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 NO: 3627 ) 36     Consolidated Balance Sheets at December 31, 2022 and 2021 38     Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 40     Consolidated Statement of Comprehensive Loss for the years ended December 31, 2022 and 2021 41     Consolidated Statement of Stockholders ’   Equity for the years ended December 31, 2022 and 2021 42     Consolidated Statement of Cash Flows for the years ended December 31, 2022 and 2021 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, 2022 and 2021, 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, 2022 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, 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 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.   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   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, labor and energy usage charges, the Company applies production overhead allocations to each item.   36 Table of Contents   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 related 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.   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, 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.     Revenue Recognition – 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. 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 2022 related to contracts with multiple performance obligations was approximately $5.3 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.   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 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 We have served as the Company’s auditor since 2018.   Draper, UT March 22, 2023    37 Table of Contents     LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES   CONSOLIDATED BALANCE SHEETS       As of     As of       December 31,     December 31,       2022     2021   Current Assets:                 Cash, cash equivalents and restricted cash   $ 16,597,371     $ 17,489,380   Accounts receivable, net of allowance for doubtful accounts of $ 59,559 and $ 409,076 at December 31, 2022 and December 31, 2021, respectively     2,310,344       1,957,579   Inventories, net of allowance for excess and obsolete inventory of $ 663,227 and $ 268,470 at December 31, 2022 and December 31, 2021, respectively     4,062,001       5,421,027   Contract assets     2,253,295       1,906,510   Prepaid expenses and other current assets     1,720,902       1,292,285   Assets held for sale     723,872       -                     Total Current Assets     27,667,785       28,066,781                     Long-Term Assets:                 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       8,858,993   Operating lease right-of-use assets     3,271,997       6,925,807   Deposits and other assets     450,038       628,109   Intangible assets, net of accumulated amortization of $ 438,250 and $ 357,231 at December 31, 2022 and December 31, 2021, respectively     212,933       334,743   Goodwill     226,095       240,259                     Total Long-term Assets     12,457,870       16,987,911                     Total Assets   $ 40,125,655     $ 45,054,692     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,       2022     2021   Current Liabilities:                 Accounts payable   $ 1,389,355     $ 1,646,662   Accrued expenses     3,087,206       4,685,665   Current portion of finance lease obligations     399,198       373,824   Current portion of operating lease liabilities     561,182       846,544   Current portion of convertible note payable     -       8,400,000   Contract liabilities     649,557       914,828                     Total Current Liabilities     6,086,498       16,867,523                     Deferred tax liability     154,645       224,779   Other liabilities, net of current portion     -       346,939   Finance lease obligation, net of current portion     2,384,011       2,499,591   Operating lease liability, net of current portion     2,710,815       6,154,064   Convertible note payable, less current portion     -       6,186,936   Senior promissory notes payable, less current portion     5,480,314       -                     Total Long-term liabilities     10,729,785       15,412,309                     Total Liabilities     16,816,283       32,279,832                     Stockholders' Equity:                 Preferred stock; par value $ 0.001 , 2,500,000 shares authorized, 0 shares issued and outstanding at December 31, 2022 and December 31, 2021.     -       -   Common stock; par value $ 0.001 , 100,000,000 shares authorized 43,986,079 and 21,285,706 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively     43,986       21,285   Additional paid-in capital     96,936,988       70,910,902   Accumulated deficit     ( 67,351,035 )     ( 53,181,928 ) Accumulated other comprehensive loss     ( 6,320,567 )     ( 4,975,399 )                   Total Stockholders' Equity     23,309,372       12,774,860                     Total Liabilities and Stockholders' Equity   $ 40,125,655     $ 45,054,692     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,       2022     2021   Revenue   $ 15,982,438     $ 18,273,442   Cost of Goods Sold     15,415,294       16,697,296                     Gross Profit     567,144       1,576,146                     Operating Expenses:                 Selling expenses     3,669,887       4,564,188   General and administrative expenses     5,701,955       5,836,629   Research and development expenses     1,835,890       1,862,653   Restructuring costs     1,893,166       -                     Total Operating Expenses     13,100,898       12,263,470                     Loss from Operations     ( 12,533,754 )     ( 10,687,324 )                   Other Income (Expense)                 Interest and other income     384,058       371,467   Interest expense     ( 419,942 )     ( 708,176 ) Amortization of discount on convertible note     ( 2,389,128 )     ( 835,331 ) Gain on currency transactions     404,162       668,255   Gain on on lease termination     147,452       -   Gain on sale of fixed assets     635       1,113                     Total Other Expense     ( 1,872,763 )     ( 502,672 )                   Loss Before Income Taxes     ( 14,406,517 )     ( 11,189,996 )                   Income Tax Benefit     ( 237,410 )     ( 63,036 )                   Net Loss     ( 14,169,107 )     ( 11,126,960 )                   Basic and Diluted Loss Per Share   $ ( 0.40 )   $ ( 0.52 )                   Basic and Diluted Weighted Average Common Shares Outstanding     35,395,466       21,567,112     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,       2022     2021                     Net Loss     ( 14,169,107 )     ( 11,126,960 )                   Other Comprehensive Loss - Currency Translation, net     ( 1,345,168 )     ( 1,929,329 )                   Total Comprehensive Loss   $ ( 15,514,275 )   $ ( 13,056,289 )   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, 2022   and 2021       Common Stock     Additional Paid-in     Accumulated     Accumulated Other Compre- hensive               Shares     Amount     Capital     Deficit     Income (Loss)     TOTAL                                                     BALANCE, December 31, 2021     21,285,706       21,285       70,910,902       ( 53,181,928 )     ( 4,975,399 )     12,774,860                                                     Common stock issued in settlement of RSUs     164,523       165       ( 165 )                     -                                                     Common shares issued for cash at $ 0.50 per share, net of offering cost of $ 1,996,469 , in May 2022     22,535,850       22,536       24,430,992                       24,453,528                                                     Warrants issued in connection with Senior Promissory Notes                     660,836                       660,836                                                     Stock-based compensation                     934,423                       934,423                                                     Currency translation, net                                     ( 1,345,168 )     ( 1,345,168 )                                                   Net Loss for the year ended December 31, 2022                             ( 14,169,107 )             ( 14,169,107 )                                                   BALANCE, December 31, 2022     43,986,079       43,986       96,936,988       ( 67,351,035 )     ( 6,320,567 )     23,309,372     The accompanying notes are an integral part of these consolidated financial statements.   42 Table of Contents   LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES   CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 2022   and 2021       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 Loss for the year ended December 31, 2021                             ( 11,126,960 )             ( 11,126,960 )                                                   BALANCE, December 31, 2021     21,285,706       21,285       70,910,902       ( 53,181,928 )     ( 4,975,399 )     12,774,860     The accompanying notes are an integral part of these consolidated financial statements.   43 Table of Contents     LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS          For the Years Ended       December 31,       2022     2021   Cash Flows from Operating Activities:                 Net Income (Loss)   $ ( 14,169,107 )   $ ( 11,126,960 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:                 Depreciation and amortization     2,585,881       2,740,241   Amortization of discount on convertible notes payable     2,389,128       835,331   Stock-based compensation     934,423       481,105   Change in deferred tax asset / liability     ( 55,994 )     (63,036 ) Loss (Gain) on lease termination     ( 147,452 )     -   Loss (Gain) on sale of equipment     ( 635 )     ( 1,113 ) Changes in assets and liabilities:                 Accounts receivable     ( 460,837 )     971,460   Inventory     984,130       ( 336,651 ) Contract assets     ( 460,743 )     610,476   Prepaid expenses and other current assets     ( 354,307 )     479,423   Accounts payable     ( 158,797 )     ( 532,718 ) Accrued expenses     ( 1,632,897 )     798,543   Operating lease liabilities     ( 544,391 )     ( 945,808 ) Contract liabilities     ( 234,873 )     ( 155,291 ) Assets Held for Sale     ( 712,549 )     -                     Total Adjustments     2,370,663       3,923,117                     Net Cash used in Operating Activities     ( 12,039,020 )     ( 7,203,843 )                   Cash Flows from Investing Activities:                 Purchase of property and equipment     ( 1,690,621 )     ( 1,133,378 ) Proceeds from sale of property and equipment     635       1,113   Net cash paid for acquisition     -       ( 317,874 )                   Net Cash used in Investing Activities     ( 1,689,986 )     ( 1,450,139 )                   Cash Flows from Financing Activities:                 Payments on finance lease obligation     77,939       ( 380,334 ) Payments on Convertible Note     ( 16,800,000 )     14,283,333   Proceeds from issuance of common stock and prefunded warrants     24,418,612       -   Proceeds from issuance of Senior Promissory Notes     6,000,000       -                     Net Cash Provided by Financing Activities     13,696,551       13,902,999                     Effect of foreign currency exchange on cash     ( 859,554 )     ( 1,024,086 )                   Net Change in Cash, Cash Equivalents and Restricted Cash     ( 892,009 )     4,224,931                     Cash, Cash Equivalents and Restricted Cash at Beginning of Period     17,489,380       13,264,449   Cash, Cash Equivalents and Restricted Cash at End of Period   $ 16,597,371     $ 17,489,380     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,       2022     2021   Supplemental Disclosures of Cash Flow Information:                 Cash paid during the period for:                 Interest   $ 348,575     $ 635,671   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   Debt discount on Senior Promissory Notes     695,749       -     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. 