What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-22 compared with 2022-03-31 · 294 added, 267 removed, 904 unchanged (38% of the section changed)

1 unchanged sentence

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm  (PCAOB ID 3627 )

Report  

of Independent Registered Public Accounting Firm (PCAOB ID NO:

Consolidated Balance Sheets at December 31, 2022 and 2021

Consolidated Statements of Operations for the years ended December 31, 2022 and 2021

Consolidated Statement of Comprehensive Loss for the years ended December 31, 2021 and 2020

Consolidated Statement of Comprehensive Loss for the years ended December 31, 2022 and 2021

Consolidated Statement of Stockholders ’

11 unchanged sentences

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.

As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern.

Management's plans in regard to 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.

18 unchanged sentences

Inventory Costing

As described in Notes 1 and 2 to the consolidated financial statements, the Company uses a standard costing method to value inventory. 

Critical Audit Matter Description

As described in Notes 1 and 4 to the consolidated financial statements, the Company uses a standard costing method to value inventory produced. 

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.

In addition to raw materials, labor and energy usage charges, the Company applies production overhead allocations to each item.

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.

How the Critical Audit Matter was Addressed in the Audit

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.  

Assessing the accuracy, completeness, and reasonableness of the costs included in the standard costing model, including overhead allocations 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 inventory products, including assessing the reasonableness of production times, labor requirement and energy usage utilized.  

Performing cost testing on raw material inputs purchased by tracing the recorded costs to supporting third party invoices.  

1 unchanged sentence

Contracts with Multiple Performance Obligations

Critical Audit Matter Description

As described in Note 1 to the consolidated financial statements, the Company has some contracts with customers that contain multiple performance obligations.

6 unchanged sentences

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.

How the Critical Audit Matter was Addressed in the Audit

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.

Examining revenue arrangements on a test basis, including assessing the key terms and conditions of the arrangements and testing the identification, evaluation, and accounting of the performance obligation for conformity with relevant authoritative guidance.

Performing procedures to test the completeness and accuracy of the data used to determine estimated stand-alone selling price.  

Evaluating the reasonableness of the approaches used to determine estimated stand-alone selling price.

Professionals with specialized skill and knowledge were utilized by the Firm to assist in the evaluation of management’s conclusions with respect to certain complex revenue arrangements.

/s/ Sadler, Gibb & Associates, LLC

20 unchanged sentences

1,292,285  

Assets held for sale

723,872  

Total Current Assets

2 unchanged sentences

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

Property and equipment, net of accumulated depreciation of $ 9,046,499 and $ 7,554,803 at December 31, 2022 and December 31, 2021, respectively  

8,296,807  

54 unchanged sentences

6,186,936  

Senior promissory notes payable, less current portion

5,480,314  

Total Long-term liabilities

6 unchanged sentences

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

par value $ 0.001 , 2,500,000 shares authorized, 0 shares issued and outstanding at December 31, 2022 and December 31, 2021.

Common stock;

39 unchanged sentences

1,862,653  

Restructuring costs

1,893,166  

Total Operating Expenses

5 unchanged sentences

Other Income (Expense)

Gain on modification of earn-out liability

306,077  

Interest and other income

3 unchanged sentences

Amortization of discount on convertible note

Fair value adjustment of warrants

Gain (Loss) on currency transactions

668,225  

( 2,389,128 )

Gain (Loss) on sale of fixed assets

Gain on currency transactions

404,162  

Total Other Income (Expense)

668,255  

Gain on on lease termination

147,452  

Gain on sale of fixed assets

Total Other Expense

( 1,872,763 )

5 unchanged sentences

( 11,126,960 )

Basic and Diluted Loss Per Share

Basic and Diluted Loss Per Share

Basic and Diluted Weighted Average Common Shares Outstanding

6 unchanged sentences

For the Years Ended

( 11,126,960 )

( 9,808,360 )

Other Comprehensive Income (Loss) - Currency Translation, net

( 1,929,329 )

3,120,489  

Other Comprehensive Loss - Currency Translation, net

Total Comprehensive Loss

$ ( 13,056,289 )

$ ( 6,687,871 )

The accompanying notes are an integral part of these consolidated financial statements.

