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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36210

LiqTech International, Inc.

(Exact name of registrant as specified in its charter)

Nevada |  | 20-1431677
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
Industriparken 22C, DK 2750 Ballerup, Denmark |  |
(Address of principal executive offices) |  | (Zip Code)

Registrant’s telephone number, including area code: +45 31315941

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading symbol(s) |  | Name of each exchange on which registered
Common Stock, $0.001 par value |  | LIQT |  | The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Table of Contents

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☐ | Accelerated filer | ☐
Non-accelerated filer | ☒ | Smaller reporting company | ☒
Emerging growth company | ☐ |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

On June 30, 2020, the aggregate market value of the common stock outstanding and held by non-affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant based on the closing price of the registrant’s common stock of $5.62 per share on June 30, 2020 was $118,122,891. As of March 31, 2021, there were 21,697,373 shares of common stock, $0.001 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2021 Annual Meeting of stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K or will be filed by amendment.

Table of Contents

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

|  |  | Page
PART I |  |
| Item 1 | Business | 1
| Item 1A | Risk Factors | 10
| Item 1B | Unresolved Staff Comments | 21
| Item 2 | Properties | 22
| Item 3 | Legal Proceedings | 22
| Item 4 | Mine Safety Disclosures | 22
PART II |  |
| Item 5 | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 22
| Item 6 | Selected Financial Data | 22
| Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23
| Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 31
| Item 8 | Financial Statements and Supplementary Data | 32
| Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 60
| Item 9A | Controls and Procedures | 60
| Item 9B | Other Information | 61
PART III |  |
| Item 10 | Directors, Executive Officers and Corporate Governance | 62
| Item 11 | Executive Compensation | 62
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 62
| Item 13 | Certain Relationships and Related Transactions, and Director Independence | 62
| Item 14 | Principal Accountant Fees and Services | 62
PART IV |  |
| Item 15 | Exhibits and Financial Statement Schedules | 63
| Signatures | 67

Table of Contents

PART I

Forward Looking Statements

Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. This is especially underlined by the anticipated impacts from the COVID-19 pandemic on the Company, including the related effects to our business operations, results of operations, cash flows, and financial position. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Annual Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Item 1. | Business

Overview

LiqTech International, Inc. is a clean technology company that provides state-of-the-art gas and liquid purification products by manufacturing ceramic silicon carbide filters and membranes. For more than two decades, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in three business areas: ceramic membranes for liquid filtration systems, diesel particulate filters (DPFs) to control soot exhaust particles from diesel engines, and plastic components for usage in various industries. Using nanotechnology, we develop proprietary products using patented silicon carbide technology. Our products are based on unique silicon carbide membranes that facilitate new applications and improve existing technologies. We market our products from our office in Denmark, and through local representatives and distributors. The products are shipped directly to customers from our production facilities in Denmark.

The terms “LiqTech”, “we”, “our”, “us”, the “Company” or any derivative thereof, as used herein, refer to LiqTech International, Inc., a Nevada corporation, together with its direct and indirect wholly owned subsidiaries, including LiqTech USA, Inc., a Delaware corporation (“LiqTech USA”), which owns all of the outstanding equity interest in LiqTech Holding A/S, a Danish limited company, organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“LiqTech Holding”), together with its direct wholly owned subsidiaries LiqTech Ceramics A/S (“LiqTech Ceramics”), LiqTech Water A/S (“LiqTech Water”), LiqTech Water Projects A/S ("LiqTech Water Projects”) and LiqTech Plastics A/S (“LiqTech Plastics”), all Danish limited companies organized under the Danish Act on Limited Companies of the Kingdom of Denmark, and LiqTech NA, Inc., a Delaware corporation (“LiqTech NA”). Collectively, LiqTech USA, LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics and LiqTech NA are referred to herein as our “Subsidiaries”.

We conduct operations in the Kingdom of Denmark. Our Danish operations are located in the Copenhagen area, in Hobro and in Aarhus.

Our Products

We manufacture and sell ceramic membranes and systems for the filtration of liquids and diesel particulate filters to control soot exhaust particles from diesel engines. We also provide plastics components through LiqTech Plastics for a variety of internal and external industrial applications.

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Silicon Carbide Ceramic Membranes for Liquid Filtration

Under the “LiqTech”, “Cometas” and “Provital” brand names, we manufacture and sell ceramic membranes and systems for liquid filtration using our patented silicon carbide technology (sometimes also referred to herein as our “SiC Filters”). Our current focus is on marine scrubber wash water, contaminated water from the production of hydrocarbons, which we refer to herein as “produced water”, removal of heavy metals in mining and energy applications, pre-filtration for reverse osmosis in drinking water and other industrial applications.

Our SiC Filters have been used in the following applications by our clients:

| ● | Marine scrubber wash water: We supply water filtration systems for marine scrubber systems used on ships to reduce sulfur emissions emanating from heavy fuel oil (HFO) operations, allowing vessels to comply with the IMO 2020 sulfur cap. To date, more than 250 water treatment systems have been installed as a result of orders from European and Asian scrubber technology providers, shipyards, and shipowners.
| ● | Produced water: Our membrane systems can be used for the filtration of produced water, which is a byproduct of oil and gas production. The amount of produced water varies from 0.1 to 10 times the amount of oil produced. We have performed testing with major international private and public oil and gas companies. Our solution is market-proven, approved by various international oil and gas companies for onshore and offshore applications.
| ● | Pre-filtration of reverse osmosis drinking water: To convert seawater or surface water into potable water, the seawater or surface water must be pre-filtered before entering the reverse osmosis membranes. We have a market-proven solution that has been tested by various customers around the world.
| ● | Industrial applications: We have delivered complete water treatment systems for specific targeted, aggressive fluid applications, such as the removal of heavy metals for energy providers and water treatment systems for mining wastewater.
| ● | Producing clean drinking water: In addition to pre-filtration before reverse osmosis described above, the potential advantages of LiqTech SiC ceramic membranes in other drinking water applications are numerous. Some examples include groundwater removal of precipitated salts such as iron and manganese along with surface water removal of organic suspended solids and humic acid.
| ● | Pool and spa water: We have supplied several turnkey water filtration systems for medium to very large public swimming pool installations in Europe. We believe our SiC ceramic membranes provide unique advantages for the commercial pool filtration industry with the smallest footprint on the market, reduced water and chemical consumption, and consistent, high-quality water filtration.

