PACIFIC GREEN TECHNOLOGIES INC. This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws ofthe United States , we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are stated in
In this quarterly report, unless otherwise specified, all dollar amounts are expressed inUnited States dollars and all references to "common shares" refer to the common shares in our capital stock. As used in this quarterly report and unless otherwise indicated, the terms "we", "us", "our", the "Company", and "our company" meanPacific Green Technologies Inc. , aDelaware corporation, and our wholly owned subsidiaries, (1)Pacific Green Innoergy Technologies Ltd. , aUnited Kingdom company, (2)Pacific Green Marine Technologies Group Inc. , aDelaware corporation, (3)Pacific Green Marine Technologies Inc. , aDelaware corporation, (4)Pacific Green Technologies (UK) Ltd. (Formerly Pacific Green Marine Technologies Ltd. ), aUnited Kingdom company, (5)Pacific Green Technologies (Middle East )Holdings Ltd. , aUnited Arab Emirates company, (6)Pacific Green Technologies Arabia LLC , 70% owned, aKingdom of Saudi Arabia company, (7)Pacific Green Technologies (Canada) Inc. (Formerly Pacific Green Marine Technologies Inc. ), a Canadian corporation, (8)Pacific Green Solar Technologies Inc. , aDelaware corporation, (9)Pacific Green Technologies International Ltd. , aBritish Virgin Islands company, (10)Pacific Green Technologies Asia Ltd. , aHong Kong company, (11)Pacific Green Technologies Engineering Services Limited (Formally Pacific Green Technologies China Ltd. ), aHong Kong company, (12)Pacific Green Technologies (Australia) Pty Ltd. , anAustralia company, (13)Pacific Green Technologies (Shanghai) Co. Ltd. (Formerly Shanghai Engin Digital Technology Co. Ltd. ), a Chinese company, (14)Guangdong Northeast Power Engineering Design Co. Ltd. , a Chinese company, (15)Pacific Green Energy Parks Inc. , aDelaware corporation, (16)Pacific Green Energy Storage Technologies Inc. , aDelaware corporation, (17)Pacific Green Energy Storage (UK) Ltd. (Formerly Pacific Green Marine Technologies Trading Ltd. ), aUnited Kingdom company, (18) Pacific Green Battery Energy Parks 1 Ltd., 50% owned, aUnited Kingdom company, (19) Pacific Green Battery Energy Parks 2 Ltd., aUnited Kingdom company, (20)Richborough Energy Park Ltd. , 50% owned, aUnited Kingdom company, unless otherwise indicated, (21)Pacific Green Energy Parks (UK) Ltd. , aUnited Kingdom company, (22)Sheaf Energy Ltd. , a United
Kingdom company. Corporate History
Our company was incorporated inDelaware onMarch 10, 1994 , under the name ofBeta Acquisition Corp. InSeptember 1995 , we changed our name toIn-Sports International, Inc. InAugust 2002 , we changed our name fromIn-Sports International, Inc. toECash, Inc. In 2007, due to limited financial resources, we discontinued our operations. Over the course of the ensuing five years, we sought out new business opportunities.
On
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Effective
? 500,000,000 shares of common stock with a par value of$0.001 ; and ? 10,000,000 shares of preferred stock with a par value of$0.001 . The increase of authorized capital was approved by our board of directors onJuly 1, 2012 and by a majority of our stockholders by a resolution datedJuly 1, 2012 .
Original Strategy and Recent Business
Since 2012, the Company has focused on marketing, developing and acquiring technologies designed to improve the environment by reducing pollution. The Company has acquired technologies, patents and intellectual property fromEnviroTechnologies Inc. through share transfer, assignment and representation agreements entered into during 2012 and 2013. Following those acquisitions, management has expanded the registration of intellectual property rights around the world and pursued opportunities globally for the development and marketing of the emission control technologies.
Working with a worldwide network of agents to market the ENVI-Systems™ emission control technologies, the Company has focused on three applications of the technology:
ENVI-Marine TM
Diesel exhaust from ships, ferries and tankers includes ash and soot as
particulate components and sulfur dioxide as an acid gas. Testing has been
conducted on diesel shipping to confirm the application of seawater as a
neutralizing agent for sulfur emissions as well as capturing particulate matter.
