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 of
the 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
prepared in accordance with United States Generally Accepted Accounting
In this quarterly report, unless otherwise specified, all dollar amounts are expressed in
United Statesdollars 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" mean Pacific Green Technologies Inc., a Delawarecorporation, and our wholly owned subsidiaries, (1) Pacific Green Innoergy Technologies Ltd., a United Kingdomcompany, (2) Pacific Green Marine Technologies Group Inc., a Delawarecorporation, (3) Pacific Green Marine Technologies Inc., a Delawarecorporation, (4) Pacific Green Technologies (UK) Ltd.( Formerly Pacific Green Marine Technologies Ltd.), a United Kingdomcompany, (5) Pacific Green Technologies( Middle East) Holdings Ltd., a United Arab Emiratescompany, (6) Pacific Green Technologies Arabia LLC, 70% owned, a Kingdom of Saudi Arabiacompany, (7) Pacific Green Marine Technologies (USA) Inc., a Delawarecorporation (inactive), (8) Pacific Green Technologies (Canada) Inc.( Formerly Pacific Green Marine Technologies Inc.), a Canadian corporation, (9) Pacific Green Solar Technologies Inc., a Delawarecorporation, (10) Pacific Green Corporate Development Inc.(formerly Pacific Green Hydrogen Technologies Inc.), a Delawarecorporation, (11) Pacific Green Wind Technologies Inc., a Delawarecorporation, (12) Pacific Green Technologies International Ltd., a British Virgin Islandscompany, (13) Pacific Green Technologies Asia Ltd., a Hong Kongcompany, (14) Pacific Green Technologies China Ltd., a Hong Kongcompany, (15) Pacific Green Technologies (Australia) Pty Ltd., an Australiacompany, (16) Pacific Green Environmental Technologies (Asia) Ltd., 50.1% owned, a Chinese company, (17) Pacific Green Technologies (Shanghai) Co. Ltd.( Formerly Shanghai Engin Digital Technology Co. Ltd.), a Chinese company, (18) Guangdong Northeast Power Engineering Design Co. Ltd., a Chinese company, (19) Pacific Green Energy Parks Inc., a Delawarecorporation, (20) Pacific Green Energy Storage Technologies Inc., a Delawarecorporation, (21) Pacific Green Energy Storage (UK) Ltd.( Formerly Pacific Green Marine Technologies Trading Ltd.), a United Kingdomcompany, (22) Richborough Energy Park Ltd., a United Kingdomcompany, unless otherwise indicated. Corporate History
Our company was incorporated in
Delawareon March 10, 1994, under the name of Beta Acquisition Corp.In September 1995, we changed our name to In-Sports International, Inc.In August 2002, we changed our name from In-Sports International, Inc.to ECash, 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.
effected a reverse split of our common stock following which we had 27,002
shares of common stock outstanding with
Certificate of Amendment of Certificate of Incorporation, wherein we increased
our authorized share capital to 510,000,000 shares of stock as follows:
? 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. 2 The increase of authorized capital was approved by our board of directors on July 1, 2012and by a majority of our stockholders by a resolution dated July 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 from
EnviroTechnologies 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
Diesel exhaust from ships, ferries and tankers includes ash and soot as
particulate components and sulphur dioxide as an acid gas. Testing has been
conducted on diesel shipping to confirm the application of seawater as a
neutralizing agent for sulphur 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
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 sulphur dioxide demonstration tests at the American Bituminous Coal Partnerspower plant in Grant Town, West Virginia. The testing achieved a three test average of 99.3% removal efficiency. The implementation of US Clean Airregulations in July 2010has created additional demand for sulphur dioxide removal in all industries emitting sulphur pollution. Furthermore, Chinaconsumes approximately one half of the world's coal, but introduced measures designed to reduce energy and carbon intensity in its 14th 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 sulphur 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. Vision & Strategy Pacific Greenenvisions 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 broadened our business to provide turnkey and scalable end-to-end technology solutions in the renewable energy sector. Our technological platform now has four main components: ? Emission Control Systems ("ECS"); ? Concentrated Solar Power("CSP"); ? Battery Energy Storage Systems ("BESS"); and ? Electric Vehicle Charging Stations ("EVCS"). 3
In all the above areas, the Company plans to execute this vision by a dual
strategy of equipment sales and proactive infrastructure ownership, each to be
led by acquisitions of technology capabilities and project investment
opportunities, highlighted to date by the following events:
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
to provide CSP alongside future ammonia and hydrogen production facilities
Asiaand South America; ? on October 20, 2020, the Company closed the acquisition of Innoergy
Limited (“Innoergy”), a
Osaka Gas Co. Ltd, in
Royal Dutch Shell plc. The acquisition underpins our entry into the BESS market; and
(“Richborough”), a BESS development project to deliver 100MW of energy in
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.
