LIQTECH INTERNATIONAL INC 10-K

Item 9A. Controls and Procedures   Evaluation of Disclosure Controls and Procedures   Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and effectiveness of our internal controls over financial reporting and disclosure controls and procedures (pursuant to Rule 13a-15(b) and (c) under the Exchange Act) as of the end of the period covered by this Annual Report. A weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a misstatement of the registrant's financial statements will not be prevented or detected on a timely basis.   There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.   Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2022 were not effective due to material weaknesses in internal controls over financial reporting, described below   Notwithstanding this finding, we concluded that the consolidated financial statements included in this Report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States. During the year ended December 31, 2022, the Company was not subject to the requirements of Section 404(b) of the Sarbanes-Oxley Act. As such, our independent registered public accounting firm was not required to, and thus did not, audit our internal control structure.   Management's Report on Internal Control over Financial Reporting   Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.   Internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.   Internal control over financial reporting is defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the audited consolidated financial statements.   Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the Company's management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the criteria set forth in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commissions (2013).   Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2022 were not effective due to material weaknesses in internal controls over financial reporting.   66 Table of Contents   Management's Remediation Initiatives   In response to the identified material weaknesses, our management, with oversight from the Company’s Audit Committee, has been and will continue to dedicate necessary resources to enhance the Company’s internal control over financial reporting and remediate the identified material weaknesses. As an example of such remediation, the Company in 2022 hired additional employees into the finance department, and we plan to continue to work on remediating the material weaknesses during 2023 by improving competencies and processes. Further, the Company implemented a new ERP system along with other IT programs to help reinforce its controls and processes, and these investments are an important step in the remediation of the material weaknesses. During 2022, the Company introduced an updated Delegation of Authority, with the overall purpose to provide clarity for all employees on the extent to which they can commit the Company and at the same time provide the Company with assurance that decisions about agreements are made by the appropriate functions and employees. Lastly, the Company has started the process of redesigning and ensuring documentation of all processes and procedures related to the financial reporting process to ensure the effective design and operation of process-level controls.   While management believes that the steps that we have taken and plan to take will improve the overall system of internal control over financial reporting and will remediate identified material weaknesses, the material weaknesses cannot be considered remediated until the applicable relevant controls operate for a sufficient period of time.   Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we completed substantive procedures for the year ended December 31, 2022. Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP. Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the periods presented in this Form 10-K.   Limitations on the Effectiveness of Internal Controls   An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.   While management believes that the steps that we have taken and plan to continue to take will improve the overall system of internal control over financial reporting and will remediate identified material weaknesses, the material weaknesses cannot be considered remediated until the applicable relevant controls operate for a sufficient period of time.   Item 9B. Other Information   None   Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections   Not applicable.   67 Table of Contents   Item 10. Directors, Executive Officers and Corporate Governance   The information required by this Item 10 is incorporated herein by reference to our Definitive Proxy Statement relating to our 2023 Annual Meeting of Stockholders. We intend to file such Definitive Proxy Statement with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.   Item 11. Executive Compensation   The information required by this Item 11 will be included in the Definitive Proxy Statement referenced above in Item 10 and is incorporated herein by reference.   Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   The information required by this Item 12 will be included in the Definitive Proxy Statement referenced above in Item 10 and is incorporated herein by reference.   Item 13. Certain Relationships and Related Transactions, and Director Independence   The information required by this Item 13 will be included in the Definitive Proxy Statement referenced above in Item 10 and is incorporated herein by reference.   Item 14. Principal Accountant Fees and Services   The information required by this Item 14 will be included in the Definitive Proxy Statement referenced above in Item 10 and is incorporated herein by reference.    68 Table of Contents     Item 15. Exhibits and Financial Statement Schedules   (a)          Financial Statements and Schedules   The financial statements are set forth under Item  8 of this Annual Report. The following financial statement schedule for the years ended December 31, 2022 and December 31, 2021  is included in this Annual Report on Form 10 -K:   a.          Valuation and Qualifying Accounts for the years ended December 31, 2022  and December 31, 2021.       2022     2021   Bad debt expense     ( 24,534 )     ( 28,499 ) Reserve for obsolete inventory     404,160       162,651         Balance Beginning of Year     Charges to Costs and Expenses     Deductions (1)     Balance End of Year   Year Ended December 31, 2022                                 Allowance for inventory obsolescence   $ 268,470     $ 404,160     $ ( 9,403 )   $ 663,227   Allowance for doubtful accounts     409,076       ( 24,534 )     ( 324,983 )     59,559   Totals   $ 677,546     $ 379,626     $ ( 334,386 )   $ 722,786                                     Year Ended December 31, 2021                                 Allowance for inventory obsolescence   $ 723,949     $ 162,651     $ ( 618,129 )   $ 268,470   Allowance for doubtful accounts     498,044       ( 28,499 )     ( 60,469 )     409,076   Totals   $ 1,221,993     $ 134,152     $ ( 678,598 )   $ 677,546         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     ( 1 ) Includes write-offs, the impact of foreign currency exchange rates.   