In addition to marine applications, these tests also showed applicability of the
system for large displacement engines such as stationary generators,
compressors, container handling, heavy construction and mining equipment.
ENVI-Pure TM
Increasing legislation relating to landfill of municipal solid waste has led to
the emergence of increasing numbers of waste to energy plants ("WtE"). A WtE
plant obviates the need for landfill, burning municipal waste for conversion to
electricity. A WtE plant is typically 45-100MW. The ENVI-Clean™ system is
particularly suited to WtE as it cleans multiple pollutants in a single system.
ENVI-Clean TM
EnviroTechnologies Inc. has successfully conducted sulfur dioxide demonstration
tests at the American Bituminous Coal Partners power plant in Grant Town, West
Virginia . The testing achieved a three test average of 99.3% removal efficiency.
The implementation of US Clean Air regulations in July 2010 has created
additional demand for sulfur dioxide removal in all industries emitting sulfur
pollution. Furthermore, China consumes approximately one half of the world's
coal, but introduced measures designed to reduce energy and carbon intensity in
its 12th Five Year Plan. Applications include regional power facilities and
heating for commercial buildings and greenhouses. Typical applications range in
size from 1 to 20 megawatts (MW) with power generation occupying the larger end
of the range. The ENVI-Clean™ system removes most of the sulfur dioxide,
particulate matter, greenhouse gases and other hazardous air pollutants from the
flue gases produced by the combustion of coal, biomass, municipal solid waste,
diesel and other fuels.
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Vision & Strategy
Pacific Green envisions a world of rapidly growing demand for renewable energy
technological solutions to address the challenges presented by a changing
climate. Having achieved success in marine emission control technologies we have
now diversified our business to provide turnkey and scalable end-to-end
environmental and renewable technology solutions in the energy sector. Our
technological platform now has three main divisions:
? Emission Control Systems ("ECS");
? Concentrated Solar Power ("CSP"); and
? Battery Energy Storage Systems ("BESS");
In all the above areas, Pacific Green plans to execute this vision by a dual
strategy of equipment sales and proactive infrastructure development and
ownership, each is led by acquisitions of technology capabilities and project
investment opportunities, highlighted to date by the following events:
? on
Digital Technology Co. Ltd. ("Engin") a solar design, development and
engineering company. Engin is a design and engineering business focused
primarily on CSP, desalination and waste to energy technologies. Engin's CSP
reference plants in
provide CSP alongside future ammonia and hydrogen production facilities in
Asia andSouth America ;
? on
("Innoergy"), a
Ltd, in
acquisition underpins our entry into the BESS market; and
? on March 18, 2021 , the Company acquired Richborough Energy Park Limited ("Richborough"), a BESS development project to deliver 100MW of energy in
Kent, UK .
? on
BESS development project to deliver 250MW of energy in Kent, UK .
In support of this dual strategy, we have adopted a Human Resource Strategy that seeks to hire the best talent in the core areas of our business. Our hiring plan includes the addition of sales and project execution specialists. Strategic PartnershipsPacific Green has forged global partnerships with private and state-owned energy providers and owners. This strategic alignment with leading energy industry platforms empowersPacific Green to provide quickly scalable solutions in the core areas of our business, to gather unique insights on cutting-edge trends and leverage recurring revenue opportunities that enable us to cross-sell products and services.
The Company has entered into several partnership and framework agreements in the core areas of our business.
OnDecember 23, 2019 , the Company entered into a International Strategic Alliance Agreement with (1)Beijing Shouhang IHW Resources Saving Technology Company Ltd. ("Shouhang"), a company listed on theShenzhen Stock Exchange
inChina , and (2)PowerChina .