13 unchanged sentences

164,523  

Common shares issued for Convertible Note

Common shares issued for cash at $ 0.50 per share, net of offering cost of $ 1,996,469 , in May 2022

22,535,850  

1 unchanged sentence

24,430,992  

Exchange of common stock to prefunded warrants

24,453,528  

Warrants issued in connection with Senior Promissory Notes

660,836  

Stock-based compensation

4 unchanged sentences

( 1,345,168 )

Net Income for the year ended December 31, 2021

Net Loss for the year ended December 31, 2022

( 14,169,107 )

7 unchanged sentences

23,309,372  

The accompanying notes are an integral part of these consolidated financial statements.

LIQTECH INTERNATIONAL, INC.

10 unchanged sentences

24,818,315  

Common shares issued per Board authorization of RSUs for services by the board of directors

44,992  

45,000  

Common shares issued to settle RSUs for services provided by the board of directors

Stock-based compensation

298,780  

Exercise of stock options

Common stock issued in settlement of RSUs

50,245  

Common shares issued for Convertible Note

80,000  

Common shares issued for cash at $ 5.00 per share, net of offering cost of $ 762,875 , May 2020

531,649  

531,729  

Exchange of common stock to prefunded warrants

( 500,000 )  

Prefunded warrants, 515,000 , transferred to equity upon modification in August 2020

Stock-based compensation

481,105  

1 unchanged sentence

Currency translation, net

3,120,489  

Net Income for the year ended December 31, 2020

( 1,929,329 )

Net Loss for the year ended December 31, 2021

( 11,126,960 )

BALANCE, December 31, 2021

5 unchanged sentences

12,774,860  

The accompanying notes are an integral part of these consolidated financial statements.

LIQTECH INTERNATIONAL, INC.

12 unchanged sentences

2,389,128  

Stock-based compensation

835,331  

Stock-based compensation

934,423  

Change in fair value of warrant liability

481,105  

Gain on modification of earn-out liability

Change in deferred tax asset / liability

Loss (Gain) on lease termination

Loss (Gain) on sale of equipment

5 unchanged sentences

610,476  

2,522,275  

Prepaid expenses and other current assets

1 unchanged sentence

Accounts payable

( 2,006,919 )

Accrued expenses

798,543  

( 1,632,897 )

798,543  

1 unchanged sentence

Contract liabilities

Income taxes payable

Assets Held for Sale

Total Adjustments

9 unchanged sentences

Proceeds from sale of property and equipment

102,416  

Purchase of other intangible assets

Net cash paid for acquisition

4 unchanged sentences

Payments on finance lease obligation

Proceeds from convertible notes payable, net

77,939  

Proceeds from exercise of stock options

Payments on Convertible Note

( 16,800,000 )

14,283,333  

Proceeds from issuance of prefunded warrants

Proceeds from issuance of common stock and prefunded warrants

24,418,612  

Proceeds from issuance of common stock, net

Proceeds from issuance of Senior Promissory Notes

6,000,000  

4 unchanged sentences

( 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

4 unchanged sentences

$ 17,489,380  

The accompanying notes are an integral part of these consolidated financial statements.

LIQTECH INTERNATIONAL, INC.

6 unchanged sentences

$ 635,671  

$ 13,726  

Non-cash financing activities

7 unchanged sentences

531,729  

Debt discount on Senior Promissory Notes

695,749  

The accompanying notes are an integral part of these consolidated financial statements.

2 unchanged sentences

Business and Basis of Presentation

The consolidated financial statements include the accounts of LiqTech International, Inc., the “Company”

and its subsidiaries.

The consolidated financial statements include the accounts of LiqTech International, Inc.

and its subsidiaries (the “Company”).

The terms "Company", “us", "we" and "our" as used in this report refer to the Company and its subsidiaries, which are set forth below.

6 unchanged sentences

(“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 NA 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.

7 unchanged sentences

(“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  

1 unchanged sentence

All material intercompany transactions and accounts have been eliminated in the consolidation.

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.

--  The functional currency of LiqTech International, Inc.

and LiqTech USA, Inc.

The functional currency of LiqTech Holding, LiqTech Water, LiqTech Plastics, LiqTech Ceramics, LiqTech Water Projects, and LiqTech Emission Control is the Danish Krone (“DKK”);

8 unchanged sentences

Translation gains and losses are deferred and accumulated as a component of other comprehensive income (loss) in stockholders’

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  

14 unchanged sentences

Bad debt expense

320,270  

Receivables written off during the periods

Effect of currency translation

49,605  

Allowance for doubtful accounts at the end of the period

1 unchanged sentence

$ 409,076  

Inventory  – Inventory directly purchased is carried at the lower of cost or net realizable value, as determined on the first -in, first -out method.