Beyond those applications mentioned above utilizing silicon carbide ceramic membranes, LiqTech has developed many other industrial water treatment applications that do not use ceramic membranes. These applications include:

| ● | Seawater Reverse Osmosis (SWRO): SWRO represents a new LiqTech solution to convert seawater into potable water using polymeric membranes. With its high energy efficiency and consistent water quality, we believe SWRO provides one of the most efficient and sustainable solutions to convert seawater into drinkable freshwater. The LiqTech SWRO units are suitable for small commercial vessels, fishing boats, sailing boats, small port applications, and for generally most applications with access to seawater and where desalinated, potable water is needed.

| ● | Filter Press: The LiqTech Filter Press is a water sludge treatment system, enabling solid and liquid separation. The filter press can convert sludge into a filter cake consisting of up to 80% dry matter, depending on the pressure and application. One of the primary purposes of employing a filter press is to reduce handling costs associated with discharge.

| ● | UV Disinfection: LiqTech is a distributor of UV-C LED Disinfection Systems. This technology can be used to purify water, air, and surfaces to provide reliable and low-cost disinfection to protect human health.

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Our SiC membranes are manufactured based on patented technology. We are not aware of other companies that make both the substrate (honeycomb) and the membrane (the surface layer that accomplishes the filtering) solely from silicon carbide. Our products are based on the following silicon carbide membrane technologies:

| ● | CoMem ceramic membranes utilize a unique patented membrane technology designed as a tubular membrane. The membranes utilize a crossflow structure to handle high concentrations of suspended solids found in produced water in the oil & gas and chemical industries, as well as wastewater from industrial processes and manure filtration. It offers consistent removal of oil and suspended solids at high throughput rates regardless of feed conditions. We offer onshore and offshore solutions and have extensive experience with produced water streams for fracking, gas condensate, and oil emulsions. We believe our SiC filters are the better alternative to micro-flotation and walnut shell filters due to cost savings, reduced installation cost, robustness, and decreased downtime. Our chemically inert, plug-and-play membranes are extremely hard, chemically resistant, and durable ceramics with high flux (flow). SiC membranes are stronger, harder, longer-lasting, more temperature-resistant, and recover faster than conventional ceramic or polymeric membranes;

| ● | Flat sheet membranes (“FSMs”) are designed for sub-merged outside-in filtration applications. The FSM is suitable for wastewater reuse, groundwater, pre reverse osmosis treatment, and other applications. LiqTech’s FSM towers can be customized with different rack sizes and tower heights. The FSMs offer low energy consumption, maximum permeation, innovative rack design, and high flux. These membranes are used in drinking water, pre-RO, and industrial wastewater reuse applications. The FSM carrier and the selective layer are also made of silicon carbide, which gives the product unique advantages such as high flux, total chemical resistance (pH 0-14), long life and one of the lowest fouling tendency of any polymeric or ceramic membrane material;

| ● | Disc membranes are designed for the removal of high-suspended solids, oil droplets, and process water. The disc membranes use outside-in filtration and have internal permeation channels, facilitating the removal of the solids. A crossflow effect is generated through the discs' rotation at high velocities, which enables flow cleaning of the filter membrane surface. This principle offers 80% energy savings compared to conventional cross-flow systems;

| ● | Aqua Solution® integrates a dead-end structural design with cutting-edge membrane technology in a solution specifically designed for applications in the pre-treatment for reverse osmosis, wastewater treatment, and swimming pool and spa water filtration. Our Aqua Solution® offers the same water flow as conventional sand filters, which typically require up to 400 times more space and have pore sizes at least three times bigger than our SiC membranes. Moreover, our Aqua Solution® reduces the number of membrane elements, pressure vessels, the water consumption for backwash, and the energy costs by offering high flow capabilities at very low pressure. Also, it eliminates the consumption or maintenance of filter cartridges; and

| ● | Hybrid Technology Membranes (HTM) is a new patented asymmetric membrane that combines the desired properties from silicon carbide (SiC) and zirconia (ZrO₂) ceramics. With a pore size of 60 nanometers (nm), it is suitable for ultrafiltration applications. This state-of-the-art membrane technology facilitates new separation processes and new filtration applications.

The advantages of our SiC Filters compared to other pre-filtration systems for reverse osmosis are:

| ● | Equivalent water flow to commonly used sand filters that require up to 400 times more space and contain pore sizes that are at least three times larger than our SiC Filters. Additionally, our SiC Filters reduce the number of membrane elements and pressure vessels;

| ● | High flow capacities that are achieved at very low pressures, which reduce energy costs;

| ● | Reduced water consumption for sand filter backwash; and

| ● | Elimination of the consumption or maintenance of filter cartridges.

For the years ended December 31, 2020 and 2019, our sales of liquid filters, services and systems were $14,147,842 and $25,464,614, respectively, and accounted for 63% and 78% of our total sales, respectively.

For the years ended December 31, 2020 and 2019, we received revenue from government grant projects of $599,102 and $624,981, respectively.

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Diesel Particulate Filters (DPFs) for Gas Purification

We offer diesel particulate filters for exhaust emission control solutions to the verified retrofit and original equipment manufacturer (OEM) market through our direct sales force. DPF sales are generally made to distributors specializing in sales to end users. We use a proprietary “nano washcoat” to provide catalytic coating for anything from diesel particulate filters to catalytic converters. Our DPF products are sold worldwide under the LiqTech brand.

We have developed a robust silicon carbide diesel particulate filter that is especially effective for vehicles that produce a high soot load, and if properly maintained, should last as long as the vehicle’s engine. Our DPFs are ideal for off-road vehicles because of their strength, chemical non-reactive nature, temperature resilience and thermal conductivity.

Our DPF filters can handle higher soot loads than filters that do not use a silicon carbide membrane, which makes them ideal for situations in which engines infrequently reach high enough temperatures to burn off soot. Examples include:

| ● | Garbage trucks;
| ● | Port vehicles;
| ● | Diesel pickup trucks not carrying a full load;
| ● | Off-road construction vehicles that idle for long periods of time; and
| ● | Intra-city vehicles that do not reach highway speeds.

Future tightening legislation in the marine industry has also created a new opportunity for our DPF product to reduce black carbon emissions from shipping.

For the years ended December 31, 2020 and 2019, our sales of DPFs were $5,131,891 and $5,652,685, respectively, and accounted for 23% and 17% of our total sales, respectively.

Plastics

Plastics have been part of our offering since the acquisiton of BS Plastic A/S on September 4, 2019. LiqTech provides highly flexible and innovative plastics manufacturing, focusing on machining, welding, bending, and solvent cementing. With an intense focus on customer demands, LiqTech serves market leaders in the cleantech, pharma, food, healthcare, and graphics industries.

For the years ended December 31, 2020 and 2019 (4 months), our plastics revenues were $2,647,366 and $895,203, respectively and accounted for 12% and 3% of our total sales, respectively.

