LIQTECH INTERNATIONAL INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Glimpses |
The following discussion should be read in conjunction with our unaudited
condensed consolidated financial statements and the related notes included
elsewhere in this quarterly report. In addition, the following discussion should
be read in conjunction with our annual report on Form 10-K filed with the U.S.
Securities and Exchange Commission on , and the financial
statements and notes thereto. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements. Given
these risks and uncertainties, readers are cautioned not to place undue reliance
on such forward-looking statements.



Overview



We are a clean technology company that provides state-of-the-art technologies
for gas and liquid purification by manufacturing ceramic silicon carbide
filters. For more than a decade, we have developed and manufactured products of
re-crystallized silicon carbide. We specialize in two business areas: ceramic
membranes for liquid filtration and diesel particulate filters ("DPF " ) for the
control of soot exhaust particles from diesel engines. Using nanotechnology, we
develop proprietary products using patented silicon carbide technology. Our
products are based on unique silicon carbide membranes which facilitate new
applications and improve existing technologies. We market our products from our
offices in the United States and Denmark, and through local representatives. The
products are shipped directly to customers from our production facilities in the
United States and Denmark.



The terms "LiqTech", "we", "our", "us", the "Company" or any derivative thereof,
as used herein refer to LiqTech International, Inc., a Nevada corporation,
together with its direct and indirect wholly owned subsidiaries, including
LiqTech USA, Inc., a Delaware corporation ("LiqTech USA"), which owns all of the
outstanding equity interest in LiqTech International A/S, a Danish limited
company, organized under the Danish Act on Limited Companies of the Kingdom of
Denmark ("LiqTech Int. DK"), together with its direct wholly owned subsidiary
LiqTech Systems A/S, a Danish limited company, organized under the Danish Act on
Limited Companies of the Kingdom of Denmark (formerly known as Provital,
"LiqTech Systems") and LiqTech NA, Inc., a Delaware corporation ("LiqTech
Delaware"). Collectively, LiqTech USA, LiqTech Int. DK, LiqTech Systems and
LiqTech Delaware are referred to herein as our "Subsidiaries".



We conduct operations in the Kingdom of Denmark and the United States. Our
Danish DPF and membrane manufacturing operations are located in the Copenhagen
area; LiqTech Systems' assembly and testing operations are located in Hobro in
Jutland, Denmark. Our U.S. operations are conducted by LiqTech Delaware located
in White Bear Lake, Minnesota.



Our Strategy

Our strategy is to create stockholder value by leveraging our competitive strengths in silicon carbide filters and membranes by focusing on discrete applications in key end markets. Essential features of our strategy include:

? Continue to maintain and gain new marine industry customers. We currently

provide water filtration systems for scrubber technology providers, ship

owners and ship operators.

? Enter new geographic markets and expand existing markets. We plan to continue

to manufacture and sell our products from our core operations in Denmark and

the United States. We work with distributors, agents and partners to access

other important geographic markets.

? Continue to strengthen our position in the DPF market. We believe that we have

a strong position in the retrofit market for diesel particulate filter (DPF)

systems. We intend to continue our efforts to maintain our market position in

this area. Furthermore, we intend to leverage our experience in the OEM market

by expanding our presence with new products relating to diesel particulate

filter systems.

? Continue to develop and improve technologies and open new end markets. We

intend to continue to develop our ceramic membranes and improve the filtration

efficiency for our filtration products. Through continuous research and

development, we intend to find new uses for our products and plan to expand

into new markets that offer significant opportunity for the Company. One of

our key strategies is to develop our membrane applications in partnership with

our customers including, for example, the development of the next generation

of diesel particulate filters with asymmetric design for the OEM market.

? Continue our focus on the development and sales of standardized systems. We

will continue our focus on selling systems based on our unique SIC Filters. We

will also combine the ceramic membranes with other technologies to be able to

offer our customers complete filtration solutions. We will continue our focus

on developing smaller standard systems, like our ground water treatment system

    and our residential swimming pool system.




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  Table of Contents



Developments



Results of Operations


The financial information below is derived from our unaudited condensed consolidated financial statements included elsewhere in this report.