The receivables written off during the period 2022 mainly relates to legacy marine scrubber contracts and partnerships, renegotiated and terminated amid the COVID disruptions and general slowdown in the marine scrubber market.

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.

2 unchanged sentences

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.

Inventory valuation adjustments for excess and obsolete inventory are calculated based on current inventory levels, movement, expected useful lives, and estimated future demand for our products.

Contracts Assets / Liabilities -- Contract assets are the Company’s rights to consideration in exchange for goods or services and are recognized when a performance obligation has been satisfied but has not yet been billed.

When the Company issues invoices to the customer, and the billing is higher than the capitalized Contract assets, the net amount is transferred to Contract liabilities.

Contract assets/liabilities are transferred to revenue and cost of 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.

Most commonly, this invoice is sent to the customer at commissioning of the product or no later than 12 months after delivery.

Further included in Contract Assets are short-term receivables such as VAT and other receivables.

Assets Held for Sale -- Assets are classified as held for sale when all of the following criteria for a plan of sale have been met:

( 1 ) management, having the authority to approve the action, commits to a plan to sell the assets;

( 2 ) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets;

( 3 ) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated;

( 4 ) the sale of the assets is probable and is expected to be completed within one year;

( 5 ) the assets are being actively marketed for a price that is reasonable in relation to their current fair value;

and ( 6 ) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn.

When all of these criteria have been met, the assets are classified as held for sale on the balance sheet.

Assets classified as held for sale are reported at the lower of their carrying value or fair value less costs to sell.

Depreciation and amortization of assets ceases upon designation as held for sale.

Leases  

5 unchanged sentences

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.

The Company’s lease terms may include options to extend or terminate the lease, recognized 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.

24 unchanged sentences

For the Year Ended December 31

North America

$ 1,073,433  

4 unchanged sentences

10,493,575  

10,493,574  

Middle East & Africa

2,123,248  

4 unchanged sentences

For the Year Ended December 31

Liquid filters and systems

$ 5,297,286  

$ 7,196,465  

Diesel particulate filters

6,844,861  

7,183,868  

Plastics components

3,528,606  

3,615,681  

Development projects

311,685  

2 unchanged sentences

$ 18,273,442  

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.

For Water (systems and aftermarket), Ceramics (diesel particulate filters and membranes), and Plastics (components), revenue is recognized when performance obligations specified within the terms of a contract with the customer are satisfied, which occurs when control of the product transfers to the customer or when services are rendered by the Company.

The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title along with risks and rewards of ownership have transferred to the customer.

This generally occurs when the product is shipped or accepted by the customer. 

1 unchanged sentence

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.

The satisfaction of performance obligations under the terms of a revenue contract generally gives rise to the right to receive payment from the customer.

The Company's standard payment terms vary by the type and location of the customer and the products or services offered.

Generally, the time between when revenue is recognized and when payment is due is not significant.

Pre-payments received prior to satisfaction of performance obligations are recorded as a Contract liability.

Given the insignificant days between revenue recognition and receipt of payment, financing arrangements do not exist between the Company and its customers.

Considering the relatively short time between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers.

For contracts with customers that include multiple performance obligations, judgment is required to determine whether performance obligations specified in these contracts are distinct and should be accounted for as separate revenue transactions for recognition purposes.

For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price.

Standalone selling prices are generally 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.

Standalone selling prices are generally determined based on the prices charged to customers or using expected cost-plus margin.

System sales are recognized when the Company transfers control to the customer based upon sales and delivery conditions specified in the sales contract.

This typically occurs upon shipment of the system from the production facility but can also occur upon other agreed delivery terms.

In connection with the completion of the system, it is normal procedure to issue a FAT (Factory Acceptance Test) stating that the customer has accepted the performance of the system as it is being shipped from our production facility in Hobro.

In connection with the completion of the system, it is normal procedure to issue a FAT (Factory Acceptance Test) asserting that the customer has accepted the performance of the system as it is being shipped from our production facility in Hobro.

As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer), and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross 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.