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Our Competitive Strengths

Our products compete with other filters that are made of ceramic and polymeric materials. Most of our competitors are large industrial companies; however, we believe our patented technology allows us to produce high-quality products that provide an advantage over many of our competitors, many of which have greater financial, technological, manufacturing, and personnel resources. We intend to continue to devote resources to developing new technologies and improving our products to reinforce our competitive advantages, retain our existing customers and acquire new customers.

We believe the following strengths position us to increase our revenue and profitability:

| ● | Advantages of Silicon Carbide Membranes: Our liquid filtration and diesel exhaust products utilize silicon carbide membranes, which have unique qualities that we believe make our products more effective than those of our competitors. Unlike other filtration products made of aluminum oxide, silicon carbide membranes are chemically inert and temperature resistant. Furthermore, silicon carbide membranes exhibit a high degree of hydrophilicity (the tendency of a surface to become wet or absorb water), which results in unique high flux (and low energy consumption). Silicon carbide is also very durable, and its hardness is only surpassed by diamonds, making it a highly desirable material for various abrasive fluids in industrial applications. As a result, we believe that such superior physical properties make our products desirable in both liquid filtration products and exhaust emission control products.
| ● | Complete systems fabrication: LiqTech provides full fabrication and integration of our membranes into complete filtration systems made from corrosive-resistant materials and components. We possess in-house engineering capabilities for process design, 3D modeling, and control systems. Our professional staff of highly dedicated engineers and craftsmen take responsibility for the entire specification, engineering, fabrication, and commissioning process. We believe that supplying our customers with turnkey solutions built upon our silicon carbide membranes is unique in the market. LiqTech is more than a membrane supplier — LiqTech is also a supplier of integrated water treatment systems.
| ● | Broad Application of LiqTech Membranes: Our membranes can be applied in a variety of applications, including filtration of marine scrubber wastewater, processing of industrial wastewater and produced water, pre-treatment of drinking water, pre-filtration for reverse osmosis, oil emulsion separation, bacteria removal for aquaculture, commercial swimming pool water treatment, ultrafiltration for the food and beverage industry, and the separation of metals from liquids in industrial processes.
| ● | Marketing and Manufacturing in Key Markets and Expanding to Other Markets: We have production and sales capacity in Europe. We also sell our products through distributors and agents in many other countries such as China, Korea, Spain, the UK and France. Moreover, we have established customer relationships in more than 25 countries.
| ● | Strong and Experienced Management Team: Our management team has deep experience in the clean technology and filtration industries and drives growth through developing new applications and technologies and cultivating relationships with customers.

Our Strategy

Our strategy is to create stockholder value by leveraging our competitive strengths in silicon carbide filters, membranes, and water treatment solutions through our focus on discrete applications in key end markets. Essential features of our strategy include:

| ● | Retain and acquire new customers in the marine industry. We currently provide water filtration systems for scrubber technology providers, shipowners, and ship operators. We are expanding our range of marine products to better leverage existing customer relationships and develop new relationships.
| ● | Enter new geographic markets and expand existing markets. We plan to continue to manufacture and sell our products from our manufacturing center in Denmark. We work with distributors, agents, and partners to access other important geographic markets.
| ● | Strengthen our position in the DPF market. We believe that we have a strong position in the retrofit market for diesel particulate filter (DPF) systems where we intend to advance our efforts to maintain our market position in this area. Furthermore, we intend to leverage our OEM market experience by expanding our presence with new products and markets relating to diesel particulate filter systems.

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| ● | Develop and improve technologies and enter new end markets. We intend to continue to develop our ceramic membranes and improve the efficiency of our filtration products. Through continuous research and development, we intend to find new uses for our products and plan to expand into new markets that offer the company significant opportunities.
| ● | Focus on the development and sales of standardized water filtration and treatment systems. We will continue our focus on selling systems based on our unique SiC membranes and we will also combine the ceramic membranes with other technologies to offer our customers complete filtration solutions. Moreover, we will continue developing smaller standard systems, like those for groundwater treatment and residential swimming pools.

Our Industry

Overview

We serve primarily two industries: the liquid filtration market and the diesel particle filter (DPF) market. Our goal is to leverage our products and technologies into industrial liquid filtration applications that offer significant growth opportunities and take advantage of favorable market trends.

Liquid Filtration Market

The market for marine water filtration systems is rapidly evolving due to new regulations for sulfur and ballast water emissions. Industry experts estimate that 4,000 to 6,000 ships will be retrofitted with a scrubber water treatment system over the next five years. At the end of 2019, the industry statistics noted that nearly 4,000 ships have installed or ordered scrubbers (according to the DNV GL report published in March 2020), with most installations being open-loop scrubbers that discharge the wash water directly into the sea. The addressable market for LiqTech is focused on closed-loop scrubbers, where the scrubber wash water is routed through the LiqTech filtration system to remove sulfur and other particulates, and the clean water is then recycled as wash water.

As noted above, the use of open-loop scrubbers to clean the exhaust from marine engines that use high-sulfur residual oil and diesel fuels may lead to the discharge of high concentrations of harmful compounds from vessels using such scrubbers. Several trials have been conducted on board vessels by scrubber suppliers to define the constituent concentrations in wash water discharge. The research concluded that scrubber wash water also contains suspended solids, heavy metals, hydrocarbons, and polycyclic aromatic hydrocarbons (PAHs). Before the scrubber wash water is discharged, it must be treated to remove solids. LiqTech’s water treatment systems can be used to remove the solids from the wet scrubber wash water. The treatment process includes a pre-filtration step followed by filtration from a LiqTech SiC membrane. Treated water quality is monitored (NTU, PAH, and pH) before discharge. We believe that many of the open-loop scrubbers already installed will eventually be converted to closed-loop (where the LiqTech filtration system is employed), thus resulting in a significantly larger market for LiqTech. The Company is globally engaging with scrubber equipment suppliers, ship owners/operators, and shipyards. Furthermore, we present our water treatment and filtration solutions at marine conferences and trade shows and through digital marketing.

In addition to our marine scrubbers, LiqTech offers packaged filtration systems consisting of ceramic SiC and conventional reverse-osmosis (RO) membranes for industrial and municipal customers. We anticipate that global demand will increase for robust products that generate low operating expenses such as ours, especially those that are well-suited for mobile and modular systems. RO membranes are increasingly used to produce drinking water (desalination of seawater or brackish water), demineralized water for industrial processes (boiler feed water, microelectronics production), and food processing and pharmaceuticals. Moreover, many laboratories rely on pure water, for which demineralization is an essential step. LiqTech is differentiated by what we believe is our superior SiC membrane technology and the provision of complete, integrated water treatment systems. According to market reports published by Markets and Markets in October 2020, the market size for membrane technologies in the water industry is expected to grow at a compound annual growth rate (CAGR) of 5.8%, from $18.5 billion in 2020 to $24.6 billion 2025.