The following tables set forth our revenues, expenses and net income for the three and six months ended and 2018:



                                                        Three Months Ended June 30,
                                                                                         Period to Period Change
                                          As a %                         As a %                            Percent
                           2019          of Sales         2018          of Sales           US$                %
Net Sales                 9,297,186          100.0 %     3,598,028          100.0 %        5,699,158          158.4 %
Cost of Goods Sold        7,222,076           77.7       2,938,206           81.7          4,283,870          145.8
Gross Profit              2,075,110           22.3         659,822           18.3          1,415,288          214.5

Operating Expenses
Selling expenses            514,037            5.5         463,998           12.9             50,039           10.8
General and
administrative
expenses                    968,437           10.4         582,208           16.2            386,229           66.3
Research and
development expenses        199,184            2.1         176,281            4.9             22,903           13.0
Total Operating
Expenses                  1,681,658           18.1       1,222,487           34.0            459,171           37.6

Profit (Loss) from
Operation                   393,452            4.2        (562,665 )        (15.6 )          956,117          169.9

Other Income
(Expense)
Interest and other
income                       18,173            0.2           7,173            0.2             11,000          153.4

Interest (expense) (36,502 ) (0.4 ) (4,174 )

  (0.1 )          (32,328 )       (774.5 )
Gain (loss) on
currency transactions      (206,718 )         (2.2 )       296,140            8.2           (502,858 )       (169.8 )
Gain (loss) on sale
of fixed assets             (21,619 )         (0.2 )             -              -            (21,619 )            -
Total Other Income
(Expense)                  (246,666 )         (2.7 )       299,139            8.3           (545,805 )       (182.5 )

Profit (loss) Before
Income Taxes                146,786            1.6        (263,526 )         (7.3 )          410,312          155.7
Income Taxes Expense
(Income)                          -              -               -              -                  -              -

Net Profit (loss)           146,786            1.6        (263,526 )       
 (7.3 )          410,312          155.7




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                                                          Six Months Ended June 30,
                                                                                           Period to Period Change
                                           As a %                          As a %                            Percent
                            2019          of Sales          2018          of Sales             $                %
Net Sales                 16,718,384          100.0 %      5,989,410          100.0 %        10,728,974         179.1
Cost of Goods Sold        13,168,194           78.8        5,389,180           90.0           7,779,014         144.3
Gross Profit               3,550,190           21.2          600,230           10.0           2,949,960         491.5

Operating Expenses
Selling expenses             997,623            6.0          873,790           14.6             123,833          14.2
General and
administrative
expenses                   1,739,302           10.4        1,344,647           22.5             394,655          29.4
Research and
development expenses         402,356            2.4          345,677            5.8              56,679          16.4
Total Operating
Expenses                   3,139,281           18.8        2,564,114           42.8             575,167          22.4

Profit (loss) from
Operation                    410,909            2.5       (1,963,884 )        (32.8 )         2,374,793         120.9

Other Income
(Expense)
Interest and other
income                        25,450            0.2           10,457            0.2              14,993         143.4
Interest (expense)           (75,150 )         (0.4 )        (60,474 )         (1.0 )           (14,676 )       (24.3 )
Gain (Loss) on
currency transactions       (158,560 )         (0.9 )        217,086            3.6            (375,646 )      (173.0 )
Gain (Loss) on sale
of fixed assets              (21,619 )         (0.1 )              -              -             (21,619 )           -
Total Other Income
(Expense)                   (229,879 )         (1.4 )        167,069            2.8            (396,948 )      (237.6 )

Profit (loss) Before
Income Taxes                 181,030            1.1       (1,796,815 )        (30.0 )         1,977,845         110.1
Income Taxes Expense
(Income)                           -              -                -              -                   -             -

Net Profit (loss)            181,030            1.1       (1,796,815 )     
  (30.0 )         1,977,845         110.1




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Comparison of the Three Months Ended and


Revenues



Net sales for the three months ended  were $9,297,186 compared to
$3,598,028 for the same period in 2018, representing an increase of $5,699,158
or 158.4%. The increase in sales consisted of an increase in sales of liquid
filters and systems of $6,464,165, a decrease in sales of DPF of $726,340 and a
decrease in revenue related to development projects of $38,667. The increase in
revenue for our liquid filters and water treatment systems is due to completion
of projects related to the marine scrubber industry. The realized revenue is a
record for the Company. The decrease in demand for our DPF is mainly due to a
decrease in market activity compared to the same period last year.



Gross Profit



Gross profit for the three months ended  was $2,075,110 compared to
a gross profit of $659,822 for same period in 2018, representing an increase of
$1,415,288 or 214.5%. The increase in gross profit was due to high sales
activity and a better product mix with increased sales of liquid filters and
water treatment systems, which have a higher gross margin. Included in gross
profit is depreciation of $246,846 and $212,573 for the three months ended  and 2018, respectively.