This second performance obligation is recognized as revenue at the time of the commissioning services being rendered together with the cost incurred.

Part of the invoicing to the customer is also attributed to the commissioning, and at transfer of the control of the system (i.e., the first performance obligation), this portion is recognized as Contract liabilities.

Aftermarket sales represent parts, extended warranties, and maintenance services.

3 unchanged sentences

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.

We measure the 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.

24 unchanged sentences

Contract liabilities

( 1,152,178 )

$ 1,603,738  

16 unchanged sentences

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 Awards  

--  During the years presented in the accompanying consolidated financial statements, the Company has granted stock awards.

The Company accounts for stock awards in accordance with the provisions of FASB ASC Topic 718, Compensation –

Stock Compensation.

Stock-based compensation costs of $ 934,423 and $ 481,105 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, 2022 and 2021, 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  

19 unchanged sentences

Actual results could differ from those estimated.

Recent Accounting Pronouncements  – 

Recent Accounting Pronouncements  – In March 2022, the FASB issued ASU 2022 - 02, Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures (Topic 326 ):

Financial Instruments –

Credit Losses.

This amended guidance will eliminate the accounting designation of a loan modification as a TDR, including eliminating the measurement guidance for TDRs.

The amendments also enhance existing disclosure requirements and introduce new requirements related to modifications of receivables made to borrowers experiencing financial difficulty.

Additionally, this guidance requires entities to disclose gross write-offs by year of origination for financing receivables, such as loans and interest receivable.

The ASU is effective January 1, 2023, and is required to be applied prospectively, except for the recognition and measurement of TDRs which can be applied on a modified retrospective basis.

We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements and related disclosures.

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.

The ASU was effective for annual reporting periods after January 1, 2022.

The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2020, the FASB issued ASU 2020 - 06 Accounting for Convertible Instruments and Contracts in An Entity’s Own Equity.

ASU 2020 - 06 simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature and for convertible instruments with a beneficial conversion feature.

As a result, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features.

Additionally, ASU 2020 - 06 amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method.

The treasury stock method is no longer available.

For SEC filers, excluding smaller reporting companies, ASU 2020 - 06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

For all other entities, ASU 2020 - 06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

The Company early adopted ASU 2020 - 06 on January 1, 2022, using a modified retrospective approach.

In March 2020, the FASB issued ASU 2020 - 4 Reference Rate Reform (Topic 848 ).

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.

The new standard was effective upon issuance and upon adoption can be applied prospectively to applicable contract modifications made on or before December 31, 2022.

The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016 - 13, Financial Instruments—Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments.

The amendments in this update, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.

As a smaller reporting company, the guidance is effective for our fiscal years beginning after December 15, 2022.

We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements and related disclosures.

NOTE 2 –

1 unchanged sentence

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.

however, the Company has incurred significant recent losses, which raises substantial doubt about the ability of the Company to continue as a going concern for a period of one year from the issuance of these financial statements.

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.

no  assurance that the Company will be successful in executing the proposed cost reductions and profitability improvement measures, thus 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:

Furnace parts and supplies

$ 213,224  

NOTE 3 –

RESTRUCTURING COSTS

During the second quarter of 2022, the Company completed a restructuring program to reduce costs, decrease operating losses and improve cash flow.

Total restructuring and restructuring-related net charges pursuant to this program were $ 1,893,166 , which were recorded separately in the income statement as “restructuring costs”, and allocated as follows:

CEO separation -- On May 10, 2022, the Board of Directors accepted the resignation of Sune Mathiesen as Chief Executive Officer and a director of the Company, effective on May 12, 2022.

As previously announced, Mr.

Mathiesen had been on a medical leave of absence since March 17, 2022.

In connection with Mr.

Mathiesen’s resignation, Mr.

Mathiesen and the Company entered into a Separation Agreement and Release (the “Separation Agreement”).

Under the provisions of the Separation Agreement, Mr.

Mathiesen received DKK1,605,000 ($ 228,975 ), which is the equivalent of six months of salary, car allowance and pension contributions, paid in a lump-sum payment, less applicable deductions and withholdings.

Terminated employees –

In the second quarter of 2022, the Company re-aligned its corporate management structure, which involved a reduction in headcount and labor costs of approximately 25 %.