Generally, we also expect a growing, global demand for higher-quality re-injection water from unconventional oil and gas productions. In addition, we expect tightening water discharge legislation, increasing water usage (more water produced per barrel of oil), and the introduction of Enhanced Oil Recovery (“EOR”) techniques. The tightening legislation for water discharge can be a problem for conventional treatment and filtration technologies; however, our SiC Filters can mitigate these challenges, and we believe the increasing demand represents a favorable market trend for our business.

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Water is essential to life on earth, and clean water shortages are affecting billions of people. Today, 2.2 billion people lack safely managed drinking water, and 3 billion people worldwide lack basic handwashing facilities at home (according to UN Water in June 2019). In addition, more than 700 million people could be displaced due to water scarcity (according to the UN in March 2019). Additionally, according to the World Health Organization, approximately 361,000 children die every year due to unsafe water and lack of basic sanitation. Due to the growing need for pure water for drinking and industrial purposes, the market for water filtration is growing rapidly, with more and larger plants being commissioned all over the world.

Diesel Particulate Filter (DPF) Market

The increase in global regulation of diesel engine exhaust particles is expected to drive growth in the DPF market. We expect jurisdictions in the United States to begin requiring DPF filters. In Europe, for example, German cities are setting requirements for off-road machinery to include DPF filters. According to an industry publication (Verified Market Research published in January 2021), the global market for new DPF filters manufactured by OEMs is expected to increase approximately 11% per year from 2020 to 2027 with a value of $11 billion in 2019 to an estimated value of $25 billion in 2027. Diesel emissions consist of several toxic gases and particles: particulate matter (soot), carbon monoxide, and hydrocarbons. Soot has been linked to a variety of human health problems. Reducing diesel emissions will have both health and social benefits along with reduced costs.

In response to these health impacts, governments have been implementing legislation to regulate emissions from diesel engines. California implemented the Diesel Risk Reduction Plan, and New York City implemented binding directives for the retrofitting of buses, garbage trucks, and construction machines. In the European Union, Directive EC 715/2007 of June 20, 2007 defines particle count limits for certain cars and light utility vehicles. Also, low emission zones have been implemented locally in various places in Europe, creating a patchwork of regulation.

The Asian markets have shown an improved standard of living due to financial growth, which has led to increased sales of vehicles in the region. At the same time, pollution in major cities has reached high (more than 2.5) levels of particulate matters. As a result, the Chinese government has introduced additional regulations, including new emissions standards, faster than previously anticipated. We also believe that high pollution levels will increase the need for the retrofit of existing vehicles.

Research and Development

We have fourteen (14) full-time employees that are primarily engaged in research and development activity. For the years ended December 31, 2020 and 2019, we spent $1,278,331 and $749,249, respectively, on research and development.

Manufacturing

We currently manufacture our DPF and membrane products in facilities located in Ballerup, Denmark. We assemble our water treatment systems in Hobro, Denmark. In 2019, we acquired BS Plastic A/S (now called LiqTech Plastics) that manufactures its plastic products in facilities located in Aarhus, Denmark. We are planning to expand our production capacity, primarily through investment in additional equipment for our liquid filtration products.

Raw Materials

The main raw materials that we use in our manufacturing processes are silicon carbide, steel, plastic, platinum, and palladium. We purchase these commodities from various sources generally based upon availability and price.

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Sales, Marketing and Distribution

Our products are sold primarily to large industrial customers for gas and liquid filtration. The Company sells through direct sales, systems integrators, distributors, agents, and partners.

The Company initially focused on selling its DPF filters to the automotive industry. In 2014, we acquired LiqTech Water (previously named LiqTech Systems and Provital Solutions), a Danish manufacturing company focused on filtration systems, which enabled us to shift our focus to providing complete, modular liquid filtration systems. The Company’s liquid filtration systems business now serves the marine industry; other industrial applications in mining, power generation, aquaculture and oil and gas; and non-industrial applications such as swimming pools, water reclamation and municipal drinking water.

For the year ended December 31, 2020, our four largest customers accounted for approximately 27%, 10%, 8% and 8% of our net sales (approximately 53% in total). For the year ended December 31, 2019, our four largest customers accounted for approximately 29%, 18%, 15% and 7% of our net sales (approximately 68% in total). If we are unable to diversify our customer base, our future results will be heavily dependent on these same customers.

We plan to actively market our existing products to new customers as we increase our production capacity. As of March 2021, we employed eighteen (18) full-time salespeople in addition to distribution agents. We promote our products through direct sales to potential customers and marketing activities such as participation in tradeshows and exhibitions.

In certain instances, our products are delivered to the end customer through systems integrators. These systems integrators use our filtration products in larger filtration systems, which eventually are installed in products used by the end customer. Due to legislative regulation, systems integrators are often required by end customers to receive approval for their systems, including the components used in such systems, which requires significant time and expense. As a result, we believe that certain of the systems integrators that use our products will not replace our filters with competitive products unless there are compelling reasons.

Intellectual Property

We have one issued patent in the United States that we co-own with a third party, two issued patents in Denmark, five issued foreign patents (Germany, China and South Korea) that we co-own with a third party, and two pending European patent applications that we co-own with third parties. The U.S. patent that we co-own is generally effective for 20 years from the filing date (July 8, 2004) of the earliest U.S. or international application to which it claims priority. The scope and duration of each of our foreign patents varies in accordance with local law.

Government Regulation

We do not believe that we are subject to any special governmental regulations affecting our products in the countries in which we operate. We are subject to numerous health and safety laws and regulations. In the United States, these laws and regulations include the Federal Occupation Safety and Health Act and comparable state legislation. We are also subject to similar requirements in other countries in which we have extensive operations, including Denmark. We actively seek to maintain a safe, healthy and environmentally friendly workplace for all of our employees and other stakeholders.

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Environmental Matters

We are subject to a broad range of environmental laws and regulations that govern, among other things, air emissions, wastewater discharges, and the handling, storage, disposal, and release of waste and hazardous substances. It is our policy to comply with all applicable environmental requirements at each of our facilities. We are subject to similar requirements in Denmark and other European countries. From time to time, we have identified minor environmental compliance issues at our facilities. To date, compliance with environmental matters has not had a material effect upon the Company’s capital expenditures, results of operations, or competitive position.

We believe that, due to the constant focus on the environment and clean air and clean water standards throughout the world, more stringent regulations in the U.S., Europe and elsewhere around the world are likely as governmental agencies seek to improve standards required for certification of products intended to promote clean air and water. In the event our products fail to meet these changing standards, some or all our products may become obsolete, which could have an adverse effect on our business, operating results, financial condition, and long-term prospects.

