LIQTECH INTERNATIONAL INC 10-K

Item 8. Financial Statements and Supplementary Data.   Index to Consolidated Financial Statements     Page   Report of Independent Registered Public Accounting Firm  (PCAOB ID 3627 )   36     Consolidated Balance Sheets at December 31, 2021 and 2020 38     Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 40     Consolidated Statement of Comprehensive Loss for the years ended December 31, 2021 and 2020 41     Consolidated Statement of Stockholders ’   Equity for the years ended December 31, 2021 and 2020 42     Consolidated Statement of Cash Flows for the years ended December 31, 2021 and 2020 44     Notes to the Consolidated Financial Statements 46   35 Table of Contents   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the Board of Directors and Shareholders of LiqTech International, Inc.:   Opinion on the Financial Statements   We have audited the accompanying consolidated balance sheets of LiqTech International, Inc. (“the Company”) as of December 31, 2021, and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.   Explanatory Paragraph Regarding Going Concern   The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company incurred a net loss, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.   Basis for Opinion   These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.   Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audits provide a reasonable basis for our opinion.    Critical Audit Matters   The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.   Inventory Costing   As described in Notes 1 and 2 to the consolidated financial statements, the Company uses a standard costing method to value inventory.  Management reviews and assesses the standard costing estimates annually or more frequently in the event circumstances indicate a change in cost structure or material variance from actual has occurred.  In addition to raw materials and labor, the Company applies a production overhead allocation cost to each item.   We identified the auditing of inventory costing as a critical audit matter because of the significant estimates and assumptions management used in the determination of the standard costing allocation and overhead allocations. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.   36 Table of Contents   Our audit procedures consisted of the following:     ● Obtaining an understanding and testing management’s process for developing the standard costing model and overhead allocations.   ● Assessing the accuracy, completeness, and reasonableness of the costs included in the standard costing model and overhead allocation to ensure all costs capitalized were appropriate, complete and proper.   ● Evaluating the appropriateness and reasonableness of the assumptions used by management to allocate costs to specific costs, including assessing the reasonableness of production times, labor requirement and energy usage.     ● Performing cost testing on raw material inputs purchased by tracing the recorded costs to supporting third party invoices.     Revenue Recognition – Contracts with Multiple Performance Obligations   As described in Note 1 to the consolidated financial statements, the Company has some contracts with customers that contain multiple performance obligations. For these contracts, management accounts for individual performance obligations separately if they are distinct. As described by management, management exercises judgment and uses estimates in order to (1) determine whether performance obligations are distinct and should be accounted for separately; (2) determine the standalone selling price of each performance obligation; (3) allocate the transaction price among the various performance obligations on a relative standalone selling price basis; and (4) determine whether revenue for each performance obligation should be recognized at a point in time or over time. Revenue recognized in 2021 related to contracts with multiple performance obligations was approximately $7.2 million.   We identified the auditing of revenue from contracts with multiple performance obligations as a critical audit matter because there was significant judgments by management in identifying, evaluating and accounting for performance obligations in contracts with multiple performance obligations, which led to significant auditor judgment and effort in performing procedures to evaluate whether contracts with multiple performance obligations were appropriately identified, evaluated and accounted for by management.   Our audit procedures consisted of the following:     ● Obtaining an understanding and testing management’s process for identifying, evaluating, and accounting for contracts with multiple performance obligations.   ● Examining revenue arrangements on a test basis, including evaluating the terms and conditions of the arrangements and testing the identification, evaluation, and accounting of the performance obligation.   ● Performing procedures to test the completeness and accuracy of the data used to determine stand-alone selling price.     ● Evaluating the reasonableness of the approach used to determine stand-alone selling price.     /s/ Sadler, Gibb & Associates, LLC   We have served as the Company’s auditor since 2018.   Draper, UT March 30, 2022    37 Table of Contents     LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES   CONSOLIDATED BALANCE SHEETS       As of     As of       December 31,     December 31,       2021     2020   Current Assets:                 Cash, cash equivalents and Restricted cash   $ 17,489,380     $ 13,264,449   Accounts receivable, net of allowance for doubtful accounts of $ 409,076 and $ 498,044 at December 31, 2021 and December 31, 2020, respectively     1,957,579       3,129,109   Inventories, net of allowance for excess and obsolete inventory of $ 268,470 and $ 723,949 at December 31, 2021 and December 31, 2020, respectively     5,421,027       5,522,038   Contract assets     1,906,510       2,708,136   Prepaid expenses and other current assets     1,292,285       1,031,194                     Total Current Assets     28,066,781       25,654,926                     Long-Term Assets:                 Property and Equipment, net of accumulated depreciation of $ 7,554,803 and $ 8,908,145 at December 31, 2021 and December 31, 2020, respectively     8,858,993       10,321,511   Operating lease right-of-use assets     6,925,807       4,947,734   Deposits and other assets     628,109       545,673   Intangible assets, net of accumulated amortization of $ 357,231 and $ 269,441 at December 31, 2021 and December 31, 2020, respectively     334,743       480,060   Goodwill     240,259       260,233                     Total Long-term Assets     16,987,911       16,555,211                     Total Assets   $ 45,054,692     $ 42,210,137     The accompanying notes are an integral part of these consolidated financial statements.   38 Table of Contents   LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES   CONSOLIDATED BALANCE SHEETS       As of     As of       December 31,     December 31,       2021     2020   Current Liabilities:                 Accounts payable   $ 1,646,662     $ 2,332,151   Accrued expenses     4,685,665       4,909,531   Current portion of finance lease obligations     373,824       394,839   Current portion of operating lease liabilities     846,544       1,026,235   Current portion of convertible note payable     8,400,000       -   Contract liabilities     914,828       1,152,178                     Total Current Liabilities     16,867,523       9,814,934                     Deferred tax liability     224,779       305,167   Other liabilities, net of current portion     346,939       -   Finance lease obligation, net of current portion     2,499,591       3,112,496   Operating lease liability, net of current portion     6,154,064       4,159,225   Convertible note payable, less current portion     6,186,936       -                     Total Long-term liabilities     15,412,309       7,576,888                     Total Liabilities     32,279,832       17,391,822                     Stockholders' Equity:                 Preferred stock; par value $ 0.001 , 2,500,000 shares authorized, 0 and 0 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively     -       -   Common stock; par value $ 0.001 , 100,000,000 shares authorized 21,285,706 and 21,655,461 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively     21,285       21,655   Additional paid-in capital     70,910,902       69,897,698   Accumulated deficit     ( 53,181,928 )     ( 42,054,968 ) Accumulated other comprehensive loss     ( 4,975,399 )     ( 3,046,070 )                   Total Stockholders' Equity     12,774,860       24,818,315                     Total Liabilities and Stockholders' Equity   $ 45,054,692     $ 42,210,137     The accompanying notes are an integral part of these consolidated financial statements.   