The new organization reflects a focused effort to align key leaders with strategic imperatives, inspire greater accountability and performance management, eliminate silos and layers of middle management, and operate a leaner, more efficient business.

Provisions for salary obligations to employees amounted to $ 158,199 , reflecting the costs related to select employees released from duties with immediate effect.

No provisions were made for the employees working during the notice period.

China close-down –

In the second quarter of 2022, the Company reduced and suspended planned capital investments, including the Company’s program to build a manufacturing and service center in China.

Pursuant to the suspended plans, the Company terminated and settled agreements with consultants, select project employees, and property development providers, resulting in a net payment of termination and cancellation charges of $ 275,445 .

Capex commitments -- As part of efforts to balance future investments with expected demands and cash flow, the Company commenced the renegotiation of all material Capex commitments during the quarter, with the ambition to reduce, cancel, or delay deliveries under the contracts, which initially amounted to approximately $ 10,300,000 .

As part of the renegotiation, a provision was made during the second quarter of $ 668,606 regarding expected cancellation charges and contractual termination costs.

During the third and fourth quarter the amount of paid cancellation charges exceeded the provision by $ 145,388 , which explains the total amount regarding capex commitments of $ 813,994 .    

Write-downs -- The re-routing of production equipment and machinery to Denmark (originally planned for China), resulted in a write-down of $ 240,576 on legacy installed equipment and machinery that was decommissioned as part of the arrival and implementation of new and more efficient equipment.

Furthermore, review of obsolete inventory and existing product demand resulted in a write-down of $ 175,977 .

The Company’s restructuring costs are as follows for the year ended December 31, 2022, which have all been settled as of December 31, 2022:

CEO separation

$ 228,975  

Raw materials

Terminated employees

158,199  

China close-down

275,445  

Work in process

Capex commitments

813,994  

416,553  

Finished goods and filtration systems

$ 1,893,166  

The following table displays a roll-forward of the restructuring accruals, presented within “accrued expenses”, for the year ended December 31, 2022 and 2021:

Restructuring accruals, January 1

Restructuring costs, net

1,893,166  

Cash payments

( 1,476,613 )

Asset impairments

Restructuring accruals, December 31

NOTE 4 - INVENTORY

Inventory consisted of the following at December 31, 2022 and December 31, 2021:

Furnace parts and supplies

Raw materials

Work in process

Finished goods and filtration systems

Reserve for excess and obsolescence

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. 

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 increase in the reserve for excess and obsolescence is mainly explained by changes in product and sales mix, due to both market driven and strategic changes implemented during the year, and furthermore new and more conservative processes implemented as part of the ERP implementation.

NOTE 5  

2 unchanged sentences

Production equipment

3 - 10  

$ 8,027,589  

$ 7,425,145  

Production equipment - finance lease

3 - 10  

3,625,558  

3,066,623  

Lab equipment

3 - 10  

118,935  

117,770  

Computer equipment

Vehicles - finance lease

1,070,437  

1,005,223  

26,020  

90,819  

Furniture and fixture

1,141,424  

1,166,071  

Furniture and fixture - finance lease

252,397  

268,208  

Leasehold improvements

5 - 10  

3,080,946  

3,273,940  

17,343,306  

16,413,799  

Less Accumulated Depreciation

( 8,501,846 )

( 7,218,468 )

Less Accumulated Depreciation - finance lease

Net Property and Equipment

$ 8,296,807  

$ 8,858,993  

Depreciation expense amounted to $ 2,007,112 and $ 1,945,489 for the year ended December 31, 2022 and 2021, respectively.

NOTE 5 - LEASES

$2,007,112 for the year ended December 31, 2022, $ 1,414,514 is allocated as cost of goods sold and $ 592,598 is allocated as operating expenses.

NOTE 6  

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.

The majority of our operating leases are non-cancelable operating leases for production and office space in Hobro, Aarhus, and Copenhagen, Denmark.

The lease agreements expire on November 30, 2034, August 31, 2024, and August 31, 2028, respectively.

During the second quarter of 2022, the Company terminated the lease agreement for the office and production space in Taicang, China.

During the year ended December 31, 2022, cash paid for amounts included for the measurement of operating lease liabilities was $ 906,373 , and the Company recorded operating lease expenses included in operating expenses of $ 984,236 .

