties, and maintenance services. For the sale of aftermarket parts, the Company transfers control and recognizes revenue when parts are shipped to the customer. When customers are given the right to return eligible parts and accessories, the Company estimates the expected returns based on an analysis of historical experience. The Company adjusts estimated revenues at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. The Company recognizes revenue for extended warranty and maintenance agreements based on the standalone selling price over the life of the contract.
The Company has received long-term contracts for grants from government entities for the development and use of silicon carbide membranes in various water filtration and treatment applications and historically in the installation of various water filtrations systems. We measure transfer of control of the performance obligation on long-term contracts utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs such as labor and materials. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and a significant factor in the accounting for such performance obligations. The timing of when we bill our customers is generally dependent upon advance billings terms, milestone billings based on completion of certain phases of the work or when services are provided, or 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.
Contracts Assets and Liabilities
Contract assets are the Company’s rights to consideration in exchange for goods or services and are recognized when a performance obligation has been satisfied but has not yet been billed. When the Company issues invoices to the customer, and the billing is higher than the capitalized Contract assets, the net amount is transferred to Contract liabilities. Contract assets/liabilities are transferred to revenue and cost of revenues when the right to consideration is unconditional and billed per the terms of the contractual agreement.
Contract assets also include unbilled receivables, which usually comprise the last invoice remaining after the delivery of the water treatment unit, where revenue is recognized at the transfer of control based upon signed acceptance of the unit by the customer. Most commonly, this invoice is sent to the customer at commissioning of the product or no later than 12 months after delivery. Further included in Contract Assets are short-term receivables such as VAT and other receivables.
The roll-forward of contract assets and contract liabilities for the years ended December 31, 2024, and 2023 were as follows:
December 31,
December 31,
2024
2023
Cost incurred
$
2,512,901
$
3,225,728
Unbilled project deliveries
51,442
582,557
VAT
93,961
329,980
Other receivables
20,972
92,619
Prepayments
(1,121,897
)
(1,688,427
)
Deferred Revenue
-
(33,360
)
$
1,557,379
$
2,509,097
Distributed as follows:
Contract assets
$
1,666,698
$
2,891,744
Contract liabilities
(109,319
)
(382,647
)
$
1,557,379
$
2,509,097
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Income Taxes
Income taxes are accounted for under the asset and liability method in accordance with ASC 740, “ Income Taxes .” Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and establishes a valuation allowance if, based on the weight of available evidence, it believes it is more likely than not that all or a portion of the deferred tax assets will not be realized.
The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not the position will be sustainable upon examination by the taxing authority, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the tax authorities have full knowledge of all relevant information concerning the tax position. The tax benefit recognized is measured as the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense.
Stock-Based Compensation
Stock-based awards granted to qualified employees, non-employee directors, and consultants are measured at fair value and recognized as an expense in accordance with ASC Topic 718, “ Share-Based Payments .” For service-based awards, stock-based compensation is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. The fair value of our stock options is estimated using a Black-Scholes option valuation model. Restricted stock awards are valued based on the closing stock price on the date of grant. The Company has elected to recognize forfeitures as they occur.
Warrant Liabilities
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants in accordance with ASC 480, “ Distinguishing Liabilities from Equity ,” and ASC 815-40, “ Contracts in Entity ’ s Own Equity .” This assessment, which requires the use of professional judgment, considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815-40, including whether the warrants are indexed to the Company’s own shares and whether the events where holders of the warrants could potentially require net cash settlement are within the Company’s control, among other conditions for equity classification. Warrant liabilities are recognized at fair value, with changes in fair value recognized in the consolidated statement of operations each period.
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 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. 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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