Competition

Our products compete with other filters that are made using both ceramic and plastic membranes. Most of our competitors are large industrial companies; however, we believe our patented technology, manufacturing know-how, and trade secrets allow us to produce high-quality products that provide an advantage over many of our competitors, many of which have greater financial, technological, manufacturing and personnel resources. We intend to continue to devote resources to the development of new technologies and the improvement of our products to retain existing customers and acquire new customers.

Employees

At December 31, 2020 we had 114 employees, 112 of whom were full-time employees. We have 109 employees in Denmark, including 64 in production, 13 in administration, 14 in research and development, 16 in sales and engineering and two in executive management. At December 31, 2020 we also had 5 accounting and production employees remaining in the United States, where we recently ceased operations and the last employee left the Company at the end of January 2021.

Certain employees in Denmark are represented by workers’ councils that have collective bargaining agreements. With the exception of such Danish employees, no other employees are members of a labor union or are represented by workers’ councils that have collective bargaining agreements. We believe that we have good relations with our employees.

Corporate Information

We filed our Articles of Incorporation on July 1, 2004 and are incorporated under the laws of the State of Nevada. Our principal executive office is located at Industriparken 22C, 2750 Ballerup, Denmark, and our telephone number is +45 3131 5941. We maintain an Internet website at www.liqtech.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the SEC and are available in print to any stockholder who requests a copy. The information contained in, or accessible from, our website is not a part of this Annual Report.

Additionally, the SEC maintains a website that contains reports, proxy statements, information statements and other information regarding issuers, including us, that file electronically with the SEC at www.sec.gov.

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Item 1A. Risk Factors

RISKS RELATED TO OUR BUSINESS AND OPERATIONS

The COVID-19 pandemic could have a material adverse effect on our business, results of operations and financial condition in the future.

Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the outbreak of respiratory illness caused by thea novel coronavirus first identified in Wuhan, Hubei Province, China (COVID-19). The COVID-19 pandemic has resulted in authorities worldwide implementing numerous measures to contain or mitigate the outbreak of the virus, such as travel bans and restrictions, border controls, limitations on business activity, social distancing requirements, quarantines, and shelter-in-place orders. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide. The impact of the pandemic on our business and operations and our ability to execute our strategic plans remains uncertain and will depend on many unpredictable factors outside of our control, including, without limitation, the extent, trajectory and duration of the pandemic; the development, availability and distribution of vaccines and other effective treatments to treat the COVID-19 virus and any new variants thereof; the emergence of new variants that are more contagious, symptomatic or fatal and the time the medical community requires to respond to such variants; the imposition of and compliance with protective public safety measures; the impact of the pandemic on the global economy; and the related impacts on our development pipeline and demand for our products.

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At the end of the first quarter of 2020, we initiated several precautions in accordance with local regulations and guidelines to mitigate the spread of COVID-19 across our businesses. These precautions have impacted the way we carry out our business, including additional sanitation and cleaning procedures in our production and other facilities, temperature and symptom confirmations, remote working when possible, and implementation of social distancing and staggered worktime requirements for our employees who must work on-site. If we are required to continue such measures for an extended period of time, it could impact the ability of our employees to collaborate efficiently. In addition, the loss or unavailability of our production staff or other key employees and executives, as a result of sickness of employees or their families or the responsibility of employees to manage family obligations while working from home, could negatively impact our business and operations and our ability to operate or execute our business strategy. Continued employee telecommuting activity also increases the risk of a security breach of our information technology systems. The changed environment under which we are operating could have an impact on our internal controls over financial reporting.

Moreover, the ongoing impacts of the COVID-19 pandemic could result in interruptions or delays in the operations of regulatory authorities, which may impact review or approval timelines; delays in necessary interactions with other agencies and contractors due to limitations in employee resources or forced furlough of government employees; termination of, or difficulties in procuring or maintaining, arrangements with third parties upon whom we depend such as manufacturers, including contract manufacturing organizations, suppliers and other strategic partners; and disruptions or restrictions on our ability to pursue partnerships and other business transactions. As a result of the COVID-19 pandemic, we have not experienced significant disruption or delays in our global supply chain. If the COVID-19 pandemic worsens, however, we may experience supply disruptions due to temporary closures, production slowdowns, staffing shortages, logistics, delays and disruptions in the manufacture and/or shipment of our products.

Since the start of the COVID-19 pandemic in early 2020, there has been an overall decline in new orders, particularly in the shipping industry, due to reduced investment caused by demand disruption and the volatility of oil prices. The effects of a prolonged pandemic could result in a continued negative impact on investment in the shipping industry and in other industries. In addition, if COVID-19 impacts the financial position of our customers or any of our collaboration partners, we may have difficulty collecting receivables or milestone payments, and our business and results of operations could be exposed to risks associated with uncollectible accounts or defaults on contractual payment obligations by our collaboration partners. If we are unable to generate sufficient cash from operations due to impacts of the COVID-19 pandemic or otherwise, we may need to raise additional funds. The duration and severity of any further economic or market impact of the pandemic remains uncertain, and there can be no assurance that it will not have an adverse effect on our liquidity and capital resources, including our ability to access capital markets, in the future, on terms that are favorable to us, or at all.

Historically, we have been dependent on a few major customers for a significant portion of our Company's revenue. Our revenue could decline if we are unable to maintain or develop relationships with additional customers and our results of operations could be adversely affected if any one of these customers is unable to meet their financial obligations to us.

For the year ended December 31, 2020, our four largest customers accounted for approximately 27%, 10%, 8% and 8% of our net sales (approximately 53% in total). For the year ended December 31, 2019, our four largest customers accounted for approximately 29%, 18%, 15% and 7% of our net sales (approximately 68% in total). If we are unable to diversify our customer base, our future results will be heavily dependent on these customers. Our dependence on a limited number of customers means that the loss of a major customer or any reduction in orders by a major customer would materially reduce our net sales and adversely affect our results of operations. We expect that sales to relatively few customers will continue to account for a significant percentage of our net sales for the foreseeable future; however, these customers or our other customers, may not use our products at current levels in the future, if at all. We have no firm, long-term volume commitments from any of our major customers, and we generally enter into individual purchase orders with our customers, in certain cases under master agreements that govern the terms and conditions of the relationship. We have experienced delays or cancellations of orders and fluctuations in order levels from period to period and expect that we will continue to experience such delays, cancellations, and fluctuations in the future. Customer purchase orders may be delayed or cancelled, and order volume levels can be changed with limited or no penalties. We may not be able to replace cancelled, delayed, or reduced purchase orders with new orders. If any one of these customers reduces its demand for our products, it will likely have a material adverse effect on our operations.