The Strategic Alliance Agreement provides for the development of CSP plants
whereby (1) the Company provides the Intellectual Property, the technical
know-how, design and engineering, (2) Shouhang, with annual revenues of
approximately
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Battery Energy Storage Systems ("BESS")
OnJanuary 14, 2021 , the Company signed a framework agreement withShanghai Electric Gotion New Energy Technology Co., Ltd ("SEG"). The agreement provides for the supply of lithium-ion BESS. SEG is a joint-venture between Shanghai Electric Group Co., Ltd. ("Shanghai Electric ") and Guoxuan High-tech Co., Ltd. With multiple production facilities and a long-established history in technology manufacturing and supply-chain management, SEG is well-positioned to provide lithium-ion BESS technology around the world. Shanghai Electric has operating revenues in excess ofUSD$20bn . OnMarch 18, 2021 , the Company signed a framework agreement withTUPA Energy Limited ("TUPA") to gain exclusive rights to 1.1GW of BESS projects in theUK . TUPA is aUK based company with expertise in planning, grid connections and land acquisition. The Company has to date executed 100MW in relation to the Richborough Energy Park project. OnMay 31, 2022 ,Pacific Green Technologies Inc. (the "Company") announced that it has entered into agreements withInstalcom Limited for Principal Contractor and the ensuing Operations and Maintenance contractor for the 99.98 MW battery energy park that the Company is developing at Richborough Energy Park inKent, England .
OnJune 8, 2022 ,Pacific Green Technologies Inc. (the "Company") announced that it has entered into an energy optimization agreement withShell Energy Europe Limited for the 99.98 MW battery energy park that the Company is developing at Richborough Energy Park inKent, England In addition to supply agreements, onDecember 2, 2020 , the Company signed a joint venture and marketing agreement with AMKEST to assist with the promotion of the Company's core business platform in theKingdom of Saudi Arabia and the widerMiddle East .Amkest Group is overseen by its founder,Amr Khashoggi , who holds board positions in numerous influential companies and government bodies across the Kingdom and is currently serving as Strategic Advisor to the Kingdom's prominent new development city,King Abdullah Economic City (KAEC).Amkest Group's leadership team is led by Chief Executive Officer,Salman Alireza , whose background includes various founding, executive and director-level positions in the business development sector within theKingdom of Saudi Arabia , in addition to an MBA fromLondon Business School . Results of Operations The following summary of our results of operations should be read in conjunction with our unaudited interim financial statements for the three and nine months endedDecember 31, 2022 , and 2021. Revenue for the three and nine Months Ended December 31, 2022 was$ 3,639,992 and$ 6,859,221 versus$5,252,807 and$6,714,594 for the three and nine months endedDecember 31, 2021 . The Company's revenues were mainly derived from the sale of marine scrubber units and related services. During the three months endedDecember 31, 2022 , the Company was in the process of commissioning 3 (2021 - 6) marine scrubber units which contributed to revenue of$2,253,221 (2021 -$3,710,227 ). InFebruary 2021 , a major client deferred 32 marine scrubber units. Of these, 6 units have proceeded (2 commissioned in year endedMarch 31, 2022 and 4 commissioned in quarter endedJune 30, 2022 ), while 13 were cancelled. The remainder are still postponed and the option to either proceed or cancel, which originally expired onFebruary 9, 2023 , has been extended toDecember 2023 . During the three and nine months endedDecember 31, 2022 , revenue from services, including specific services performed in the marine business sector and design and engineering services in the solar business sector, was$1,386,771 and$2,251,553 as compared to$1,542,580 and$2,262,076 for the three and nine months endedDecember 31, 2021 . During the nine months endedDecember 31, 2022 , the gross profit margin for products and services were 20% (2021- 44%) and 38% (2021- 24%), respectively. The gross profit margin for products decreased in 2022 because of lower contract value and consistent cost of goods sold for marine scrubbers delivered in 2022. Overall, the gross profit margin for the nine months endedDecember 31, 2022 was approximately 26% (2021 - 38%). Expenses for the three and nine months endedDecember 31, 2022 , were$2,665,734 and$9,054,688 as compared to$3,752,629 and$11,025,916 for the three and six months endedDecember 31, 2021 . Management and technical consulting fees were comprised of fees paid to our directors, officers and advisors for business development efforts and advisory services. Office-based costs, travel expenses, and professional fees also increased due to increased business activities. Additionally, the delivery of units resulted in warranty provision being recorded for possible maintenance and claim issues within a prescribed period. For the three and nine month periods, the Company recorded a warranty recovery of$744,918 (2021 - expense of$18,159 ) and$563,318 (2021 -$21,648 ) as a result of 1 (2021 - nil) and 5 (2021 - 2) vessels being commissioned and commencing their warranty period. Included in this was a large release of the warranty provision, for vessels whose warranty period has expired. 5 The three and nine Months EndedDecember 31, 2022 , our company recorded a net loss of$2,224,179 ($0.05 per share) and$7,725,280 ($0.16 per share) as compared to net loss of$4,361,184 ($0.09 per share) and$7,622,887 ($0.16 per share) for the three and nine months endedDecember 31, 2021 . Our financial results for the nine months endedDecember 31, 2022 and 2021 are summarized as follows: Three Months Ended Nine Months Ended December 31, December 31, 2021 2021 (As restated- (As restated- 2022 Note 2) 2022 Note 2) $ $ $ $ Revenues Products 2,253,221 3,710,227 4,607,668 4,452,518 Services 1,386,771 1,542,580 2,251,553 2,262,076 Total revenues 3,639,992 5,252,807 6,859,221 6,714,594 Cost of goods sold 2,471,658 Products 1,986,344 766,756 3,686,591 1,716,671 Services 1,031,160 1,216,504 1,614,136 4,188,329
Total cost of goods sold 3,017,504 1,983,260
5,300,727 2,526,265
Gross profit 622,488 3,269,547 1,558,494 2,471,658
ExpensesAdvertising and promotion 120,230 170,870 421,903 488,088 Amortization of intangible assets 639 177,172 1,989 520,116 Bad debts expense / (recovery) 36,341 21,012 (10,193 ) 21,012 Depreciation 45,600 52,519 148,671 152,062 Foreign exchange (gain) / loss (5,776 ) 34,791 98,545 86,369 Management and technical consulting 802,533 764,379 2,106,857 2,292,632 Office and miscellaneous expense 509,864 525,009 1,499,940 1,318,839 Operating lease expense 231,789 117,350 440,779 360,717 Professional fees 547,538 390,866 1,295,198 1,338,544 Research and development - - 13,772 - Salaries and wages 909,364 1,140,663 2,957,988 3,725,349 Transfer agent and filing fees 15,278 91,865 46,075 253,088 Travel and accommodation 197,252 249,338 596,482 473,953 Warranty and related expense / (recovery) (744,918 ) 16,795 (563,318 ) (4,853 ) Total expenses 2,665,734 3,752,629 9,054,688 11,025,916 Other income / (expense) Financing interest income 32,790 85,889 89,090 378,840 Interest (expense) / income and other (220,300 ) (53,198 ) (298,011 ) 47,534 Net loss for the period before noncontrolling interest (2,230,756 ) (450,389 ) (7,705,115 ) (8,073,276 ) Share of income / (loss) attributable to noncontrolling interest (6,577 ) - 20,165 - Net loss for the period (2,224,179 ) (450,389
) (7,725,280 ) (8,073,276 )
Liquidity and Capital Resources
Working Capital
December 31, March 31,
2022 2022
$ $
Current assets 6,647,605 24,854,658
Current liabilities 25,040,664 19,079,665
Working capital (deficit) (18,393,059 ) 5,774,993
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Cash Flows
Nine Months Nine Months
Ended December Ended December
31, 31,
2022 2021
$ $
Net cash used in operating activities (6,094,070 ) (13,262,030 )
Net cash used in investing activities (31,902,457 ) (398,507 )
Net cash provided by financing activities 34,947,926 (99,504 )
Effect of exchange rate changes on cash (737,456 ) 121,392
Net change in cash and cash equivalents (3,786,057 ) (13,638,649 )
As of December 31, 2022 , we had $2,500,411 in cash and cash equivalents,
$6,647,605 in total current assets, $25,040,664 in total current liabilities and
a working capital deficit of $18,393,059 compared to working capital of
$5,774,993 as at March 31, 2022 . The Company's working capital reduced dueto reduction of receivables. During the nine months endedDecember 31, 2022 , we used$6,094,070 in operating activities, whereas we used$13,262,030 from operating activities for the three months period endedDecember 31, 2021 . The operating cash flow for the nine months endedDecember 31, 2022 , was mainly due to the collection of large receivables. During the nine months endedDecember 31, 2022 , we used$31,902,457 in investing activities, whereas we used$398,507 in investing activities during the nine months endedDecember 31, 2021 . Our investing activities for the nine months endedDecember 31, 2022 , were primarily related to additions of project under development and equipment.