19 unchanged sentences

Accumulated depreciation

( 1,389,488 )

Property and equipment, net

58 unchanged sentences

$ 212,933  

$ 334,743  

NOTE 8 - 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 .

In connection with certain orders, the Company provides to customers a working guarantee, prepayment guarantee, or security bond.

For that purpose, the Company has a guaranteed credit line of EUR 1,350,000 (approx.

$ 1,440,000 ) secured by a cash deposit.

As of December 31, 2022, our bank has issued working guaranties of $ 281,584 to customers against the credit line.

N OTE 9 –

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.

LONG-TERM DEBT

Convertible Note

On March 24, 2021, the Company 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”) maturing on October 1, 2023 and 80,000 shares of our common stock, $ 0.001 par value (“Common Stock”), for an aggregate purchase price of $ 15.0 million upon the satisfaction of the closing conditions set forth in the Securities 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;

The Note was a senior, unsecured obligation of the Company, payable at 112 % of the principal amount at maturity ( October 1, 2023), or earlier upon redemption or repurchase as set forth in the Note.

The Note was 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 was 100.6749 shares of Common Stock per $1,000 of principal amount of the Note.

The conversion rate was subject to anti-dilution adjustments, including for stock dividends, splits, and combinations;

issuances of options, warrants, or similar rights;

2 unchanged sentences

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.

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:

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 was 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.

Beginning on March 1, 2022, the Company paid the first monthly installment of $ 840,000 in cash.

As of June 22, 2022, the Note, including accrued interest and all relevant obligations, was repaid in full, amounting to $ 13,446,875 , allocated between a principal repayment of $ 11,640,000 and contractual repayment premium of $ 1,806,875 .

The components of the Convertible Note are as follows: 

Convertible Note

10 unchanged sentences

$ 14,586,936  

For the year ended December 31, 2022 and 2021, the Company recognized interest expense of $ 308,958 and $ 547,917 , respectively, and $ 2,213,065 and $ 835,331 , respectively, related to the amortization of debt issuance costs. 

Senior Promissory Notes

On June 22, 2022, the Company issued and sold Senior Promissory Notes in an aggregate principal amount of $ 6.0 million (the "Notes") and issued warrants to purchase 4,250,000 shares of common stock of the Company to affiliates of Bleichroeder L.P., 21 April Fund, L.P., and 21 April Fund, Ltd.

(together, the "Purchasers"), pursuant to a note and warrant purchase agreement entered into with the Purchasers.

The Notes have a term of 24 months and do not bear interest during this period.

If the notes are not repaid on or before the second anniversary of issuance, however, the Notes will thereafter bear interest of 10 % per annum, which will increase by 1 % each month the Notes remain unpaid, up to a maximum of 16 % per annum, payable monthly.

Additionally, as part of the transaction, the Company issued 230,000 warrants to the placement agent.

All of the warrants issued in this transaction have an exercise price of $ 0.65 per share, a term of five years and are exercisable for cash at any time.

As a result, the Company recorded an initial debt discount of $ 695,749 , based on the relative fair value of the warrants and notes issued.

The Company determined the fair value of the warrants by using the Black-Scholes Option Pricing Model, with the following assumptions:

expected term of 2.5 years, stock price of $ 0.43 , exercise price of $ 0.65 , volatility of 80.8 %, risk-free rate of 3.13 %, and no forfeiture rate.

The debt discount will be accreted according to the effective interest method over the contractual term of the note.

The warrants qualified for equity classification and were reported within Additional Paid-In Capital.

The components of notes payable are as follows:

Senior Promissory Notes

$ 6,000,000  

unamortized debt discount

Senior Promissory Notes payable

$ 5,480,314  

Current portion of Senior Promissory Notes payable

Senior Promissory Notes payable, less current portion

5,480,314  

Senior Promissory Notes payable

$ 5,480,314  

For the year ended December 31, 2022, and 2021, the Company recognized interest expense of $ 0 and $ 0 , respectively, and $ 176,063 and $ 0 , respectively, related to the amortization of the debt discount.

NOTE 10 -  

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.

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.

In 2022 The Company was in dialogue with a former client regarding marine waste-water treatment systems delivered in 2019, related to a potential warranty claim due to corrosion on certain parts and components, with a total estimated remediation cost of $ 1.5 million.

The Company disputed the claim in full, resulting in a settlement agreement signed in the fourth quarter with expected remediation work in 2023.