Pacific Greenhas forged global partnerships with private and state-owned energy providers and owners. This strategic alignment with leading energy industry platforms empowers Pacific Greento 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.
ECS The Company has a joint venture with
PowerChina SPEM Limited(the "JV"). The JV has successfully provided manufacturing, installation and logistical support on over USD$200mof ECS business, particularly in the marine industry. PowerChinais one of the largest EPC contractors in the world with annual revenues of
USD$50bn. CSP On December 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 the Shenzhen Stock Exchange
China, 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 provides manufacturing of the solar field and molten salt tank services, and (3)
EPC role worldwide. 4 BESS
January 14, 2021, the Company signed a framework agreement with Shanghai 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 of USD$20bn. On March 18, 2021, the Company signed a framework agreement with TUPA Limited("TUPA") to gain exclusive rights to 1.1GW of BESS projects in the UK. TUPA is a UKbased 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 mentioned in the M&A section above. EVCS
The agreement with SEG will extend to EVCS.
In addition to supply agreements, on
December 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 the Kingdom of Saudi Arabiaand the wider Middle East. Amkest Groupis 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'sleadership 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 the Kingdom of Saudi Arabia, in addition to an MBA from London 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 months ended
Revenue for the three and nine months ended
December 31, 2021was $2,642,184and $5,535,004versus $4,658,466and $37,470,425for the three and nine months ended December 31, 2020. The Company's revenues were mainly derived from the sale of marine scrubber units and related services. During the nine months ended December 31, 2021, the Company recognized revenue for 9 (2020 - 46) marine scrubber units and these marine scrubber units were in various stages of engineering, delivery, and commissioning. For the three and nine months ended December 31, 2021, revenue from solar business sector was $916,597and $1,227,626as compared to $2,371and $139,231for the three and nine months ended December 31, 2020. During the nine months ended December 31, 2021, the Company recognized revenue for 11 (2020 - 7) solar projects. During the nine months, the Company realized a gross margin of 43% (2020 - 40%). Gross margin increased mainly due to higher gross margin on sale of scrubber units. Expenses for the nine months ended December 31, 2021, were $12,764,679as compared to $20,973,556for the nine months ended December 31, 2020, as the Company reduced its operations for the nine months period. Management and technical consulting fees decreased significantly also due to lower sales. Management and technical consulting fees were comprised of fees paid to third parties for business development efforts, advisory services, as well as amounts paid to the directors of the Company. Advertising, office-based costs, and professional fees also decreased due to reduced 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 nine months ended December 31, 2021, the Company recorded a warranty expense recovery of $4,853(2020 - expense of $1,407,420) related to the estimated expectation of warranty costs. Expenses for the three months ended December 31, 2021, were $4,324,649as compared to $4,386,278for the three months ended December 31, 2020. Management and technical consulting fees decreased due to lower sales and were comprised of fees paid to third parties for business development efforts, advisory services, as well as amounts paid to the directors of the Company. Professional fee decreased due to less contract and acquisition work. For the three months ended December 31, 2021, the Company recorded a warranty expense of $16,795(2020 - $160,125) related to the estimated expectation of warranty costs. 5
Our financial results for the three and nine months ended
2020 are summarized as follows:
Three Months Ended Nine Months Ended December 31, December 31, 2021 2020 2021 2020 Revenues
$ 2,642,184 $ 4,658,466 $ 5,535,004 $ 42,128,892Cost of goods sold $ 1,328,338 $ 3,625,204
$ 3,137,247 $ 25,515,248Gross Profit $ 1,313,846 $ 1,033,262 $ 2,397,757 $ 16,613,644Expenses
Advertising and promotion
$ 170,870 $ 152,172 $ 488,088 $ 510,748Amortization of intangible assets $ 396,539 $ 389,703 $ 1,178,217 $ 1,169,039Bad debts expense $ 21,012$ - $ 21,012$ - Depreciation $ 52,519 $ 47,807 $ 152,062 $ 144,457Foreign exchange loss $ 34,791 $ (41,959 ) $ 86,369 $ 2,577Lease expense $ 117,350 $ 93,910 $ 360,717 $ 342,077
Management and technical consulting