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. 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 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 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   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, 2022 and 2021. 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.    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, 2022, and 2021, the Company held $ 1,440,394 and $ 2,125,695 , 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, 2022 and December 31, 2021, the Company had $ 12,999,271 and $ 11,346,826 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.    The roll-forward of the allowance for doubtful accounts as of December 31, 2022 and December 31, 2021 is as follows:        2022     2021   Allowance for doubtful accounts at the beginning of the period   $ 409,076     $ 498,044   Bad debt expense     ( 24,534 )     ( 28,499 ) Receivables written off during the periods     ( 295,778 )     ( 24,415 ) Effect of currency translation     ( 29,205 )     ( 36,054 ) Allowance for doubtful accounts at the end of the period   $ 59,559     $ 409,076     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.   47 Table of Contents   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 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 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 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   --  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, 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.   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, 2022 and 2021:       % Distribution     For the Year Ended December 31       2022     2021     2022     2021   Americas     7 %     17 %   $ 1,073,433     $ 3,121,797   Asia-Pacific     21 %     25 %     3,406,420       4,658,070   Europe     59 %     58 %     9,379,337       10,493,575   Middle East & Africa     13 %     0 %     2,123,248       -         100 %     100 %   $ 15,982,438     $ 18,273,442     The Company’s sales by product line are as follows for the years ended December 31, 2022 and 2021:       % Distribution     For the Year Ended December 31       2022     2021     2022     2021   Water     33 %     39 %   $ 5,297,286     $ 7,196,465   Ceramics     43 %     39 %     6,844,861       7,183,868   Plastics     22 %     20 %     3,528,606       3,615,681   Corporate     2 %     2 %     311,685       277,428         100 %     100 %   $ 15,982,438     $ 18,273,442     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.  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 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. Considering the relatively short time between revenue recognition and receipt of payment, financing components 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 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) 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 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. 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 filtration systems. 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. 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, 2022 and December 31, 2021 is:        2022     2021   Cost incurred   $ 3,860,179     $ 3,381,994   Unbilled project deliveries     950,105       454,158   VAT     229,006       542,255   Other receivables     45,814       60,158   Prepayments     ( 3,363,039 )     ( 2,947,736 ) Deferred Revenue     ( 118,327 )     ( 499,146 )     $ 1,603,738     $ 991,682                     Distributed as follows:                 Contract assets   $ 2,253,295     $ 1,906,510   Contract liabilities     ( 649,557 )     ( 914,828 )     $ 1,603,738     $ 991,682     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 $ 144,043 and $ 308,880 for the years ended December 31, 2022 and 2021, 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, 2022 and 2021 were $ 1,835,890 and $ 1,862,653 , 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 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.   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 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 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. 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.     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 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 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 – 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:       December 31, 2022   CEO separation   $ 228,975   Terminated employees     158,199   China close-down     275,445   Capex commitments     813,994   Write-downs     416,553       $ 1,893,166     53 Table of Contents   The following table displays a roll-forward of the restructuring accruals, presented within “accrued expenses”, for the year ended December 31, 2022 and 2021:       2022     2021   Restructuring accruals, January 1   $ -     $ -   Restructuring costs, net     1,893,166       -   Cash payments     ( 1,476,613 )     -   Asset impairments     ( 416,553 )     -   Restructuring accruals, December 31   $ -     $ -       NOTE 4 - INVENTORY   Inventory consisted of the following at December 31, 2022 and December 31, 2021:       2022     2021   Furnace parts and supplies   $ 66,495     $ 213,224   Raw materials     2,474,227       2,144,067   Work in process     982,973       1,671,290   Finished goods and filtration systems     1,201,533       1,660,916   Reserve for excess and obsolescence     ( 663,227 )     ( 268,470 ) Net Inventory   $ 4,062,001     $ 5,421,027     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.      