 The cost of any remediation work is expected to be covered in the warranty accrual amount.

Product Warranties - The Company provides a standard warranty on its systems, generally for a period of one to three years after customer acceptance.

14 unchanged sentences

Foreign currency effect

( 80,534 )  

94,708  

Balance at December 31,

7 unchanged sentences

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.

As of December 31, 2022, the Company had net operating loss carry-forwards of approximately $ 26,734,381 for U.S.

federal tax purposes, expiring through 2041;

1 unchanged sentence

approximately $ 444,303 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.

approximately $ 577,266 for Singapore tax purposes, which do not expire;

and approximately $ 1,950,649 for Chinese tax purposes, which expires in 2027.

As of December 31, 2022 and December 31, 2021, the Company established a valuation allowance of $ 6,510,000 and $ 5,364,000 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.

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:

$ 5,226,000 and $ 3,506,000 for the tax components of LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics, LiqTech Emission Control, and LiqTech Water Projects, respectively;

$ 124,000 and $ 132,000 for the tax components of LiqTech Germany, respectively;

$ 98,000 and $ 104,000 for the tax components of LiqTech Singapore, respectively;

and $ 488,000 and $ 193,000 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, 2022 was $ 1,146,000 , $ 1,720,000 , $( 8,000 ), $( 6,000 ), and $ 295,000 for the US, Danish, German, Singaporean, and Chinese components, respectively.

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, Singaporean, and Chinese components, respectively.

The temporary differences, tax credits and carry forwards gave rise to the following deferred tax assets and liabilities at December 31, 2022 and December 31, 2021:

Excess of tax over financial accounting

1 unchanged sentence

$ 708,825  

Vacation accrual

Reserve for excess and obsolete inventory

6 unchanged sentences

640,163  

Deferred compensation

175,420  

Deferred compensation

52,500  

21 unchanged sentences

Deferred compensation

52,500  

Non-deductible expenses

4 unchanged sentences

210,747  

10,705  

Income tax expense (benefit)

4 unchanged sentences

Current tax (benefit)

$ ( 401,945 )

Deferred income taxes:

5 unchanged sentences

( 2,041,211 )

( 2,667,221 )

Valuation allowance

7 unchanged sentences

464,744  

175,420  

Accrued vacation

1 unchanged sentence

52,028  

14,847  

Deferred tax expense (benefit)

12 unchanged sentences

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.

For the year ended December 31, 2022, the Company had outstanding balances of 2,408,892 RSUs, 31,440,000 prefunded warrants, and 4,480,000 warrants, all exercisable for shares of Common Stock

For the year ended December 31, 2021, the Company had outstanding balances of 149,636 RSUs and 1,015,000 prefunded warrants outstanding to issue common stock.

NOTE 13 - STOCKHOLDERS' EQUITY

Common Stock – The Company has 100,000,000 authorized shares of common stock, $ 0.001 par value.

Common Stock -- The Company has 100,000,000 authorized shares of common stock, $ 0.001 par value.

As of December 31, 2022 and 2021, respectively, there were 

12 unchanged sentences

January 1, 2022, 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.  

On January 3, 2022, the Company issued 18,641 shares of Common Stock to settle RSUs for services provided by the Board of Directors in 2021.

On January 3, 2022, the Company issued 48,341 shares of Common Stock to settle RSUs for services provided by management in 2021.

On May 17, 2022, the Company issued 15,635,850 shares of Common Stock as part of the $ 23,000,000 public offering of common stock and 30,425,000 prefunded warrants to fund working capital, general corporate purposes, and partial repayment of its Senior Convertible Note.

On May 19, 2022, the Company exercised in full the option to issue 6,900,000 shares of Common Stock as part of the overallotment of $ 3,450,000 , resulting in the closing of its previously announced public offering of $ 26,450,000 to fund working capital, general corporate purposes, and partial repayment of its Senior Convertible Note.

Total transaction costs related to the combined public offering of $26,450,000 amounted to $ 1,996,469 .

On August 25, 2022, the Company issued 8,333 shares of Common Stock to settle RSUs for services provided by the Board of Directors. 

On November 29, 2022, the Company issued 9,208 shares of Common Stock to settle RSUs for services provided by management in 2022.