39 Table of Contents     LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES     CONSOLIDATED STATEMENTS OF OPERATIONS       For the Years Ended       December 31,       2021     2020   Revenue   $ 18,273,442     $ 22,526,201   Cost of Goods Sold     16,697,296       20,379,519                     Gross Profit     1,576,146       2,146,682                     Operating Expenses:                 Selling expenses     4,564,188       2,918,418   General and administrative expenses     5,836,629       6,205,040   Research and development expenses     1,862,653       1,278,331                     Total Operating Expenses     12,263,470       10,401,789                     Loss from Operations     ( 10,687,324 )     ( 8,255,107 )                   Other Income (Expense)                 Gain on modification of earn-out liability     -       306,077   Interest and other income     371,467       139,513   Interest expense     ( 708,176 )     ( 120,903 ) Amortization of discount on convertible note     ( 835,331 )         Fair value adjustment of warrants     -       ( 901,250 ) Gain (Loss) on currency transactions     668,225       ( 1,469,607 ) Gain (Loss) on sale of fixed assets     1,113       27,772                     Total Other Income (Expense)     ( 502,672 )     ( 2,018,398 )                   Loss Before Income Taxes     ( 11,189,996 )     ( 10,273,505 )                   Income Tax Benefit     ( 63,036 )     ( 465,145 )                   Net Loss     ( 11,126,960 )     ( 9,808,360 )                   Basic and Diluted Loss Per Share   $ ( 0.52 )   $ ( 0.46 )                   Basic and Diluted Weighted Average Common Shares Outstanding     21,567,112       21,209,118     The accompanying notes are an integral part of these consolidated financial statements.   40 Table of Contents     LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES   CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS       For the Years Ended       December 31,       2021     2020                     Net Loss     ( 11,126,960 )     ( 9,808,360 )                   Other Comprehensive Income (Loss) - Currency Translation, net     ( 1,929,329 )     3,120,489                     Total Comprehensive Loss   $ ( 13,056,289 )   $ ( 6,687,871 )   The accompanying notes are an integral part of these consolidated financial statements.   41 Table of Contents     LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES   CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 2021   and 2020         Common Stock     Additional Paid-in     Accumulated     Accumulated Other Compre- hensive               Shares     Amount     Capital     Deficit     Income (Loss)     TOTAL                                                     BALANCE, December 31, 2020     21,655,461       21,655       69,897,698       ( 42,054,968 )     ( 3,046,070 )     24,818,315                                                     Common stock issued in settlement of RSUs     50,245       50       ( 50 )                     -                                                     Common shares issued for Convertible Note     80,000       80       531,649                   531,729                                                     Exchange of common stock to prefunded warrants     ( 500,000 )     ( 500 )     500                       -                                                     Stock-based compensation                     481,105                       481,105                                                     Currency translation, net                                     ( 1,929,329 )     ( 1,929,329 )                                                   Net Income for the year ended December 31, 2021                             ( 11,126,960 )             ( 11,126,960 )                                                   BALANCE, December 31, 2021     21,285,706       21,285       70,910,092       ( 53,181,928 )     ( 4,975,399 )     12,774,860     42 Table of Contents   LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES   CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 2020   and 2019       Common Stock     Additional Paid-in     Accumulated     Accumulated Other Compre- hensive               Shares     Amount     Capital     Deficit     Income (Loss)     TOTAL                                                     BALANCE, December 31, 2019     20,547,668       20,548       61,398,150       ( 32,246,608 )     ( 6,166,559 )     23,005,531                                                     Common shares issued per Board authorization of RSUs for services by the board of directors     8,212       8       44,992                   45,000                                                     Common shares issued to settle RSUs for services provided by the board of directors     8,333       8       ( 8 )                 -                                                     Stock-based compensation                     298,780                       298,780                                                     Exercise of stock options     6,248       6       18,494                       18,500                                                     Common shares issued for cash at $ 5.00 per share, net of offering cost of $ 762,875 , May 2020     1,085,000       1,085       4,661,040                       4,662,125                                                     Prefunded warrants, 515,000 , transferred to equity upon modification in August 2020                     3,476,250                       3,476,250                                                     Currency translation, net                                     3,120,489       3,120,489                                                     Net Income for the year ended December 31, 2020                             ( 9,808,360 )             ( 9,808,360 )                                                   BALANCE, December 31, 2020     21,655,461       21,655       69,897,698       ( 42,054,968 )     ( 3,046,070 )     24,818,315     43 Table of Contents     LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS          For the years Ended       December 31,       2021     2020   Cash Flows from Operating Activities:                 Net Income (Loss)   $ ( 11,126,960 )   $ ( 9,808,360 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:                 Depreciation and amortization     2,740,241       2,827,341   Amortization of discount on convertible notes payable     835,331       -   Stock-based compensation     481,105       343,780   Change in fair value of warrant liability     -       901,250   Gain on modification of earn-out liability     -       ( 306,077 ) Change in deferred tax asset / liability     ( 63,036 )     ( 63,200 ) Loss (Gain) on sale of equipment     ( 1,113 )     ( 27,772 ) Changes in assets and liabilities:                 Accounts receivable     971,460       3,143,651   Inventory     ( 336,651 )     ( 322,800 ) Contract assets     610,476       2,522,275   Prepaid expenses and other current assets     479,423       565   Accounts payable     ( 532,718 )     ( 2,006,919 ) Accrued expenses     798,543       1,355,846   Operating lease liabilities     ( 945,808 )     ( 874,441 ) Contract liabilities     ( 155,291 )     ( 269,198 ) Income taxes payable     -       ( 14,806 )                   Total Adjustments     3,923,117       7,209,495                     Net Cash used in Operating Activities     ( 7,203,843 )     ( 2,598,865 )                   Cash Flows from Investing Activities:                 Purchase of property and equipment     ( 1,133,378 )     ( 3,754,166 ) Proceeds from sale of property and equipment     1,113       102,416   Purchase of other intangible assets     -       ( 55,198 ) Net cash paid for acquisition     ( 317,874 )     ( 301,573 )                   Net Cash used in Investing Activities     ( 1,450,139 )     ( 4,008,521 )                   Cash Flows from Financing Activities:                 Payments on finance lease obligation     ( 380,334 )     ( 38,725 ) Proceeds from convertible notes payable, net     14,283,333       -   Proceeds from exercise of stock options     -       18,500   Proceeds from issuance of prefunded warrants     -       2,575,000   Proceeds from issuance of common stock, net     -       4,662,127                     Net Cash Provided by Financing Activities     13,902,999       7,216,902                     Effect of foreign currency exchange on cash     ( 1,024,086 )     2,871,001                     Net Change in Cash, Cash Equivalents and Restricted Cash     4,224,931       3,480,517                     Cash, Cash Equivalents and Restricted Cash at Beginning of Period     13,264,449       9,783,932   Cash, Cash Equivalents and Restricted Cash at End of Period   $ 17,489,380     $ 13,264,449     The accompanying notes are an integral part of these consolidated financial statements.   