Furthermore, a significant portion of our accounts receivables is concentrated with a few major customers, who may not be able to meet their financial obligations to us. The failure of any such customers to pay amounts owed to us in a timely fashion or at all could have an adverse effect on our results of operations. The Company is also exposed to credit risk on its accounts receivable, and this risk is heightened during periods when economic conditions worsen. The Company's outstanding receivables are not covered by collateral or credit insurance. The Company's exposure to credit and collectability risk on its receivables may also be higher in certain international markets, and its ability to mitigate such risks may be limited. While the Company has procedures to monitor and limit exposure to credit risk on its receivables, there can be no assurance such procedures will effectively limit our credit risk and avoid losses.

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We will need to raise additional funds to develop our business, which may adversely affect our future growth.

We expect to finance our anticipated future growth and possibly future strategic acquisitions through public or private equity offerings or debt financings. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of, our plans to grow our revenues or to consummate one or more strategic acquisitions or otherwise to scale back our business plans. In addition, we could be forced to reduce or forego attractive business opportunities. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. In addition, debt financing, if available, may involve restrictive covenants. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Our access to the financial markets and the pricing and terms we receive in the financial markets could be adversely impacted by various factors, including changes in financial markets and interest rates.

Adverse conditions or events affecting the marine transportation industries may have a material adverse effect on our business.

Global health crises, such as the outbreak of COVID-19, can significantly impact us and our customers and suppliers. For example, the global shipping industries have been negatively impacted by the coronavirus outbreak due to increased travel restrictions and may be further adversely affected by an extended shutdown of various businesses in the impacted regions. In light of this operating environment, shipping companies that carry goods may begin to significantly reduce the number of seaborne vessels as measures to stop the spread of the coronavirus negatively impacts the demand for seaborne transport of goods. This in turn can adversely affect the demand for our marine scrubbers to these shipping customers if many vessels sit idle or are taken out of service during the outbreak.

Furthermore, the volatility in oil prices caused by demand destruction from economic shutdowns and travel limitations, attenuated by reduced supply from major producers, has created similar volatility in the price of fuel oil used by our marine customers, including low-sulfur fuel oil. A reduction in the price of low-sulfur fuel oil could negatively affect the demand for our marine scrubber systems, which could impact our sales of marine scrubbers and our operating results.

We may be adversely affected by global and regional economic conditions and legislative, regulatory and political developments.

We sell our products around the world, and we expect to continue to derive a substantial portion of sales from outside the U.S. The uncertain macroeconomic environment caused by the outbreak of COVID-19 may adversely affect our results and could have a negative impact on demand for our products. Customers or suppliers may experience cash flow problems and as a result, may modify, delay or cancel plans to purchase our products, and suppliers may significantly and quickly increase their prices or reduce their output. Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, amounts owed to us. Any inability of current and/or potential customers to purchase our products and/or to pay us for our products may adversely affect our sales, earnings and cash flow. Sales and earnings could also be affected by our ability to manage the risks and uncertainties associated with the application of local legal requirements or the enforceability of laws and contractual obligations, trade protection measures, changes in tax laws, regional political instability, war, terrorist activities, severe or prolonged adverse weather conditions and natural disasters as well as health epidemics or pandemics.

Our success will depend, to a large degree, on the expertise and experience of the members of our management team, the loss of whom could have a material adverse effect on our business.

Our success is, to a large degree, dependent upon the expertise and experience of the management team and its ability to attract and retain qualified personnel who are technically proficient. The loss of the services of one or more of such personnel could have a material adverse effect on our business. Our business may be adversely affected if we are unable to continue to attract and retain such personnel.

We will need to add qualified additional personnel as we expand our business, and we may not be able to employ such persons, which could affect our ability to expand and have a material adverse effect on our business.

In order to expand our product offerings and customer base, we will need to hire additional qualified personnel. We may not be able to identify such persons, and even if we identify them, we may not have the funds or ability to employ them, which could have a material adverse effect on our business.

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Future growth of our business depends in part, on the availability of funding for emissions control programs as well as the enforcement of existing emissions-related environmental regulations and further tightening of emission standards worldwide, all of which are beyond our control and the lack of which could negatively affect our future growth.

Future growth of our business depends in part on the availability of funding for emissions control programs, which can be affected by economic as well as political reasons that are beyond our control. For example, in light of a past budget crisis in California, funding was not available for a state-funded emissions control project and its start date was delayed. Funding for these types of emissions control projects drives the demand for our diesel particulate filters. If such funding is not available, or delayed, it can negatively affect our future growth prospects. In addition to funding, we also expect that our future business growth will be driven, in part, by the enforcement of existing emissions-related environmental regulations and tightening of emissions standards worldwide, where regulations and standards are frequently contested in litigation. For example, the Alliance for California Business filed suit against the California Air Resources Board in an effort to cease the California Air Resources Board’s mandate that a DPF be retrofitted on certain older diesel trucks. Likewise, our ability to expand our business in the marine industry is dependent on the effective implementation of IMO 2020, which requires the burning of low-sulfur oil for marine vessels or the inclusion of marine scrubber technology. If existing regulations and emissions standards do not continue to become stricter, are loosened or are not enforced by governmental authorities due to commercial and business pressure, economic conditions or otherwise, it could have a material adverse effect on our business, operating results, financial condition and long-term prospects.

If we are unable to manage our expected growth, our business may be materially and adversely affected.

We expect to expand our operations, including by expanding our internal resources, making acquisitions and entering into new markets, and we intend to continue to focus on rapid growth, including organic growth and additional acquisitions. The growth of our business could place significant strain on our management, operational and financial resources. To manage our future growth, we could be required to improve existing or implement new operational or financial systems, procedures and controls or expand, train and manage a growing employee base. Our failure to accomplish any of these tasks could materially and adversely affect our business. Even if we are successful in integrating future acquisitions into our existing operations, we may not derive the benefits, such as operational or administrative synergies, that we expected from such acquisitions, which may result in the investment of our capital resources without realizing the expected returns on such investment. We also may not recognize the anticipated benefits of completed dispositions or other divestitures we may pursue in the future.

We face constant changes in governmental standards by which our products are evaluated, and if we cannot meet any such changes, some of our products could become obsolete, which could have a material adverse effect on our business.

We believe that, due to the intencifying focus on the environment and clean air and water standards throughout the world, new requirements in the future to adhere to more stringent regulations are possible as governmental agencies seek to improve standards required for certification of products intended to promote clean air and water. In the event our products fail to meet these evolving standards, some or all of our products may become obsolete, which could have an adverse effect on our business, operating results, financial condition and long-term prospects.