During the nine months ended
Anticipated Cash Requirements We have raised funds to construct our first BESS 99.98MW facility project at Richborough Energy Park inKent, United Kingdom . OnMay 11, 2022 the Company announced it had entered into a Subscription and Shareholders Agreement with a third party investor, who has committed$16 million (£13 million) of equity funds to the project. OnJune 21, 2022 the Company announced it had reached financial close ("Financial Close") for$34.90 million (£28.25 million) of senior debt for the Richborough project. The senior debt, in conjunction with the equity investment, will provide the Company with the funding to bring the battery park to commercial operations anticipated between June andSeptember 2023 . The senior debt facility agreement is entered into withClose Leasing Limited ("CLL"), pursuant to which CLL will provide a development loan to fund the construction, which will be utilized in stages following the expenditure of the equity investment. The development loan will then be refinanced into a 10-year amortized term loan upon the start of commercial operations. OnDecember 6, 2022 the Company acquiredSheaf Energy Limited for$9,126,000 (£7,500,000) which will be developed into our second BESS 250MW facility project. The acquisition was funded with a secured loan from a third party investor,Sheaf Storage Limited . We anticipate reaching financial close during the first half of 2023. We anticipate requiring additional short-term funds to fund our Sheaf project expenditure prior to financial close, plus our normal operating expenditure over the next 12 months and are currently negotiating with several parties to raise sufficient funds from private placements, shareholder loans and other third party loans. As ofDecember 31, 2022 , we had$2,500,411 cash on hand. After careful consideration we believe current operations, anticipated deliveries and expected profit from such deliveries, sales of products in our Batteries business and the raising of short-term funds to be sufficient to cover expected cash operating expenses over the next 12 months.
Our cash requirement estimates may change significantly depending on the nature of our business activities and our ability to raise capital from our shareholders or other sources.
We currently have office locations inthe United States ,Canada ,United Kingdom ,China ,Hong Kong ,Abu Dhabi ,Kingdom of Saudi Arabia , andAustralia . We have hired staff in various regions and rely heavily upon the use of contractors and consultants. Our general and administrative expenses for the period will consist primarily of technical consultants, management, salaries and wages, professional fees, transfer agent fees, bank and interest charges and general office expenses. The professional fees relate to matters such as contract review, business acquisitions, regulatory filings, patent maintenance, and general legal, accounting and auditing fees. 7 Going Concern
Our financial statements for the quarter ended
The assessment of the liquidity and going concern requires the Company to make judgments about the existence of conditions or events that raise substantial doubt about the ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. This includes judgments about the Company's future activities and the timing thereof and estimates of future cash flows. Significant assumptions used in the Company's forecasted model of liquidity include forecasted sales, costs, and capital expenditures. Changes in the assumptions could have a material impact on the forecasted liquidity and going concern assessment.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders. Critical Accounting Estimates The preparation of these consolidated financial statements in conformity with United States Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by our company may differ materially and adversely from our company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties.
Useful lives of Intangible Assets
The carrying value of our intangible assets represents its original cost at the
time of purchase, less accumulated amortization. We amortize our intangible
assets using the straight-line method over their estimated useful lives. The
estimated useful life of our intangible assets are listed in the table below.