44 Table of Contents   LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS       For the Years Ended December 31,       2021     2020   Supplemental Disclosures of Cash Flow Information:                 Cash paid during the period for:                 Interest   $ 635,671     $ 103,953   Income Taxes   $      $ 13,726                     Non-cash financing activities                 Original issue discount on convertible note     1,800,000       -   Convertible Note debt conversion feature     3,048,396       -   Debt issuance costs on convertible note     716,667       -   Common Stock issued in conjunction with convertible note financing     531,729       -     The accompanying notes are an integral part of these consolidated financial statements.   45 Table of Contents   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Business and Basis of Presentation   The consolidated financial statements include the accounts of LiqTech International, Inc., the “Company” and its subsidiaries. The terms "Company", “us", "we" and "our" as used in this report refer to the Company and its subsidiaries, which are set forth below. The Company engages in the development, design, production, marketing and sale of automated filtering systems, ceramic silicon carbide liquid applications and diesel particulate air filters in the United States, Canada, Europe, Asia and South America. Set forth below is a description of the Company and each of its subsidiaries:   LiqTech International, Inc., a Nevada corporation organized in July 2004, formerly known as Blue Moose Media, Inc.   LiqTech USA, a Delaware corporation and a 100 % owned subsidiary of the Company formed in May 2011.   LiqTech Holding A/S (formerly known as LiqTech International A/S), a Danish corporation, incorporated on January 15, 2000 ( “LiqTech Holding”), a 100 % owned subsidiary of LiqTech USA, handling all joint group activities such as management, marketing, finance, IT etc.   LiqTech NA, Inc. (“LiqTech NA”), incorporated in Delaware on July 1, 2005, a 100 % owned subsidiary of LiqTech USA, engaged in the production, marketing and sale of ceramic diesel particulate and liquid filters in the United States and Canada. LiqTech NA has closed operations in January 2021, and all activity in this company has ceased.   LiqTech Water A/S (formerly known as LiqTech Systems A/S), a Danish Corporation (“LiqTech Water”), incorporated on September 1, 2009, engaged in the manufacture of fully automated filtering systems for use within marine applications, municipal pool and spa applications, and other industrial applications within Denmark and international markets.   LiqTech Plastics A/S (formerly known as BS Plastic A/S), a Danish Corporation (“LiqTech Plastics”), acquired on September 1, 2019, engaged in the manufacture of specialized machined and welded plastic parts within Denmark and international markets.   LiqTech Ceramics A/S, a Danish corporation (“LiqTech Ceramics”), incorporated on December 20, 2019, engaged in the development, design, application, marketing and sales of membranes, ceramic diesel particulate and liquid filters, and catalytic converters in Europe, Asia and South America.   LiqTech Water Projects A/S, a Danish corporation (“LiqTech Water Projects”), incorporated on July 28, 2020 that is a dormant company without activity. This company was formed to include the investments for our joint venture in the Middle East.   LiqTech Emission Control A/S, a Danish corporation (“LiqTech Emission Control”), incorporated on March 1, 2021 that is a dormant company without activity. This company was formed to include the investments for our joint venture in China.   LiqTech Environment Technologies (China) Co. Ltd. (“LiqTech China”), incorporated on September 23, 2021, to be engaged in the development, design, application, marketing and sales of ceramic diesel particulate, liquid filters, and catalytic converters in Asia.   LiqTech Germany (“LiqTech Germany”), a 100 % owned subsidiary of LiqTech Holding, incorporated in Germany on December 9, 2011. This company is in the process of closing operations, and all activity in this company has ceased.   LiqTech PTE Ltd (“LiqTech Singapore”), a 95 % owned subsidiary of LiqTech Holding, incorporated in Singapore on January 19, 2012. This company is in the process of closing operations, and all activity in this company has ceased.     Consolidation   --  The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned subsidiary. All material intercompany transactions and accounts have been eliminated in the consolidation.   46 Table of Contents   Reclassification  – Certain amounts presented in previously issued financial statements have been reclassified to be consistent with the current period presentation. In the statement of operations and comprehensive loss, the Company has reclassified the prior year comparative amounts of general and administrative expenses and other expenses to be consistent with the current classification.   Functional Currency / Foreign currency translation   --  The functional currency of LiqTech International, Inc., and LiqTech USA, Inc. is the U.S. Dollar. The functional currency of LiqTech Holding, LiqTech Water, LiqTech Plastics, LiqTech Ceramics, LiqTech Water Projects and LiqTech Emission Control is the Danish Krone (“DKK”); the functional currency of LiqTech China is the Renminbi (“RMB”); the functional currency of LiqTech Germany is the Euro; and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is the U.S. Dollar for the purpose of these consolidated financial statements. The balance sheet accounts of the foreign subsidiaries are translated into U.S. Dollars at the period-end exchange rates, and all revenue and expenses are translated into U.S. Dollars at the average exchange rates prevailing during the twelve months ended December 31, 2021 and 2020. Translation gains and losses are deferred and accumulated as a component of other comprehensive income (loss) in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.     Significant events   --  In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID- 19” ) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid- March 2020, we initially elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, many of our employees have been working remotely for select periods in line with recommendations from the government agencies. Throughout 2021 and up until the date of this report, we are maintaining our focus on securing operational continuity despite the infrequent restrictions imposed on our business from various cycles of the pandemic. We strive to protect our employee by maintaining focus on relevant COVID protective measures including, but limited to, maintaining physical distance, cleaning and disinfection of high-touch surfaces, and a general recommendation to our employees to follow government guidelines on vaccination and testing strategy.   We are unable to accurately predict the full impact that COVID- 19 will have on our long-term financial condition, results of operations, liquidity and cash flows, and our compliance with the measures implemented to avoid the spread of the virus did have a material adverse impact on our financial results for the fiscal year 2021. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures along with the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, might not be sufficient to cover our capital requirements for the next 12 months from the issuance of this report as we consider further investments to generate revenue growth. In addition, as a result of the reduced order intake, continued supply chain disruptions, and decreased manufacturing levels, our future gross profit will also likely be unfavorably impacted until such time that we are able to operate our manufacturing facilities at higher capacity levels as originally planned prior to the COVID- 19 pandemic. Notwithstanding the reduction in our manufacturing levels and continued supply chain disruptions, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2022.   While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect and how our business may be adversely affected as a result of the pandemic’s global economic impact and associated supply chain disruptions. In the future, the pandemic may cause reduced or changed demand characteristics for our products, especially if it results in a global recession or structural shifts in the demand for our products across our end markets.   Cash, Cash Equivalents and Restricted Cash   --  The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. As of December 31, 2021, and 2020, the Company held $ 2,125,695 and $ 1,515,620 , respectively, of restricted cash. The restricted cash is held as security by a local financial institution for ensuring a leasing facility and for payment guarantees issued for the benefit of customers in connection with prepayments of sales orders and for warranties after the delivery of sales orders.   