$ 1,026,808 $ 1,238,962 $ 3,072,262 $ 9,583,143Office and miscellaneous $ 525,009 $ 460,338 $ 1,318,839 $ 1,396,263Professional fees $ 390,866 $ 601,790 $ 1,338,544 $ 1,494,425Research and development $ - $ - $ - $ 4,368Salaries and wages $ 1,234,243 $ 1,187,967 $ 4,029,737 $ 4,510,241Transfer agent and filing fees $ 91,865 $ (34,007 ) $ 253,088 $ 106,758Travel and accommodation $ 249,338 $ 129,470
$ 473,953 $ 302,040Warranty costs $ 16,795 $ 160,125 $ (4,853 ) $ 1,407,420Total expenses $ 4,328,005 $ 4,386,278 $ 12,768,035 $ 20,973,556Other income (expense) Gain on derecognition of subsidiary and termination of lease $ - $ - $ - $ 242,193Gain (loss) on change in fair value of derivative liability $ - $ (50,869 )$ - $ (1,306 )Gain on reduction of acquisition costs of subsidiary $ - $ - $ - $ 3,240,250Financing interest income $ 85,889 $ 247,253 $ 378,840 $ 548,543Gain (loss) on change in fair value of derivative liability $ (53,198 ) $ (24,015 )
Net Income (Loss)
$ (2,981,468 ) $ (3,180,647 )
$ (9,943,904 ) $ (371,957 )
Liquidity and Capital Resources
Working Capital December 31, March 31, 2021 2021 Current Assets
$ 23,050,745 $ 41,228,286Current Liabilities $ 32,509,427 $ 41,180,588Working Capital (Deficiency) $ (9,458,683 ) $ 47,6986 Cash Flows Nine Months Nine Months Ended Ended December 31, December 31, 2021 2020 Net Cash Used in Operating Activities $ (13,610,996 ) $ (5,937,101 )Net Cash Used in Investing Activities $ (49,540 ) $ (85,683 )Net Cash Provided by (Used in) Financing Activities $ (99,504 ) $ 1,750Effect of Exchange Rate Changes on Cash $
Net Change in Cash and Cash Equivalents $
December 31, 2021, we had $9,797,768in cash and cash equivalent, $23,050,745in total current assets, $32,509,427in total current liabilities and a working capital deficit of $9,458,683compared to working capital of $47,698as at March 31, 2021. The Company's working capital reduced as less revenue was recognized from marine scrubbers and paydown of accounts payable. In addition, the Company's contract assets, contract liabilities, and accruals change from period to period, depending on the status of equipment deliveries, customer receipts and payments to third party manufacturers. During the nine months ended December 31, 2021, we used $13,610,996in operating activities, whereas we used $5,937,101from operating activities for the nine months period ended December 31, 2020. The negative operating cash flow for the nine months ended December 31, 2020, mainly resulted from reduction in revenue. During the nine months ended December 31, 2021, we used $49,540in investing activities, whereas we used $85,683in investing activities during the nine months ended December 31, 2020. Our investing activities for the nine months ended December 31, 2021, were primarily related to additions of equipment. During the nine months ended December 31, 2021, we used $99,504in financing activities, whereas we received $1,750in financing activities for the nine months ended December 31, 2020. Our financing activities for the nine months ended December 31, 2021, were related to stock option exercise.
Anticipated Cash Requirements
The Company is developing a battery energy storage system "BESS" facility in the
UK. At the date of filing the 10Q, there are no contractual commitments to proceed since the preconditions required to achieve financial close have not yet been reached. To part-fund the project equity, the Company is currently negotiating a subordinated debt facility which is anticipated to be concluded contemporaneously with the financial close. 7
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 in
the United States, Canada, United Kingdom, China, Hong Kong, Spainand Australia. We have hired staff in various regions and rely heavily upon the use of contractors and consultants. Our general and administrative expenses for the year 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. Should we require additional funding over the next twelve months, we would intend to raise new cash requirements from private placements, shareholder loans or possibly a registered public offering (either self-underwritten or through a broker-dealer). If we are unsuccessful in raising enough money through such efforts, we may review other financing possibilities such as bank loans. At this time, we do not have a commitment from any broker-dealer to provide us with financing. There is no assurance that any financing will be available to us or if available, on terms that will be acceptable to us. As of December 31, 2021, we had $9,797,768cash on hand. Our realized and anticipated profits derived from sales of ENVI marine units plus anticipated sales of products and services in our new Batteries and Solar businesses are expected to fund our planned expenditure levels. After careful consideration we believe current operations, anticipated deliveries and expected profit from such deliveries to be sufficient to cover expected cash operating expenses over
the next 12 months. Going Concern
Our financial statements for the quarter ended
prepared on a going concern basis.