Our inability to protect our intellectual property rights could negatively affect our business and results of operations.

Our ability to compete effectively depends in part upon developing, maintaining and/or protecting intellectual property rights relevant to our re-crystallized silicon carbide product forms, applications and manufacturing processes. We rely principally on a combination of patent protection, trade secret laws, confidentiality and non-disclosure agreements, and trusted business relationships to establish, maintain and protect the intellectual property rights relevant to our business. These measures, however, may not be adequate in every given case to permit us to gain or retain any competitive advantage, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States. In particular, because silicon carbide is a well-known material (developed over 100 years ago), and there has been extensive research, development and publication related to this material and its wide range of applications, obtaining intellectual property rights to key elements of silicon carbide technology can be challenging. Accordingly, at least some of the technology employed in our manufacture of re-crystallized silicon carbide products is not protected by patents.

Where we consider it appropriate, we seek patent protection in the United States and other countries on technologies used in, or relating to, our re-crystallized silicon carbide product forms, applications and manufacturing processes. The issuance of a patent is not conclusive as to its scope, validity and enforceability. Thus, any patent or patent application which may issue into a patent held by us could be challenged, invalidated or held unenforceable in litigation or proceedings before the U.S. Patent and Trademark Office and/or other patent tribunals or circumvented by others. No consistent policy regarding the breadth of patent claims has emerged to date in the United States, and the landscape could become more uncertain in view of future rule changes by the United States Patent and Trademark Office, the introduction of patent reform legislation and decisions in patent law cases by United States federal courts. The patent landscape outside the United States is even less predictable. As a result, the validity and enforceability of patents cannot be predicted with certainty. In addition, we may fail to apply for patents on important technologies or product candidates in a timely fashion, if at all, and our existing and future patents may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products or technologies, especially given the long history of silicon carbide development.

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Our patent strategy involves complex legal and factual questions. Our ability to maintain and solidify our proprietary technology may depend in part upon our success in obtaining patent rights and enforcing those rights once granted or licensed. We do not know whether any of our pending patent applications will result in the issuance of any patents. Our issued patents and those that may be issued in the future may be challenged, invalidated, rendered unenforceable or circumvented, which could limit our ability to prevent competitors from marketing similar or related products, or shorten the term of patent protection that we may have for our products, processes and enabling technologies. In addition, the rights granted under any issued patents may not provide us with competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies, duplicate technology developed by us or otherwise possess intellectual property rights that could limit our ability to manufacture our products and operate our business.

We also rely on trade secret protection for our confidential and proprietary information. Trade secrets, however, can be difficult to protect. We may not be able to maintain our technology or know-how as trade secrets, and competitors may develop or acquire equally valuable or more valuable technology or know-how related to the manufacture of comparable silicon carbide products. We also seek to protect our confidential and proprietary information, in part, by requiring all employees, consultants and business partners to execute confidentiality and/or nondisclosure agreements upon the commencement of any employment, consulting arrangement or engagement with us. These agreements generally require that all confidential and proprietary information developed by the employee, consultant, or business partner, or made known to the employee, consultant or business partner by us, during the course of the relationship with us, be kept confidential and not disclosed to third parties. These agreements may be breached and may not provide adequate remedies in the event of breach. To the extent that our employees, consultants, or business partners use intellectual property owned by others in their work for and/or with us, disputes could arise as to the rights in related or resulting technologies, know-how or inventions. Moreover, while we also require customers and vendors to execute agreements containing confidentiality and/or nondisclosure provisions, we may not have obtained such agreements from all of our customers and vendors. In addition, our trade secrets may otherwise become known or be independently discovered by competitors, customers, or vendors. Such customers or vendors may also be subject to laws and regulations that require them to disclose information that we would otherwise seek to keep confidential.

Moreover, others may independently develop and obtain patents covering technologies that are similar or superior to the product forms, applications, or manufacturing processes that we employ. If that happens, we may need to obtain licenses for these technologies and may not be able to obtain licenses on reasonable terms, if at all, which could limit our ability to manufacture our future products and operate our business. In addition, third parties could utilize our intellectual property rights in territories where we do not have intellectual property protection. Such third parties may then try to import products made using our intellectual property rights into the United States or other countries, which could have a material adverse effect on our business.

Our contracts with third parties could negatively affect our intellectual property rights.

To further our product development efforts, we continue to work closely with customers, the Danish government and other third parties to research and develop advancements in silicon carbide product forms, applications, manufacturing processes and related products and technologies. We have entered into agreements with private third parties and have been awarded a research and development contract with the Danish government to independently and jointly research, design and develop new devices and systems that incorporate our silicon carbide technologies. We expect to enter into similar private agreements and be awarded similar government contracts in the future. In some instances, the research and development activities that we conduct under these contracts may produce intellectual property to which we may not have ownership or exclusive rights and will be unable to protect or monetize. Furthermore, there could be disputes between us and a private third party as to the ownership rights to any inventions that we develop in collaboration with such third party. Any such dispute may cause us to incur substantial costs and could place a significant strain on our financial resources, divert the attention of management from our core business or harm our reputation.

We could become subject to intellectual property litigation that could be costly, limit or cancel our intellectual property rights, divert time and efforts away from business operations, require us to pay damages and/or otherwise have an adverse material impact on our business.

The success of our business is highly dependent on protecting our intellectual property rights. Unauthorized parties may attempt to copy or otherwise obtain and use our products and/or enabling technologies. Policing the unauthorized use of our intellectual property rights is difficult and expensive, as is enforcing these rights against unauthorized use by others. Identifying unauthorized use of our intellectual property rights is difficult because we may be unable to monitor the processes and/or materials being employed by other parties. The steps we have taken may not prevent unauthorized use of our intellectual property rights, particularly in foreign countries where enforcement of intellectual property rights may be more difficult than in the United States.

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Our continued commercial success will also depend in part upon not infringing the patents or violating the intellectual property rights of third parties. We are aware of patents and patent applications generally relating to aspects of our technologies filed by, and issued to, third parties. Nevertheless, we cannot determine with certainty whether such patents or patent applications of other parties may materially affect our ability to conduct our business. There may be existing patents of which we are unaware that we may inadvertently infringe, resulting in claims against us or our customers. In the event that the manufacture, use and/or sale of our products or processes is challenged, or if our product forms or processes conflict with the patent rights of others, third parties could bring legal actions against us or our customers in the United States, Europe or other countries, claiming damages and seeking to enjoin the manufacturing and/or marketing of our products. Additionally, it is not possible to predict with certainty what patent claims may issue from any relevant third-party pending patent applications. Third parties may be able to obtain patents with claims relating to our product forms, applications and/or manufacturing processes which they could attempt to assert against us or our customers.