Accounts held in each U.S. institution are insured by the Federal Deposit Insurance Company (“FDIC”) up to $250,000. At December 31, 2021 and December 31, 2020 the Company had $ 11,346,826 and $ 0 in excess of the FDIC insured limit, respectively.   Accounts Receivable   --  Accounts receivable 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.    47 Table of Contents   The roll-forward of the allowance for doubtful accounts as of December 31, 2021 and December 31, 2020 is as follows:        2021     2020   Allowance for doubtful accounts at the beginning of the period   $ 498,044     $ 612,434   Bad debt expense     ( 28,499 )     320,270   Receivables written off during the periods     ( 24,415 )     ( 484,265 ) Effect of currency translation     ( 36,054 )     49,605   Allowance for doubtful accounts at the end of the period   $ 409,076     $ 498,044     Inventory  – Inventory directly purchased is carried at the lower of cost or net realizable value, as determined on the first -in, first -out method.   For inventory produced, standard costs that approximate actual cost on the FIFO method are used to value inventory. Standard costs are reviewed at least annually by management, or more often in the event that 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 inventory to the extent management determines that the cost cannot be recovered due to obsolescence or other factors.   Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movement, expected useful lives, and estimated future demand of the products and spare parts.   Contracts Assets  – 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 goods sold 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 water treatment 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 the delivery. Further included in Contract Assets are short-term receivables such as VAT and other receivables.   Leases   --  The Company has elected to not recognize lease assets and liabilities with an initial term of 12 months or less and to not separate lease and non-lease components. The Company’s accounting for finance leases (formerly called capital lease obligations) remains substantially unchanged. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date is used in determining the present value. The Company will use the implicit rate when readily determinable. The operating lease ROU asset also included prepaid lease payments and reduced by accrued lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Operating lease cost for lease payments will be recognized on a straight-line basis over the lease term.   Property and Equipment   --  Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years.   48 Table of Contents   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.   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.   Revenue Recognition -- On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” which includes clarifying ASUs issued in 2015, 2016 and 2017 (“new revenue standard”). The new revenue standard was applied to all open revenue contracts using the modified retrospective method as of January 1, 2018.   The Company sells products throughout the world; sales by geographical region are as follows for the year ended December 31, 2021 and 2020:       % Distribution     For the Year Ended December 31       2021     2020     2021     2020   North America     17 %     3 %   $ 3,121,797     $ 656,032   Australia     2 %     2 %     401,485       524,255   Asia     23 %     15 %     4,256,585       3,372,286   Europe     58 %     80 %     10,493,574       17,973,628         100 %     100 %   $ 18,273,442     $ 22,526,201     The Company’s sales by product line are as follows for the years ended December 31, 2021 and 2020:       % Distribution     For the Year Ended December 31       2021     2020     2021     2020   Liquid filters and systems     39 %     63 %   $ 7,196,465     $ 14,147,842   Diesel particulate filters     39 %     22 %     7,183,868       5,131,891   Plastics components     20 %     12 %     3,615,681       2,647,366   Development projects     2 %     3 %     277,428       599,102         100 %     100 %   $ 18,273,442     $ 22,526,201     For membranes, diesel particulate filters and plastic components, revenue is recognized when performance obligations under 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 and 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 for payment from the customer. The Company's standard payment terms vary by the type and location of 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. Given the insignificant days between revenue recognition and receipt of payment, financing arrangements do not exist between the Company and its customers.   49 Table of Contents   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 based on the prices charged to customers or expected cost-plus margin.   System sales are recognized when the Company transfers control to the customer based upon sales and delivery conditions stated 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) stating 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 margin. This second performance obligation is recognized as revenue at the time of provision of the commissioning services 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), some of the invoicing will still be awaiting commissioning and is therefore recognized as Contract assets.   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 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.   The roll-forward of Contract Assets/Liabilities for the year ended December 31, 2021 and December 31, 2020 is:        2021     2020   Cost incurred   $ 3,381,994     $ 3,997,161   Unbilled project deliveries     454,158       1,015,977   VAT     542,255       446,608   Other receivables     60,158       75,010   Prepayments     ( 2,947,736 )     ( 3,112,118 ) Deferred Revenue     ( 499,146 )     ( 866,680 )     $ 991,682     $ 1,555,958                     Distributed as follows:                 Contract assets   $ 1,906,510     $ 2,708,136   Contract liabilities     ( 914,828 )     ( 1,152,178 )     $ 991,682     $ 1,555,958     50 Table of Contents   Advertising Cost   --  Costs incurred in connection with advertising of the Company’s products is expensed as incurred. Advertising cost is included in sales expenses, and total advertising costs amounted to $ 308,880 and $ 128,826 for the years ended December 31, 2021 and 2020, respectively.   Research and Development Cost   --  The Company expenses research and development costs for the development of new products as incurred. Included in operating expense for the years ended December 31, 2021 and 2020 were $ 1,862,653 and $ 1,278,331 , respectively, of research and development costs.   Income Taxes   --  The Company accounts for income taxes in accordance with FASB ASC Topic 740: Accounting for Income Taxes. This statement requires an asset and liability approach for accounting for income taxes.   Income/(Loss)   Per Share   --  The Company calculates earnings (loss) per share in accordance with FASB ASC 260, Earnings Per Share. Basic earnings per common share (EPS) are based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share are based on shares outstanding (computed as under basic EPS) and potentially dilutive common shares. Potential common shares included in the diluted earnings per share calculation include in-the-money stock options and warrants that have been granted but have not been exercised.   Stock Options and Awards   --  During the years presented in the accompanying consolidated financial statements, the Company has granted stock options and awards. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Stock-based compensation costs of $ 481,105 and $ 343,780 have been recognized for the vesting of options and stock awards granted to directors, management and certain key employees for the years ended December 31, 2021 and 2020, respectively.   Warrant Liability   --  The Company issued common stock warrants in May 2020 in conjunction with an equity financing. In accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480” ), the fair value of these warrants was initially classified as a liability on the Company’s Consolidated Balance Sheet because, according to the original terms of the warrants, a fundamental transaction could have given rise to an obligation of the Company to pay cash to its warrant holders, which was out of the control of the Company.   Fair Value of Financial Instruments   --  The Company accounts for fair value measurements for financial assets and liabilities in accordance with FASB ASC Topic 820. The authoritative guidance, which, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three -tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:     ● Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;   ● Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and   ● Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.   Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, other receivables, prepaid expenses, accounts payable, and accrued expenses approximate their recorded values due to their short-term maturities.   Accounting Estimates   --  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets including accounts receivable; allowance for doubtful accounts; reserve for excess and obsolete inventory; depreciation and impairment of property, plant and equipment; goodwill and intangible assets; liabilities including contingencies; the disclosures of contingent assets and liabilities at the date of the financial statements; warrant liability; and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.   51 Table of Contents   Recent Accounting Pronouncements  –  In November 2021, the FASB issued ASU 2021 - 10, Disclosures by Business Entities about Government Assistance: The FASB is issuing this Update to increase the transparency of government assistance including the disclosure of ( 1 ) the types of assistance, ( 2 ) an entity’s accounting for the assistance, and ( 3 ) the effect of the assistance on an entity’s financial statements. The ASU will be effective for annual reporting periods after December 15, 2021. We are still assessing the impact of ASU 2021 - 10 on our consolidated financial statements.   On August 2020, the FASB issued ASU 2020 - 06, Debt—Debt with Conversion and Other Options (Subtopic 470 - 20 ) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815 - 40 ): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods, and early adoption is permitted in annual reporting periods ending after December 15, 2020. We are still assessing the impact of ASU 2020 - 06 on our consolidated financial statements.   On March 2020, the FASB issued ASU 2020 - 04,  Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is intended to help stakeholders during the global market-wide reference rate transition period and will be in effect for a limited time through December 31, 2022. Adoption is permitted at any time. The Company is currently evaluating the impact on its financial statements.   On March 9, 2020, the FASB issued ASU 2020 - 03, “Codification Improvements to Financial Instruments.” This ASU was issued to clarify and improve various financial instruments topics. The guidance has various effective dates but is basically effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted ASU 2020 - 03 effective January 1, 2020 and concluded there was no material impact to the consolidated financial statements.   In December 2019, the FASB issued ASU 2019 - 12, Income Taxes (Topic 740 ): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We will adopt the new standard effective March 1, 2021 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.   In August 2018, the FASB issued ASU No. 2018 - 13, Fair Value Measurement (Topic 820 ): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurement by removing, modifying and adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. The Company adopted ASU 2018 - 13 effective January 1, 2020 and concluded there was no material impact to the consolidated financial statements.   In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016 - 18, Restricted Cash that requires companies, in the Statement of Cash Flows, to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Consequently, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. For the period ended December 31, 2021, the Company has recorded $ 2,125,695 as Restricted cash, $ 15,363,685 as Unrestricted cash, and a total of $ 17,489,380 as Cash, Cash equivalents and Restricted cash. For the period ended December 31, 2020, the amounts were $ 1,515,620 in Restricted cash and $ 11,748,829 in Unrestricted cash.   In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016 - 13,  Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments, including subsequently issued ASUs to clarify the implementation guidance in ASU 2016 - 13. The amendment introduces new guidance for credit losses on financial assets measured at amortized cost, including finance receivables and trade receivables. Under this new model, expected credit losses are based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability, replacing the previous incurred loss model. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted ASU 2016 - 13 effective January 1, 2020 and concluded there was no material impact to the consolidated financial statements.    Other recent accounting pronouncements issued by the FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements.     52 Table of Contents       NOTE 2 – GOING CONCERN   The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has limited cash and incurred significant recent losses. These factors raise substantial doubt about the ability of the Company to continue as a going concern. There is  no  assurance that the Company will be successful in raising additional cash through the issuance of debt or equity instruments or return to achieving profitable operations. The financial statements do  not  include any adjustments that might result from the outcome of these uncertainties.      NOTE 3 - INVENTORY   Inventory consisted of the following at December 31, 2021 and December 31, 2020:       2021     2020   Furnace parts and supplies   $ 213,224     $ 471,622   Raw materials     2,144,067       1,955,713   Work in process     1,671,290       2,394,481   Finished goods and filtration systems     1,660,907       1,424,171   Reserve for excess and obsolescence     ( 268,470 )     ( 723,949 ) Net Inventory   $ 5,421,027     $ 5,522,038     Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movements, expected useful lives, and estimated future demand for the products. The reduction in the reserve for excess and obsolescence reflects the reuse of goods previously classified as obsolete due to shift in demand pattern from external clients.        NOTE 4 -   PROPERTY AND EQUIPMENT   Property and equipment consisted of the following on December 31, 2021 and December 31, 2020:     Useful Life 2021   2020   Production equipment   3 - 10 $ 7,425,145   $ 8,599,728                         Production equipment - finance lease   3 - 10   3,066,623     4,528,695                         Lab equipment   3 - 10   117,770     127,560   Computer equipment   3 - 5   1,005,223     805,001   Vehicles   3 - 5   90,819     115,525   Vehicles - finance lease   3 - 5   -     -   Furniture and fixture     5     1,166,071     1,218,386   Furniture and fixture - finance lease     5     268,208     290,505   Leasehold improvements   5 - 10   3,273,940     3,544,256               16,413,799     19,229,656   Less Accumulated Depreciation           ( 7,218,468 )   ( 7,518,657 ) Less Accumulated Depreciation - finance lease           ( 336,338 )   ( 1,389,488 ) Net Property and Equipment         $ 8,858,993   $ 10,321,511     Depreciation expense amounted to $ 1,945,489 and $ 1,857,111 for the year ended December 31, 2021 and 2020, respectively.       NOTE 5 - LEASES   The Company leases certain vehicles, real property, production equipment and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The majority of our operating leases are non-cancelable operating leases for production and office space in Hobro, Aarhus and Copenhagen, Denmark as well as in Taicang, China and White Bear Lake, Minnesota. As of September 1, 2021 the Company entered a new lease agreement for a 8,524.67 square meter production facility in Taicang, China. The lease term is a minimum of 8 years, and the monthly lease payment is RMB 30 per square meter until August 31, 2025 ( RMB 255,740 / $ 40,918 ) and RMB 33.6 (RMB 286,429 / $ 45,829 ) per square meter from September 1, 2025 until the end of the lease period. The parties have agreed on a 50 % discount on the lease payments for the period September 1, 2021 to June 30, 2022. The lease in White Bear Lake expired in February 2021, and due to the closure of the activity in North America, the lease has not been extended.   During the year ended December 31, 2021, cash paid for amounts included for the measurement of operating lease liabilities was $ 1,057,810 , and the Company recorded operating lease expenses included in operating expenses of $ 1,135,814 .   During the year ended December 31, 2021, cash paid for amounts included for the measurement of finance lease liabilities was $ 470,389 , and the Company recorded finance lease expenses included in other income (expenses) of $ 265,221 .   