On December 30, 2022, the Company issued 80,000 shares of Common Stock to settle RSUs as per the terms outlined in the Separation Agreement.

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”).

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 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.

1 unchanged sentence

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:

In connection with and as of the date of the Exchange Agreement, the Company issued the prefunded warrants to the shareholder, and the prefunded warrants are exercisable on August 17, 2021, subject to the limitations on exercise and conditions set forth by the prefunded warrants.

The prefunded warrants became subject to customary adjustments in the event of stock splits and dividends, fundamental transactions, and subsequent offerings of rights to purchase stock.

On May 17, 2022, the Company entered a warrant purchase agreement with existing shareholders to purchase 30,425,000 shares of common stock at an offering price of $ 0.499 per prefunded warrant, which represents the offering price of $ 0.50 per share of the Company’s common stock less the $ 0.001 per share exercise price for each pre-funded warrant, for total gross proceeds of approximately $ 15,182,075 as part of the Company’s public offering of common stock and pre-funded warrants totaling $23,000,000 before underwriting discounts, commissions, and offering expenses payable by the Company.

On June 23, 2022, the Company completed a private placement of Senior Notes in an aggregate principal amount of $ 6,000,000 and warrants to purchase 4,250,000 shares of common stock of the Company to affiliates of Bleichroeder L.P., 21 April Fund, L.P., and 21 April Fund, Ltd.

(together, the "Purchasers"), pursuant to a note and warrant purchase agreement.

Additionally, as part of the transaction, the Company issued 230,000 warrants to the placement agent.

All warrants issued in this transaction have an exercise price of $ 0.65 per share, a term of five years, and are exercisable for cash at any time. 

The following is a summary of the periodic changes in warrants outstanding for the years ended December 31, 2022 and 2021:

Warrants outstanding at January 1

1,015,000  

515,000  

Warrants issued in connection with public offering and private placement

34,905,000  

Common stock exchanged to prefunded warrant

500,000  

Exercises and conversions

Warrants outstanding at December 31

35,920,000  

1,015,000  

Stock-based Compensation  

1 unchanged sentence

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, 2022, 1,387,347 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.

Directors of the Company receive share compensation as follows: 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 $ 36,750 ($ 73,500 for the Chairman of the Board) in RSUs per annum after full vesting of the initial grant.

Further, the Company has granted shares of Common Stock in the third quarter to management as part of the Incentive Plan, totaling 625,000 shares related to the onboarding of the new Chief Executive Officer, which vest over a three -year period.

In 2022, The Company’s Board of Directors adopted an Equity Incentive Plan (the “2022 Incentive Plan”).

Under the terms and conditions of the 2022 Incentive Plan, the Board of Directors is empowered to grant RSUs to officers and directors of the Company. At December 31, 2022, 1,021,545 RSUs were granted and outstanding under the Incentive Plan.

The Company recognizes compensation costs for RSU grants to directors and management based on the stock price on the date of the grant.

1 unchanged sentence

On December 31, 2022, the Company had $ 639,129 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: 

A summary of the status of the RSUs as of December 31, 2022 and changes during the period are presented below:

December 31, 2022

3 unchanged sentences

2,574,871  

71,582  

Vested and settled with share issuance

22 unchanged sentences

For the Year Ended December 31,

Income (Loss)

$ ( 1,072,530 )

5 unchanged sentences

( 5,067,631 )

Total consolidated Income (Loss)

Total consolidated Loss

$ ( 14,169,107 )

18 unchanged sentences

The following table presents customers accounting for 10% or more of the Company’s accounts receivable:

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.

As of December 31, 2022, approximately 65 % of the Company’s assets were located in Denmark, 33 % were located in the U.S., and 2 % were located in China.

As of December 31, 2021, approximately 61 % of the Company’s assets were located in Denmark, 26 % were located in the U.S., and 13 % were located in China.

NOTE 16 -  

2 unchanged sentences

The RSUs were valued at $ 110,250 for services provided by the Board of Directors in 2022.

The Company recognized the stock-based compensation of the award over the requisite service period.

The Company is recognizing the stock-based compensation of the award over the requisite service period.

On January 3, 2023, the Company issued 1,266,643 common shares to settle RSUs.

1 unchanged sentence

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. 

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. 

Buehler has served as a Director of LiqTech since 2017, during which time he has also served as the Audit Committee Chairman.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data