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. Contractual Obligations
As a “smaller reporting company”, we are not required to provide tabular
Critical Accounting Policies Use of Estimates The preparation of these consolidated financial statements in conformity with
U.S.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. The Company regularly evaluates estimates and assumptions related to the useful life and recoverability of property and equipment and intangible assets, contract assets and liabilities associated with revenue contracts in progress, contingent consideration on asset acquisition, warranty accruals, going concern, and deferred income tax asset valuation allowances. 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. 8 Intangible Assets
Intangible assets are stated at cost less accumulated amortization and are comprised of patents, customer relationships, plant designs, and software licensing. The patents, which were acquired in 2013, are being amortized on a straight-line over the estimated useful life of 17 years. The other intangible assets, which were acquired in
December 2019, are being amortized according to the following table. Intangible assets are reviewed annually for impairment. Patents 17 years straight-line Customer relationships 6 years straight-line Plant designs 6 years straight-line Software licensing 10 years straight-line
Impairment of Long-lived Assets
Our company reviews 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. If 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. Revenue Recognition
To date, the Company has derived revenue from the sale of emission control
equipment and related services as well as providing design and engineering
Irrespective of the line of business 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 Company determines revenue recognition through the following five steps:
? identification of the contract, or contracts, with a customer; ? identification of the performance obligations in the contract; ? determination of the transaction price; ? allocation of the transaction price to the performance obligations in the contract; and
? recognition of revenue when, or as, performance obligations are satisfied.
The Company accounts for a contract when it has approval and commitment from
both parties, the rights of the parties are identified, payment terms are
identified, the contract has commercial substance and collectability of
consideration is probable.
As our contracts with customers 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.
In the case of settlement agreement with customers where no continued
performance obligation is required, the Company recognizes revenue based on
consideration settled according to the agreement.
9 Contracts signed with one customer has a significant financing component. The Company provides design, production, and installation services of scrubber units to this customer. 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 instalments 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. Accounts Receivable Accounts receivables consist of trade receivables arising in the normal course of business. The Company establishes an allowance for doubtful accounts that reflects the Company's best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, age, financial information that is publicly accessible and other currently available evidence.
Financial Instruments and Fair Value Measurements
ASC 820, "Fair Value Measurements and Disclosures" requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value: Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in
active markets for identical assets or liabilities.
Level 2 Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 3 Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. The Company's financial instruments consist principally of cash, short term investments, accounts receivable, lease receivable, amounts due from and to related parties, accounts payable and accrued liabilities, and operating lease liability. The recorded values of all financial instruments are at amortized cost which approximate their current fair values because of their nature and respective maturity dates or durations. Stock-based compensation The Company records share-based payment transactions for acquiring goods and services from employees and nonemployees in accordance with ASC 718, Compensation - Stock Compensation, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are measured at grant-date fair value of the equity instruments issued. The Company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by the Company's stock price as well as assumptions regarding a number of subjective variables. These subjective variables include but are not limited to the Company's expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statement of operations over the requisite service period. The majority of the Company's awards vest upon issuance. 10
Subsequent to the adoption of ASU 2018-07 – Improvements to Nonemployee
Share-Based Payment Accounting, the accounting for employee and non-employee
stock options is now aligned.
Contract Liabilities and Contract Assets
Contractual arrangements with customers for the sale of a scrubber unit generally provide for deposits and instalments through the procurement and design phases of equipment manufacturing. Amounts received from 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 are recorded as contract assets until the equipment is manufactured to specifications and accepted by the customer. The Company presents the contract liabilities and contract assets on its balance sheet when one of the parties to the revenue contract has performed before
the other. Warranty Provision The Company reserves a 2% warranty provision on the completion of a contract following the commissioning of marine scrubbers, there being a number of milestone-based stage payments. 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 delivery 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. Lease
Leases classified as operating leases, where the Company is the lessee, are recorded as lease liabilities based on the present value of minimum lease payments over the lease term, discounted using the lessor's rate implicit in the lease for each individual lease arrangement or the Company's incremental borrowing rate, if the lessor's implicit rate is not readily determinable. Corresponding right-of-use assets are recognized consisting of the lease liabilities, initial direct costs and any lease incentive payments. Lease liabilities are drawn down as lease payments are made and right-of-use assets are depreciated over the term of the lease. Operating lease expenses are recognized over the term of the lease, consisting of interest accrued on the lease liability and depreciation of the right-of-use asset.
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