53 Table of Contents   Supplemental balance sheet information related to leases as of December 31, 2021 and 2020 was as follows:       December 31, 2021     December 31, 2020   Operating leases :                 Operating lease right-of-use assets   $ 6,925,807     $ 4,947,734                     Operating lease liabilities – current   $ 846,544     $ 1,026,235   Operating lease liabilities – long-term     6,154,064       4,159,225   Total operating lease liabilities   $ 7,000,608     $ 5,185,460                     Finance leases :                 Property and equipment, at cost   $ 3,334,830     $ 4,819,201   Accumulated depreciation     ( 336,337 )     ( 1,389,488 ) Property and equipment, net   $ 2,998,494     $ 3,429,713                     Finance lease liabilities – current   $ 373,824     $ 394,839   Finance lease liabilities – long-term     2,499,591       3,112,496   Total finance lease liabilities   $ 2,873,415     $ 3,507,335                     Weighted average remaining lease term:                 Operating leases     8.9       10.0   Finance leases     5.9       6.9                     Weighted average discount rate:                 Operating leases     6.5 %     6.2 % Finance leases     2.8 %     2.8 %   Maturities of lease liabilities at December 31, 2021 were as follows:       Operating lease     Finance lease   2022   $ 1,220,960     $ 449,480   2023     1,234,435       444,777   2024     1,083,993       445,735   2025     794,225       442,102   2026     818,507       404,679   Thereafter     3,828,035       976,221   Total payment under lease agreements     8,980,155       3,162,994   Less imputed interest     ( 1,979,546 )     ( 289,579 ) Total lease liability   $ 7,000,608     $ 2,873,415     54 Table of Contents     NOTE 6 - INTANGIBLE ASSETS   At December 31, 2021 and December 31, 2020, other intangible assets, net of accumulated amortization, consisted of customer relationships acquired in connection with the purchase of BS Plastic A/S and the cost of patent applications for the Company’s products.   Intangible assets consisted of the following at December 31, 2021 and December 31, 2020:       2021     2020   Customer relationships   $ 502,957     $ 544,770   Patent cost     189,017       204,731         691,974       749,501   Less Accumulated amortization     ( 357,231 )     ( 269,441 ) Intangible assets, net   $ 334,743     $ 480,060     Amortization expense amounted to $ 108,471 and $ 113,738 for the year ended December 31, 2021 and 2020, respectively.   Expected future amortization expense for the years ended are as follows:   Year ending December 31,   Amortization Expenses   2022     108,471   2023     108,471   2024     74,940   2025     7,880   2026     7,880   Thereafter     27,101       $ 334,743         NOTE 7 - LINES OF CREDIT   In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or a security bond. For that purpose, we have a guaranteed credit line of DKK13,000,000 (approximately $ 2,000,000 ). As of December 31, 2021, our bank has issued working guaranties of $ 643,961 for our customers based on the credit line. The credit line is secured by a cash deposit of $ 2,000,000 .     N OTE 8 – CONVERTIBLE NOTE PAYABLE   On March 24, 2021, we entered into a Securities Purchase Agreement with an institutional investor pursuant to which the Company agreed to issue and sell a $ 15.0 million principal amount Senior Convertible Note (“the Note”) due on October 1, 2023 and 80,000 shares of Common Stock for an aggregate purchase price of $ 15.0 million upon the satisfaction of the closing conditions set forth in the Purchase Agreement. The Closing occurred on April 8, 2021, and the Company issued to the Investor the securities in connection with the Closing.   The Note is a senior, unsecured obligation of the Company, payable at 112 % of the principal amount at maturity on October 1, 2023, or earlier upon redemption or repurchase as set forth in the Note. The Note is convertible into shares of Common Stock pursuant to the terms of the Note, in part or in whole, from time to time, at the election of the Investor. The initial conversion rate is 100.6749 shares of Common Stock per $1,000 of principal amount of the Note. The conversion rate is subject to anti-dilution adjustments including for stock dividends, splits and combinations; issuances of options, warrants or similar rights; spin-offs and distributions of property; cash dividends or distributions; and tender or exchange offers, in each case as further described in and pursuant to the terms of the Note.    The Company may provide written notice to the Holder electing to convert the entire Principal Amount of the Note if ( 1 ) the Daily VWAP per share of Common Stock exceeds one hundred and seventy-five percent ( 175 %) of the Conversion Price on each of twelve ( 12 ) consecutive VWAP Trading Days beginning after September 24, 2021; and ( 2 ) the Equity Conditions are satisfied on each of such twelve ( 12 ) consecutive VWAP Trading Days.   55     Beginning on March 1, 2022, and on the first day of each calendar month thereafter, at the election of the Investor or Holder, if applicable, the Company shall be required to redeem $ 840,000 of the amounts due under the Note in cash or Common Stock at 90% of the lesser of (i) the volume-weighted average price (“ VWAP ”) of the Common Stock on the trading day immediately preceding the payment date and (ii) the average of the lowest three ( 3 ) VWAPs over the 10 trading days immediately preceding the payment date, which shall in no case be less than the floor price of $ 1.75 per share.   The Note has interest payable quarterly beginning June 1, 2021 at a rate of 5 % per annum. The number of shares issuable if the Company elects to pay interest in shares of Common Stock shall be based on the Market Price.   The components of the Convertible Note are as follows:       December 31, 2021     December 31, 2020   Convertible note   $ 16,800,000       -   Less: unamortized debt issuance costs     ( 2,213,064 )     -   Convertible note payable   $ 14,586,936     $ -                     Current portion of convertible note payable     8,400,000       -   Convertible note payable, less current portion     6,186,936       -   Convertible note payable   $ 14,586,936     $ -       NOTE 9 -   AGREEMENTS, COMMITMENTS AND CONTINGENCIES   Agreements  -- LiqTech is planning to establish a joint venture to supply and operate water treatment systems for oil and gas producers in the Middle East. The partner in the joint venture is a local company. LiqTech expects to deliver technological know-how, design of water treatment systems and components to support potential projects in the Middle East. The joint venture will be established in the form of a jointly-owned limited liability company, incorporated under the laws in the local country, and LiqTech holds 49 % of the shares. All profits of the company are to be allocated proportionally to the ownership share, and none of the parties are liable for the company’s liabilities towards third parties.   Contingencies -- From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.   56 Table of Contents   On February 27, 2019, LiqTech was contacted by a former supplier alleging that the Company owed DKK 543,905 ($ 89,800 ) for services rendered in 2017. The claimant has previously filed a lawsuit to claim payment for the services, which was denied by the Company due to severe errors in the services rendered. The claim was settled out of court in which the Company agreed to pay DKK 400,000 ($ 63,575 ) for full and final settlement.   LiqTech is as of December 31, 2021 in an arbitration regarding a commercial dispute related to the delivery of Water treatment system installed on a commercial power plant. The parties disagree on whether the supplied equipment functions correctly including the ability to meet the agreed criteria. The dispute additionally concerns the equipment’s down time and the use of additives to run the equipment.  The arbitration is pending Statement of Claim and Statement of Response issued by the parties involved. LiqTech is currently disputing the claim in full and has filed a counterclaim regarding unpaid invoices. The claim against LiqTech amounts to DKK 1,671,768 ( $254,796 ) with the addition of interest.   Product Warranties - The Company provides a standard warranty on its systems, generally for a period of one to three years after customer acceptance. The Company estimates the costs that may be incurred under its standard warranty programs and records a liability for such costs at the time product revenue is recognized.   In addition, the Company sells an extended warranty for certain systems, which generally provides a warranty for up to four years from the date of commissioning. The specific terms and conditions of the warranties vary depending upon the product sold and the country in which the Company does business. Revenue received for the sale of extended warranty contracts is deferred and recognized in the same manner as the costs incurred to perform under the warranty contracts.   The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts, as necessary. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the cost per claim.   Changes in the Company's current and long-term warranty obligations included in accrued expenses on the balance sheet for the fiscal years ended December 31, 2021 and 2020 were as follows:       2021     2020   Balance at January 1,   $ 1,056,613     $ 813,288   Warranty costs charged to cost of goods sold     177,302       348,241   Utilization charges against reserve     ( 191,068 )     ( 199,624 ) Foreign currency effect     ( 80,534 )     94,708   Balance at December 31,   $ 962,313     $ 1,056,613         NOTE 10 -   INCOME TAXES   The Company accounts for income taxes in accordance with FASB ASC Topic 740, Accounting for Income Taxes, which requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which cannot be determined. In accordance with prevailing accounting guidance, the Company is required to recognize and disclose any income tax uncertainties. The guidance provides a two -step approach to recognizing and measuring tax benefits and liabilities when realization of the tax position is uncertain. The first step is to determine whether the tax position meets the more-likely-than- not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%. Actual results could differ from these estimates.   As of December 31, 2021, the Company had net operating loss carry-forward of approximately $ 23,172,440 for U.S. federal tax purposes expiring through 2041; approximately $ 16,039,713 for Danish tax purposes, which do not expire; approximately $ 472,134 for German tax purposes, which do not expire; approximately $ 613,426 for Singapore tax purposes, which do not expire and approximately $ 118,602 for Chinese tax purposes, which expires in 2026.   As of December 31, 2021 and December 31, 2020, the Company established a valuation allowance of $ 5,364,000 and $ 5,394,000 for the tax components of LiqTech International Inc. and Liqtech NA, respectively; $ 3,506,000 and $ 1,682,000 for the tax components of LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics, LiqTech Emission Control and LiqTech Water Projects, respectively, $ 132,000 and $ 143,000 for the tax components of LiqTech Germany, respectively, $ 104,000 and $ 113,000 for the tax components of LiqTech Singapore, respectively and $ 193,000 and $ 0 for LiqTech China, respectively, as management could not determine that it was more than likely not that sufficient income could be generated by these components to realize the resulting net operating loss carry-forwards and other deferred tax assets of these components. The change in the valuation allowance for the year ended December 31, 2021 was $( 30,000 ), $ 1,824,000 , $( 11,000 ), $( 9,000 ) and $ 193,000 for the US, Danish, German, Singapore and Chinese components, respectively. The change in the valuation allowance for the year ended December 31, 2020 was $ 1,549,000 , $ 473,000 , $ 14,000 and $ 11,000 for the US, Danish, German and Singapore components, respectively.   57 Table of Contents   The temporary differences, tax credits and carry forwards gave rise to the following deferred tax asset and liabilities at December 31, 2021 and December 31, 2020:       2021     2020   Excess of tax over financial accounting   $ 708,825     $ 624,154   Vacation accrual     -       1,971   Reserve for excess and obsolete inventory     49,615       151,288   Accrued expenses     4,305       -   Accrued interest     13,125       -   Discount amortization     175,420       -   Deferred compensation     52,500       49,556   Net operating loss carryover     9,959,356       7,627,046   Excess of book over tax depreciation     ( 343,294 )     ( 610,694 ) Excess of book over tax work in progress     ( 587,469 )     ( 817,131 ) Valuation allowance     ( 10,257,162 )     ( 7,331,357 )     $ ( 224,779 )   $ ( 305,167 ) Distributed as:                 Long-term deferred tax asset     -       -   Long-term deferred tax liability     ( 224,779 )     ( 305,167 )     $ ( 224,779 )   $ ( 305,167 )   A reconciliation of income tax expense at the federal statutory rate to income tax expense at the Company’s effective rate is as follows for the years ended December 31, 2021 and 2020:         2021     2020   Computed tax at expected statutory rate   $ ( 2,349,899 )   $ ( 2,157,436 ) State and local income taxes, net of federal benefit     ( 1,387 )     ( 76,055 ) Non-US income taxed at different rates     ( 101,856 )     ( 35,454 ) Deferred compensation     ( 31,500 )     ( 52,165 ) Non-deductible expenses     1,565       2,243   Non-taxable income     -       ( 75,562 ) Change in valuation allowance     2,209,294       1,918,579   Other     210,747       10,705   Income tax expense (benefit)   $ ( 63,036 )   $ ( 465,145 )   The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2021 and 2020 consisted of the following:         2021     2020   Current income taxes:                 Danish   $ -     $ ( 401,945 ) Federal     -       -   State     -       -   Current tax (benefit)   $ -     $ ( 401,945 )                   Deferred income taxes:                 Book in excess of tax depreciation   $ ( 309,719 )   $ ( 419,523 ) Work in progress     ( 174,093 )     ( 44,862 ) Net operating loss carryover     ( 2,667,221 )     ( 389,616 ) Valuation allowance     2,811,619       844,826   Deferred compensation     31,500       ( 52,165 ) Accrued interest     13,125       -   Discount amortization     175,420       -   Accrued vacation     4,305       ( 16,707 ) Reserve for obsolete inventory     52,028       14,847   Deferred tax expense (benefit)   $ ( 63,036 )   $ ( 63,200 ) Total tax expense (benefit)   $ ( 63,036 )   $ ( 465,145 )   Deferred income tax expense / (benefit) results primarily from the reversal of temporary timing differences between tax and financial statement income.    The Company files Danish, Chinese, U.S. federal and Minnesota state income tax returns. LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics, LiqTech Emission Control and LiqTech Water Projects are generally no longer subject to tax examinations for years prior to 2016 for their Danish tax returns. LiqTech NA is generally no longer subject to tax examinations for years prior to 2016 for U.S. federal and state tax returns.    58 Table of Contents       NOTE 11 -   EARNINGS PER SHARE   Basic and diluted net income (loss) per common share is determined by dividing net income (loss) by the weighted average common shares outstanding during the period. For the periods where there is a net loss, stock options, warrants and Restricted Stock Units have been excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive. Consequently, the weighted average common shares used to calculate both basic and diluted net loss per common share would be the same.   For the year ended December 31, 2021, the Company had 149,636 stock grants outstanding to issue common stock (“RSUs”). Further, the Company had 1,015,000 prefunded warrants outstanding to issue common stock.   For the year ended December 31, 2020, the Company had 128,299 stock grants outstanding to issue common stock (“RSUs”). Further, the Company had 515,000 prefunded warrants outstanding to issue common stock.       NOTE 12 - STOCKHOLDERS' EQUITY   Common Stock – The Company has 100,000,000 authorized shares of common stock, $ 0.001 par value. As of December 31, 2021 and 2020, respectively, there were  21,285,706 and 21,655,461 common shares issued and outstanding.         Voting -- Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of directors, and do not have any right to cumulate votes in the election of directors.    Dividends -- Subject to the rights and preferences of the holders of any series of preferred stock, if any, which may at the time be outstanding, holders of common stock are entitled to receive ratably such dividends as our Board of Directors from time to time may declare out of funds legally available.     Liquidation Rights -- In the event of any liquidation, dissolution or winding-up of affairs, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any outstanding shares of any series of our preferred stock, the holders of common stock will be entitled to share ratably in the distribution of any of our remaining assets.     Other Matters -- Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption rights or sinking fund provisions with respect to our common stock. All of the issued and outstanding shares of common stock on the date of this Annual Report are validly issued, fully paid and non-assessable.   Preferred Stock   -- Our Board of Directors has the authority to issue preferred stock in one or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.   The Company has 2,500,000 authorized shares of preferred stock, $ 0.001 par value. As of December 31, 2021 and 2020 there were no preferred shares issued and outstanding.   