Patents 17 years straight-line
Software licensing 10 years straight-line
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Impairment of Long-lived Assets
We review long-lived assets such as property and equipment and intangible assets with finite useful lives for impairment whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. The determination of whether impairment indicators exist requires significant judgment in evaluating underlying significant assumptions including expected sales contracts, operating costs, and current market value of assets. If an indication is identified, and the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss is recognized for the excess of the carrying amount over the fair value of the asset. We recorded an impairment charge of$2,641,639 on intangible assets during the year endedMarch 31, 2022 (March 31, 2021 -$37,700 ) as management's estimated fair value of the assets were less than its carrying value.Goodwill
We allocate the cost of acquired companies to the identifiable tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill. The allocation of the purchase price of acquired companies requires certain judgments and estimates.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 process of evaluating the potential impairment of goodwill requires significant judgment and are based upon existing contracts, historical experience, financial forecasts, and general economic conditions. We recorded an impairment charge of$3,870,223 on Engin goodwill and$549,092 on Innoergy goodwill during the year endedMarch 31, 2022 as management's estimated fair value of the reporting unit was less than its carrying value determined during impairment testing. Revenue Recognition We derive revenue from the sale of products and delivery of services. Irrespective of the types of revenue described above, revenue is recognized when control of products or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those promised products or services. The majority of the Company's marine scrubber sales contracts contain a single performance obligation satisfied over time. Other contracts contain a single performance obligation satisfied at
point in time. Revenue recognition requires significant judgements from management in regard to the determination of accounting treatment for contracts with customers. Management is required to assess contracts with customers to identify whether performance obligations in the contract are distinct and to determine whether contract terms provide the Company with a basis to recognize revenue over time. According to ASC 606-10-25-27, if the entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date, revenue should be recognized over time. The Company's scrubber system is customized to each vessel at the detailed design level, so the performance under the contract does not create an asset with an alternative use. According to the Company's contracts signed with customers under English law, the customers are contractually and legally obliged to pay for performance completed to date that covers cost plus a reasonable profit margin. Therefore, the Company concluded that revenue should be recognized over time. The Company recognizes revenue based on the input method using a percentage of costs to complete.
In the case of settlement agreements with customers where no continued performance obligation is required, we recognize revenue based on consideration settled according to the agreement.
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A contract signed with one customer has a significant financing component. 20% of the contract price is payable at least 6 calendar months prior to the dry dock date. The remaining 80% is payable in 24 equal monthly installments starting at the end of the calendar month following the installation date on a vessel-by-vessel basis. As 80% of the contract price is payable after the last performance obligation towards the scrubber, a significant financing component is separated from revenue and interest income at 5.4% is recorded when payments are received from the customer.
Contract Liabilities, Prepaid Manufacturing Costs, and Accrued Revenue
We have analyzed our sales contracts under ASC 606 and identified performance conditions that are not directly correlated with contractual billing terms with customers. As a result of the timing differences between customer sales invoices and satisfaction of performance conditions, contractual assets and contractual liabilities have been recognized. Contractual arrangements with customers for the sale of a scrubber unit generally provide for deposits and installments through the procurement and design phases of equipment manufacturing. Amounts invoiced to customers, which are not yet recorded as revenues under the Company's revenue recognition policy, are presented as contract liabilities. Similarly, contractual arrangements with suppliers and manufacturers normally involved with the manufacturing of scrubber units may require advances and deposits at various stages of the manufacturing process. Payments to our manufacturing partners, which are not yet recorded as costs of goods sold under the Company's revenue recognition policy, are recorded as prepaid manufacturing costs. The Company presents the contract liabilities and prepaid manufacturing costs on its balance sheet when one of the parties to the revenue contract and supply contract, respectively, has performed before the other.
Accrued revenue is revenue that has been earned by providing a good or service, but for which the Company has not yet billed the customer.
Accounts Receivable
We assess the collectability of accounts receivable and long-term receivable on
an ongoing basis and establish an allowance for doubtful accounts when
collection is no longer reasonably assured. In establishing the allowance, we
consider factors such as known troubled accounts, historical experience, age,
financial information that is publicly accessible and other currently available
evidence.
Warranty Provision
The Company reserves a 2% warranty provision on the completion of a contract
following the commissioning of marine scrubbers. The specific terms and
conditions of those warranties vary depending upon the product sold and
geography of sale. The Company's product warranties generally start from the
commissioning date and continue for up to twelve to twenty-four months. The
Company provides warranties to customers for the design, materials, and
installation of scrubber units. The Company has a back-to-back manufacturing
guarantee from its major supplier, which covers materials, production, and
installation. Factors that affect the Company's warranty obligation include
product failure rates, anticipated hours of product operations and costs of
repair or replacement in correcting product failures. These factors are
estimates that may change based on new information that becomes available each
period. Similarly, the Company also accrues the estimated costs to address
reliability repairs on products no longer in warranty when, in the Company's
judgment, and in accordance with a specific plan developed by the Company, it is
prudent to provide such repairs. The Company intends to assess the adequacy of
recorded warranty liabilities quarterly and adjusts the liability as necessary.
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