Expenses



Total operating expenses for the three months ended  were
$1,681,658 representing an increase of $459,171 or 37.6%, compared to $1,222,487
for the same period in 2018. This increase in operating expenses is attributable
to an increase in general and administrative expenses of $386,229, or 66.3%, and
increase in selling expenses of $50,039 or 10.8% and an increase in research and
development expenses of $22,903, or 13.0%, compared to the same period in 2018.



The main reason for the increase in operating expenses is the large number of
new additional employees and related expenses (purchase of IT equipment, office
furniture, HR consultants etc.). It is especially new project managers, who have
been hired to assist with the large increase in sales and new orders.



Non-cash compensation, included in general and administrative expenses, for the
three months ended  were $23,167, compared to $9,161 for the same
period in 2018, representing an increase of $14,006, or 152.9%. This increase is
attributable to increased non-cash compensation expense for restricted share
units granted to directors.


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



                                                                For the Three Months
                                                                   Ended               2018

Compensation upon vesting of stock options granted to employees

                                                  $          -     

$ 3,328 Compensation for vesting of restricted stock awards issued to the board of directors

                                 23,167     

5,833

Value of Warrants granted for services                                -                 -
Total Non-Cash Compensation                                $     23,167       $     9,161




 Net Income



Net profit for the three months ended  was $146,786 compared to a
loss of $263,526 for the comparable period in 2018, representing a change of
$410,312, or 155.7%. This improvement was attributable to the substantial
increase in revenue and gross profit for the three months ending ,
compared to the same period in 2018. Offset in Net Profit is Other
Income/Expenses which amounts to ($246,666) for the three months ended  compared to an income of $299,139 for the same period in 2018. The decrease
in Net Other Income/Expense of $545,805 is principally related to losses on
currency exchanges.



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Comparison of the Six Months Ended and


Revenues



Net sales for the six months ended  were $16,718,384 compared to
$5,989,410 for the same period in 2018, representing an increase of 10,728,974
or 179.1%. The increase in sales consisted of an increase in sales of liquid
filters and water treatment systems of $11,041,221, a decrease in sales of
DPF of $253,565 and a decrease in sales of development projects of $58,683. The
increase in revenue for our liquid filters and water treatment systems is due to
completion of projects related to the marine scrubber industry. The realized
revenue for the first six months of 2019 is a record for the Company. The
decrease in demand for our DPF is mainly due to a decrease in market activity
compared to the same period last year.



Gross Profit



Gross profit for the six months ended  was $3,550,190 compared to a
gross profit of $600,230 for same period in 2018, representing an increase of
$2,949,960 or 491.5%. The increase in gross profit was due to the high sales
activity for our liquid filters and water treatment systems, which have a higher
gross margin. Included in gross profit is depreciation of $554,129 and $430,081
for the six months ended  and 2018, respectively.



Expenses



Total operating expenses for the six months ended  were $3,139,281
representing an increase of $575,167 or 22.4%, compared to $2,564,114 for the
same period in 2018. This increase in operating expenses is attributable to an
increase in general and administrative expenses of $394,655, or 29.4% an
increase in research and development expenses of $56,679, or 16.4%, and an
increase in selling expenses of $123,833, or 14.2%, which include expenses
related to marketing.



The main reason for the increase in operating expenses is the large number of
new additional employees and related expenses (purchase of IT equipment, office
furniture, HR consultants etc.). It is especially new project managers, who have
been hired to assist with the large increase in sales and new orders.



Non-cash compensation, included in general and administrative expenses, for the
six months ended  were $151,611, compared to $87,434 for the same
period in 2018, representing an increase of $64,177, or 73.4%. This increase is
attributable to increased non-cash compensation expense for restricted share
units granted to directors.


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



                                                                For the Six Months
                                                                  Ended             2018

Compensation upon vesting of stock options granted to employees

                                                  $          -     

$ 15,767 Compensation for vesting of restricted stock awards issued to the board of directors

                                151,611     

71,667

Value of Warrants granted for services                                -               -
Total Non-Cash Compensation                                $    151,611     $    87,434




Net Income



Net profit for the six months ended  was $181,030, compared to a
loss of $1,796,815 for the same period in 2018, representing an improvement in
Net Income of $1,977,845, or 110.1%. This improvement was attributable to the
substantial increase in sales activities and a higher gross profit for the six
months ending , compared to the same period in 2018.