Schedules other than that listed above are omitted because the conditions requiring their filing do not exist or because the required information is provided in the Consolidated Financial Statements, including the Notes thereto. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.   69 Table of Contents    (b)             Exhibits   Exhibit No.   Description   Location           3.1   Articles of Incorporation, as amended as of May 21, 2021   Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K as filed with the SEC on March 30, 2022           3.2   Amended and Restated Bylaws   Incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q as filed with the SEC on May 15, 2012           4.1   Form of Pre-Funded Warrant   Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K as filed with the SEC on June 2, 2020           4.2   Form of Amendment to Pre-Funded Warrant   Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q as filed with the SEC on November 9, 2020           4.3   Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock of LiqTech International, Inc.   Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q as filed with the SEC on November 14, 2017           4.4   Description of our Common Stock   Incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K as filed with the SEC on March 30, 2020           4.5   Form of Pre-Funded Common Stock Purchase Warrant   Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the SEC on August 20, 2021           4.6   Form of Pre-Funded Warrant   Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the SEC on May 17, 2022           4.7   Form of Warrant   Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the SEC on June 24. 2022           10.1   Lease Agreement for Industriparken 22C, 2750 Ballerup, Denmark   Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K/A as filed with the SEC on November 15, 2011 (translated in English)           10.2   Form of Securities Purchase Agreement, by and among the Company and the purchasers named therein   Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on June 2, 2020           10.3   Form of Registration Rights Agreement, by and among the Company and the investors named therein   Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K as filed with the SEC on June 2, 2020           10.4   Lease Contract for Benshoej Industrivej 24, 9500 Hobro   Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on December 5, 2019   70     10.5   Securities Purchase Agreement, by and among the Company and HT Investments MA, LC   Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on March 30, 2021           10.6   Form of Senior Convertible Note due 2023   Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K as filed with the SEC on March 30, 2021           10.7   Form of Exchange Agreement   Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on August 20, 2021           10.8   Lease Agreement for the China Premises   Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on September 28, 2021           10.9   Executive Services Agreement by and between Liqtech Holding A/S and Simon Stadil     Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on November 30, 2021           10.10   LiqTech International, Inc. 2013 Share Incentive Plan   Incorporated by reference to the Company’s Form S-8 as filed with the SEC on January 27, 2014           10.11   Note and Warrant Purchase Agreement, by and among the Company and the Purchasers   Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K as filed with the SEC on June 24, 2022           10.12   Form of Note   Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K as filed with the SEC on June 24, 2022           10.13   Registration Rights Agreement, by and among the Company and the Purchasers   Incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K as filed with the SEC on June 24, 2022           10.14*   Executive Services Agreement, dated July 26, 2022, by and between LiqTech Holdings A/S and Fei Chen   Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K as filed with the SEC on August 1, 2022           10.15*   LiqTech International, Inc. 2022 Equity Incentive Plan   Incorporated by reference to Annex A to the Company’s Proxy Statement pursuant to Section 14(a) of the Exchange Act filed with the SEC on October 3, 2022           10.16   Exclusivity Agreement for Collaboration, Marketing and Deployment of Products and Associated Services, dated November 11, 2022, by and between the Company and NESR   Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K as filed with the SEC on November 17, 2022           21.1   List of Subsidiaries   Filed herewith           23.1   Consent of Sadler, Gibb   Filed herewith           31.1   Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith           31.2   Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith           32.1   Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002   Furnished herewith           32.2   Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002   Furnished herewith           101. INS   Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)   Provided herewith           101. CAL   Inline XBRL Taxonomy Extension Calculation Link base Document   Provided herewith           101. DEF   Inline XBRL Taxonomy Extension Definition Link base Document   Provided herewith           101. LAB   Inline XBRL Taxonomy Label Link base Document   Provided herewith           101. PRE   Inline XBRL Extension Presentation Link base Document   Provided herewith           101. SCH   Inline XBRL Taxonomy Extension Scheme Document   Provided herewith           104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).   Provided herewith   * Denotes management contract or compensatory plan, contract or arrangement.   71 Table of Contents   Item 16. Form 10-K Summary   Not Applicable.   72 Table of Contents   SIGNATURES   In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.     LIQTECH INTERNATIONAL, INC. Date: March 22, 2023       By: /s/   Fei Chen     Fei Chen  Chief Executive Officer and Principal Executive Officer   In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated.     Signatures   Title   Date                               /s/ Mark Vernon   Chairman of the Board of Directors   March 22, 2023 Mark Vernon                             /s/ Fei Chen   President, Chief Executive Officer, Principal Executive Officer and Director   March 22, 2023 Fei Chen                             /s/ Simon Stadil   Chief Financial Officer, Principal Financial and Accounting Officer   March 22, 2023 Simon Stadil                             /s/ Alexander Buehler   Director   March 22, 2023 Alexander Buehler                             /s/ Peyton Boswell   Director   March 22, 2023 Peyton Boswell                             /s/ Richard Meeusen   Director   March 22, 2023 Richard Meeusen             73