59 Table of Contents   Stock Issuances     Since  January 1, 2021, the Company has made the following issuances of common stock:    On January 6, 2021, the Company issued 11,218 shares of Common Stock to settle RSUs. The RSUs were valued at $ 70,000 for services provided by the Board of Directors in 2020. The Company recognized the stock-based compensation of the awards over the requisite service period.   On February 26, 2021, the Company issued 30,694 shares of Common Stock to settle RSUs. The RSUs were valued at $ 166,667 for services provided by management in 2020. The Company recognized the stock-based compensation of the awards over the requisite service period.   On April 9, 2021, the Company issued 80,000 restricted shares of Common Stock pursuant to the Securities Purchase Agreement executed on March 24, 2021.   On August 17, 2021, the Company entered an exchange agreement with an existing shareholder to exchange an aggregate of 500,000 shares of common stock for prefunded warrants of equivalent value. The prefunded warrants will be exercisable at any time on or after the closing date.   On September 3, 2021, the Company issued 8,333 shares of Common Stock to settle RSUs. The RSUs were valued at $ 57,500 for services provided by the Board of Directors. The Company recognized the stock-based compensation of the awards over the requisite service period.   For the years ended December 31, 2021 and 2020, the Company has recorded stock-based compensation expense of $ 481,105  and $ 343,780 , respectively.     Warrants     In connection with the securities purchase agreement entered into in May 2020, we issued a prefunded warrant (“the Warrant”) to purchase an aggregate of 515,000 shares of Common Stock at a purchase price of $ 5.00 per share. Subject to certain beneficial ownership limitations, the Warrant is immediately exercisable and may be exercised for no additional consideration. The Warrant does not expire. A holder of the Warrant will not have the right to exercise any portion of the Warrant if the holder, together with Affiliates and Attribution Parties (as such terms are defined in the Warrant), would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrant. Upon notice from the holder to the Company, however, the holder may decrease or increase the beneficial ownership limitation (but not above 9.99% of the number of shares of Common Stock outstanding).   On August 17, 2021, the Company entered an exchange agreement with an existing shareholder to exchange an aggregate of 500,000 shares of Common Stock for equivalent shares of a prefunded warrants (the “Exchange Agreement”). The prefunded warrants will be exercisable at an exercise price of $ 0.001 per share, subject to adjustments as provided under the terms of the prefunded warrants. The prefunded warrants will be exercisable at any time on or after the closing date. The Exchange Agreement contained additional terms typical of exchange agreements including representations and warranties of the parties. In connection with the Exchange Agreement, as of the date of the Exchange Agreement, the Company issued the prefunded warrants to the Shareholders. The exercise price of each prefunded warrant is equal to $ 0.001 per share, and the prefunded warrants are exercisable on or after August 17, 2021, subject to the limitations on exercise and conditions set forth by the prefunded warrants. The prefunded warrants are subject to customary adjustments in the event of stock splits and dividends, fundamental transactions, and subsequent offerings of rights to purchase stock.   The following is a summary of the periodic changes in warrants outstanding for the year ended December 31, 2021:       2021   Warrants outstanding at January 1     515,000   Common stock exchanged to prefunded warrant     500,000   Exercises and conversions     -   Warrants outstanding at December 31     1,015,000     60 Table of Contents   Stock-based Compensation     In 2013, the Company’s Board of Directors adopted a Share Incentive Plan (the “Incentive Plan”). Under the terms and conditions of the Incentive Plan, the Board of Directors is empowered to grant RSUs to officers and directors of the Company. At December 31, 2021, 149,636 RSUs were granted and outstanding under the Incentive Plan. Directors of the Company receive share compensation as follows: (i) an initial grant of 25,000 RSUs of common stock that vest over a three -year period upon appointment to the Board, followed by an annual grant of $ 35,000 ($ 70,000 for the Chairman of the Board) in RSUs per annum after full vesting of the initial grant. Further, the Company has granted shares to management for 2021 as part of the Incentive Plan, totaling 52,941 shares that vest over a three -year period.   The Company recognizes compensation costs for RSU grants to Directors and management based on the stock price on the date of the grant.   The Company recognized stock-based compensation expense related to RSU grants of $ 481,105 and $ 343,780 for the years ended December 31, 2021 and 2020, respectively. On December 31, 2021, the Company had $ 529,259 of unrecognized compensation cost related to non-vested stock grants.   A summary of the status of the RSUs outstanding as of December 31, 2021 and changes during the period are presented below:        December 31, 2021       Number of units     Weighted Average Grant-Date Fair value     Aggregated Intrinsic Value                             Outstanding, December 31, 2020     128,299     $ 5.79     $ 283,541   Granted     71,582       7.51       -   Vested and settled with share issuance     ( 50,245 )     5.85       -   Forfeited                     -   Outstanding, December 31, 2021     149,636     $ 6.59             61 Table of Contents       NOTE 13 – SEGMENT REPORTING   The Company operates in three segments: Water, Ceramics and Plastics. Effective as of January 1, 2020, the group structure was changed so that shared group activities were transferred to an individual reporting unit separated from the business units. Costs and assets for these activities were therefore separated during 2020.   Segment information for the business areas is as follows:       For the Year Ended December 31,   Revenues   2021     2020   Water   $ 7,196,465     $ 13,615,904   Ceramics     7,183,868       5,663,830   Plastics     3,615,681       2,647,366   Other     277,428       599,101   Total consolidated revenue   $ 18,273,442     $ 22,526,201           For the Year Ended December 31,   Income (Loss)   2021     2020   Water   $ ( 1,411,196 )   $ ( 1,083,578 ) Ceramics     ( 3,330,840 )     ( 3,532,137 ) Plastics     ( 1,317,293 )     ( 882,038 ) Other     ( 5,067,631 )     ( 4,310,607 ) Total consolidated Income (Loss)   $ ( 11,126,960 )   $ ( 9,808,360 )         For the Year Ended December 31,   Total assets   2021     2020   Water   $ 7,767,679     $ 14,033,107   Ceramics     13,961,057       16,734,371   Plastics     1,645,879       2,022,381   Other     21,680,077       9,420,278   Total consolidated assets   $ 45,054,692     $ 42,210,137     62 Table of Contents       NOTE 14 -   SIGNIFICANT CUSTOMERS / CONCENTRATION   The following table presents customers accounting for 10% or more of the Company’s net sales:       For the Year Ended December 31,       2021     2020   Customer A     12 %     - % Customer B     10 %     10 % Customer C     - %     27 % * Zero or less than 10%   The following table presents customers accounting for 10% or more of the Company’s accounts receivable:       December 31, 2021     December 31, 2020   Customer A     16 %     - % Customer B     - %     12 % Customer D     11 %     - % Customer E     - %     39 % Customer F     - %     16 %   As of December 31, 2021, approximately 100 % of the Company’s assets were located in Denmark. As of December 31, 2020 approximately 100 % of the Company’s assets were located in Denmark.       NOTE 15 -   SUBSEQUENT EVENTS   On January 3, 2022, the Company issued 18,641 common shares to settle RSUs. The RSUs were valued at $ 140,000 for services provided by the Board of Directors in 2021. The Company recognized the stock-based compensation of the award over the requisite service period.   On January 3, 2022, the Company issued 48,341 common shares to settle RSUs. The RSUs were valued at $ 283,605 for services provided by management in 2021. The Company is recognizing the stock-based compensation of the award over the requisite service period.   On March 18, 2022, the Company announced that Sune Mathiesen, Chief Executive Officer, has taken a medical leave of absence.  Alexander J. Buehler, who is currently serving as a member of the Board of Directors, has been appointed to serve as Interim Chief Executive Officer, effective immediately.  Mr. Buehler has served as a Director of LiqTech since 2017, during which time he has also served as the Audit Committee Chairman.   63 Table of Contents       Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   None.