54 Table of Contents     NOTE 5   -   PROPERTY AND EQUIPMENT   Property and equipment consisted of the following on December 31, 2022 and December 31, 2021:       Useful Life     2022     2021   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   3 - 5       1,070,437       1,005,223   Vehicles   3 - 5       26,020       90,819   Furniture and fixture     5         1,141,424       1,166,071   Furniture and fixture - finance lease     5         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               ( 544,653 )     ( 336,338 ) 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. Of the  $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   - 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. 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 .   During the year ended December 31, 2022, cash paid for amounts included for the measurement of finance lease liabilities was $ 427,113 , and the Company recorded finance lease expenses included in other income (expenses) of $ 323,081 .   55 Table of Contents   Supplemental balance sheet information related to leases as of December 31, 2022 and 2021 was as follows:       December 31, 2022     December 31, 2021   Operating leases :                 Operating lease right-of-use assets   $ 3,271,997     $ 6,925,807                     Operating lease liabilities – current   $ 561,182     $ 846,544   Operating lease liabilities – long-term     2,710,815       6,154,064   Total operating lease liabilities   $ 3,271,997     $ 7,000,608                     Finance leases :                 Property and equipment, at cost   $ 3,877,955     $ 3,334,830   Accumulated depreciation     ( 544,653 )     ( 336,337 ) Property and equipment, net   $ 3,333,302     $ 2,998,494                     Finance lease liabilities – current   $ 399,198     $ 373,824   Finance lease liabilities – long-term     2,384,011       2,499,591   Total finance lease liabilities   $ 2,783,209     $ 2,873,415                     Weighted average remaining lease term:                 Operating leases     9.6       8.9   Finance leases     5.4       5.9                     Weighted average discount rate:                 Operating leases     6.2 %     6.5 % Finance leases     2.2 %     2.8 %   Maturities of lease liabilities at December 31, 2022 were as follows:       Operating lease     Finance lease   2023   $ 745,898     $ 516,175   2024     604,324       517,076   2025     315,007       513,658   2026     304,595       478,441   2027     304,595       1,016,291   Thereafter     2,056,019       190,659   Total payment under lease agreements     4,330,439       3,232,300   Less imputed interest     ( 1,058,442 )     ( 449,091 ) Total lease liability   $ 3,271,997     $ 2,783,209     56 Table of Contents     NOTE 7 - INTANGIBLE ASSETS   At December 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021:       2022     2021   Customer relationships   $ 473,308     $ 502,957   Patent cost     177,875       189,017         651,183       691,974   Less Accumulated amortization     ( 438,250 )     ( 357,231 ) Intangible assets, net   $ 212,933     $ 334,743     Amortization expense amounted to $ 81,019 and $ 108,471 for the year ended December 31, 2022 and 2022, respectively.   Expected future amortization expense for the years ended are as follows:   Year ending December 31,   Amortization Expenses   2023     102,077   2024     70,523   2025     7,415   2026     7,415   2027     7,415   Thereafter     18,088       $ 212,933       NOTE 8 - LINES OF CREDIT   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 – 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 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; 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.    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.   57     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:        December 31, 2022     December 31, 2021   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     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:       December 31, 2022     December 31, 2021   Senior Promissory Notes   $ 6,000,000       -   Less: unamortized debt discount     ( 519,686 )     -   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   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.   58 Table of Contents   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. 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, 2022 and 2021 were as follows:       2022     2021   Balance at January 1,   $ 962,313     $ 1,056,613   Warranty costs charged to cost of goods sold     86,256       177,302   Utilization charges against reserve     ( 93,653 )     ( 191,068 ) Foreign currency effect     ( 56,844 )     ( 80,534 ) Balance at December 31,   $ 898,072     $ 962,313       NOTE 11 -   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, 2022, the Company had net operating loss carry-forwards of approximately $ 26,734,381 for U.S. federal tax purposes, expiring through 2041; approximately $ 20,352,624 for Danish tax purposes, which do not expire; approximately $ 444,303 for German tax purposes, which do not expire; 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; $ 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.   