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Liquidity and Capital Resources




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 , we had cash (including
restricted cash) of $13,356,355 and working capital of $21,371,856 and at
, we had cash of $3,776,111 and working capital of $6,753,593.
At , our working capital increased by $14,618,263 compared to
 due to a registered public offering of common stock in the
second quarter of 2019. Total current assets (excluding cash) were $18,388,744
and $7,597,095 at  and at , respectively, and
total current liabilities (excluding finance debt and tax) were $9,764,890 and
$4,605,254 at  and at , respectively.



In connection with certain orders, we have to convey the customer a working
guarantee or a prepayment guarantee or security bond. For that purpose, we have
a guarantee credit line of DKK 94,620 (approximately $14,427 at )
with a bank, subject to certain base limitations. As of ,
we had DKK 94,620 (approximately $14,801) in working guarantee against the
line. This line of credit is guaranteed by Vækstfonden (the Danish state's
investments fund) and is secured by certain assets of LiqTech Systems such as
receivables, inventory and equipment.



On , we issued 2,215,862 shares of common stock in a public offering
for gross proceeds of approximately $16.2 million, which has improved our
liquidity. We believe that our existing cash and cash equivalents at , along with cash generated from operations, will be sufficient to allow us
to fund our current operating plan over the next 12 months. However, we may need
additional funds to sustain and grow our business, and we may raise such funds
from time to time through public or private sales of equity or debt securities.
Financing may not be available on acceptable terms, or at all, and our failure
to raise capital when needed could materially and adversely impact our financial
condition and results of operations. Additional equity financing may be dilutive
to holders of our common stock, and debt financing, if available, may involve
significant cash payment obligations and covenants that restrict our ability to
operate our business.



Cash Flows


Six months ended Compared to six months ended




Cash provided (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 six months ended  was $5,070,627,
representing an increase of $1,739,280 compared to cash used by operating
activities of $3,331,347 for the six months ended . The increase in
cash used by operating activities for the six months ended  was
mainly due to an increase in account receivables of $7,152,037 related to the
larger number of shipped orders in the second quarter of 2019. Further other
receivables have increased by $2,204,708. The increase in Other Receivables is
due to the larger number of shipped orders, as this increase relates to the last
payment of most orders, which is normally invoiced when the commissioning has
taken place. Deposits have increased by $1,203,216 due to prepayments made for
the new furnaces in the production facility in Ballerup. Account payables have
increased by $2,595,056; contract assets and liabilities have increased by
$1,068,256 and accrued expenses have increased by $1,613,701 due to the large
increase in sales activities.



Cash used in investing activities was $327,559 for the six months ended , representing an increase of $244,567, as compared to cash used in
investing activities of $82,992 for the six months ended . The
increase in cash used in investing activities was mainly due to $81,421 in the
purchase of new IT equipment.



Cash provided by financing activities was $14,799,350 for the six months ended
, as compared to cash provided by financing activities of
$5,850,367 for the six months ended . The cash provided by
financing activities is mainly related to a public offering that raised
$16,065,000 less offering costs of $1,390,262 during the six months ended .


Off Balance Sheet Arrangements

As of , we had no off-balance sheet arrangements. We are not aware of any material transactions, which are not disclosed in our consolidated financial statements.




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Significant Accounting Policies and Critical Accounting Estimates




The methods, estimates, and judgments that we use in applying our accounting
policies have a significant impact on the results that we report in our
consolidated financial statements. Some of our accounting policies require us to
make difficult and subjective judgments, often as a result of the need to make
estimates regarding matters that are inherently uncertain. Our most critical
accounting estimates include:



? the assessment of revenue recognition, which impacts revenue and cost of

sales;

? the assessment of collectability of accounts receivable, which impacts

operating expenses when and if we record bad debt or adjust the allowance for

doubtful accounts;

? the assessment of recoverability of long-lived assets, which impacts gross

margin or operating expenses when and if we record asset impairments or

accelerate their depreciation;

? the recognition and measurement of current and deferred income taxes

(including the measurement of uncertain tax positions), which impact our

provision for taxes;

? the valuation of inventory, which impacts gross margin; and

? the recognition and measurement of loss contingencies, which impact gross

margin or operating expenses when we recognize a loss contingency, revise the

    estimate for a loss contingency, or record an asset impairment.



Recently Enacted Accounting Standards

For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see "Note 1: Recently Enacted Accounting Standards" in the accompanying Financial Statements.



Subsequent Events


The Company's management reviewed material events through and there were no material subsequent events to report.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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