59 Table of Contents   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:       2022     2021   Excess of tax over financial accounting   $ 973,859     $ 708,825   Reserve for excess and obsolete inventory     145,910       49,615   Accrued expenses     -       4,305   Accrued interest     -       13,125   Discount amortization     640,163       175,420   Deferred compensation     -       52,500   Net operating loss carryover     11,057,361       9,959,356   Excess of book over tax depreciation     ( 272,243 )     ( 343,294 ) Excess of book over tax work in progress     ( 253,930 )     ( 587,469 ) Valuation allowance     ( 12,445,765 )     ( 10,257,162 )     $ ( 154,645 )   $ ( 224,779 ) Distributed as:                 Long-term deferred tax asset     -       -   Long-term deferred tax liability     ( 154,645 )     ( 224,779 )     $ ( 154,645 )   $ ( 224,779 )   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, 2022 and 2021:         2022     2021   Computed tax at expected statutory rate   $ ( 3,025,369 )   $ ( 2,349,899 ) State and local income taxes, net of federal benefit     ( 1,532 )     ( 1,387 ) Non-US income taxed at different rates     ( 138,596 )     ( 101,856 ) Deferred compensation     52,500       ( 31,500 ) Non-deductible expenses     2,749       1,565   Non-taxable income     ( 541 )     -   Change in valuation allowance     3,035,205       2,209,294   Other     ( 161,826 )     210,747   Income tax expense (benefit)   $ ( 237,410 )   $ ( 63,036 )   The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2022 and 2021 consisted of the following:       2022     2021   Current income taxes:                 Danish   $ ( 181,417 )   $ -   Federal     -       -   State     -       -   Current tax (benefit)   $ -     $ -                     Deferred income taxes:                 Book in excess of tax depreciation   $ ( 346,154 )   $ ( 309,719 ) Work in progress     ( 294,233 )     ( 174,093 ) Net operating loss carryover     ( 2,041,211 )     ( 2,667,221 ) Valuation allowance     2,319,705       2,811,619   Deferred compensation     ( 52,500 )     31,500   Accrued interest     ( 13,125 )     13,125   Discount amortization     464,744       175,420   Accrued vacation     ( 4,305 )     4,305   Reserve for obsolete inventory     ( 88,915 )     52,028   Deferred tax expense (benefit)   $ ( 55,994 )   $ ( 63,036 ) Total tax expense (benefit)   $ ( 237,410 )   $ ( 63,036 )   60     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 2017 for their Danish tax returns. LiqTech NA is generally no longer subject to tax examinations for years prior to 2017 for U.S. federal and state tax returns.      NOTE 12 -   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, 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. As of December 31, 2022 and 2021, respectively, there were  43,986,079 and 21,285,706 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, 2022 and 2021, there were no preferred shares issued and outstanding.   61 Table of Contents   Stock Issuances     Since  January 1, 2022, the Company has made the following issuances of Common Stock:    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     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. 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 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:       2022     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   Warrants outstanding at December 31     35,920,000       1,015,000     62 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, 2022, 1,387,347 RSUs were granted and outstanding under the Incentive Plan. 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.   The Company recognized stock-based compensation expense related to RSU grants of $ 934,423 and $ 481,105 for the years ended December 31, 2022 and 2021, respectively. 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 as of December 31, 2022 and changes during the period are presented below:       December 31, 2022       Number of units     Weighted Average Grant-Date Fair value     Aggregated Intrinsic Value                             Outstanding, December 31, 2021     149,636     $ 6.59     $ -   Granted     2,574,871       0.77       -   Vested and settled with share issuance     ( 164,523 )     ( 3.58 )     -   Forfeited     ( 151,093 )     ( 6.20 )     -   Outstanding, December 31, 2022     2,408,892     $ 0.63     $ -       63 Table of Contents     NOTE 14 – 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   2022     2021   Water   $ 5,297,286     $ 7,196,465   Ceramics     6,844,861       7,183,868   Plastics     3,528,606       3,615,681   Other     311,685       277,428   Total consolidated revenue   $ 15,982,438     $ 18,273,442         For the Year Ended December 31,   Loss   2022     2021   Water   $ ( 1,072,530 )   $ ( 1,411,196 ) Ceramics     ( 4,648,768 )     ( 3,330,840 ) Plastics     ( 794,942 )     ( 1,317,293 ) Other     ( 7,652,867 )     ( 5,067,631 ) Total consolidated Loss   $ ( 14,169,107 )   $ ( 11,126,960 )       For the Year Ended December 31,   Total assets   2022     2021   Water   $ 7,781,211     $ 7,767,679   Ceramics     13,808,529       13,961,057   Plastics     1,099,019       1,645,879   Other     17,436,896       21,680,077   Total consolidated assets   $ 40,125,655     $ 45,054,692     64 Table of Contents     NOTE 15 -   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,       2022     2021   Customer A     13 %     - % Customer B     - %     12 % Customer C     - %     10 % * Zero or less than 10%   The following table presents customers accounting for 10% or more of the Company’s accounts receivable:       December 31, 2022     December 31, 2021   Customer B     - %     16 % Customer C     20 %     - % Customer D     17 %     - % Customer E     10 %     - % Customer F     - %     11 %   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 -   SUBSEQUENT EVENTS   On January 3, 2023, the Company issued 18,719 common shares to settle RSUs. The RSUs were valued at $ 110,250 for services provided by the Board of Directors in 2022. 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. The RSUs were valued at $ 674,164 for services provided by management in 2022. The Company is recognizing the stock-based compensation of the award over the requisite service period.   65 Table of Contents     Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   None.