In either case, litigation may be necessary to enforce, protect or defend our intellectual property rights or to determine the validity and scope of the intellectual property rights of others. Any litigation could be unsuccessful, cause us to incur substantial costs, divert resources and the efforts of our personnel away from daily operations, harm our reputation and/or result in the impairment of our intellectual property rights. In some cases, litigation may be threatened or brought by a patent holding company or other adverse patent owner who has no relevant product revenues and against which our patents may provide little or no deterrence. If we are found to infringe any patents, we could be required to (1) pay substantial monetary damages, including lost profits, reasonable royalties and/or treble damages if an infringement is found to be willful and/or (2) totally discontinue or substantially modify any products or processes that are found to be in violation of another party’s intellectual property rights. If our competitors are able to use our technology without payment to us, our ability to compete effectively could be harmed.

We face competition and technological advances by competitors, which could adversely affect the sales of our products.

The growth of our Company depends in part on maintaining and growing the sales of our current products in existing and new markets, but also in developing new products and technologies. There is significant competition among companies that provide solutions for pollutant emissions from diesel engines and water purification solutions. Several companies market products that compete directly with our products. Other companies offer products that potential customers may consider to be acceptable or superior alternatives to our products and services, including products that are verified by the Environmental Protection Agency or other environmental authorities. We face direct competition from companies with greater financial, technological, manufacturing and personnel resources. Newly developed products could be more effective and cost-efficient than our current or future products.

Failure to obtain adequate supplies of raw materials or failure to obtain raw materials at affordable prices could negatively affect our ability to supply products to our customers and negatively affect our profit margins.

We use silicon carbide, steel, plastic, platinum and palladium in the manufacture of our products. As other industries develop products utilizing silicon carbide, we may not be able to obtain adequate supplies of silicon carbide required for the manufacture of our existing and future products that would prevent us from supplying products to our customers and materially affect our business. Furthermore, any increased demand for, the raising of tariff rates on, or an increase of non-tariff trade barriers that apply to silicon carbide, steel, plastic, platinum or palladium could increase the price we must pay to obtain it and could adversely affect our profitability, which would have an adverse effect on our financial results.

We may rely on sub-contractors to meet current demand for our products, and we may need to obtain additional manufacturing capacity in order to increase production of our existing products or to produce our proposed new products, the failure of which could have a material adverse effect on our operations.

We may not have sufficient internal manufacturing capacity to meet the current demand for our products, and we may need to rely on subcontractors to enable us to meet this demand. Since we may rely on our subcontractors for a significant amount of our production capacity, the loss of the services of our subcontractors would have a material adverse effect on our business. Our plans for the growth of our business rely upon increasing sales of our existing products and systems and developing and marketing new products. We may not have adequate internal manufacturing facilities to substantially increase production of our products and obtaining additional manufacturing capacity in-house could require substantial capital expenditures. We may not have the capital resources to obtain or construct new facilities to expand manufacturing capacity and meet increasing demand for our products, which could have a material adverse effect on our operations. Conversely, any significant decrease in demand for our products could create idle plant capacity and an inability to cover fixed costs, which could adversely impact our results of operations and financial condition.

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Foreign currency fluctuations could adversely impact financial performance.

Our reporting currency is the United States Dollar ($). Because of our activities in Denmark, the European Continent and other countries, we are exposed to fluctuations in foreign currency rates. Most income and expense related transactions are denominated in other currencies than the reporting currency and further all excess cash balances are either held in other currencies than the reporting currency or in bank accounts outside the United States causing risks of currency fluctuations when translating balances to the official currency rate at the end of the reporting period. We may manage the risk to such exposure by entering foreign currency futures and option contracts; however, we can make no assurance that such actions will be sufficient to offset a material adverse effect on our operations in the future. As at December 31, 2020 and 2019 we have not entered into any derivate contracts to hedge our currency exposure.

Any liability for environmental harm or damages resulting from technical faults or failures of our products could be substantial and could materially adversely affect our business and results of operations.

Customers rely upon our products to meet emissions control standards imposed upon them by the government. Failure of our products to meet such standards could expose us to claims from customers. Our products are also integrated into goods used by consumers, and therefore a malfunction or the inadequate design of our products could result in product liability claims. Any liability for environmental harm or damages resulting from technical faults or failures could be substantial and could materially adversely affect our business and results of operations. In addition, a well-publicized actual or perceived problem could adversely affect the market’s perception of our products, which would materially impact our financial condition and operating results.

We could become liable for damages resulting from our manufacturing activities, which could have a material adverse effect on our business or cause us to cease operations.

The nature of our manufacturing operations exposes us to potential claims and liability for environmental damage, personal injury, loss of life and damage to, or destruction of, property. Our manufacturing operations are subject to numerous laws and regulations that govern environmental protection and human health and safety. These laws and regulations have changed frequently in the past and it is reasonable to expect additional and more stringent changes in the future. Our manufacturing operations may not comply with future laws and regulations, and we may be required to make significant unanticipated capital and operating expenditures to bring our operations within compliance with such evolving regulations. If we fail to comply with applicable environmental laws and regulations, manufacturing guidelines, and workplace safety requirements, governmental authorities may seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits, and private parties may seek damages from us. Under such circumstances, we could be required to curtail or cease operations, conduct site remediation or other corrective action, or pay substantial damage claims for which may not have sufficient or any insurance coverage for claims.

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A significant portion of our assets and the majority of our officers and some of our directors are located outside of the United States, and therefore it may be difficult for an investor to enforce within the United States any judgments obtained against us or such officers and directors.

A significant portion of our assets are located outside of the United States. In addition, the majority of our officers and some of our directors are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for an investor to affect service of process or enforce within the United States any judgments obtained against us or such officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. In addition, there is uncertainty as to whether the courts of other jurisdictions would recognize or enforce judgments of United States courts obtained against us or our directors and officers predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in other jurisdictions against us, or such officers and directors predicated upon the securities laws of the United States or any state thereof.

We have entered into a joint venture arrangement and may engage in additional collaborations, joint ventures, or strategic alliances in the future, and we may not realize the benefits of such arrangements.

Our subsidiary, LiqTech Water Projects, has entered into a joint venture agreement to supply and operate water treatment systems for oil and gas producers in the Middle East with a local company. LiqTech Water Projects expects to deliver technological know-how, design of water treatment systems and components to support potential projects in the Middle East. The joint venture will be established in the form of a jointly owned limited liability company incorporated under the laws in the local country, and LiqTech Water Projects will hold 49% of the shares. All profits of the company are to be allocated proportional to the ownership share and none of the parties are liable for the company’s liabilities towards third parties.

Additionally, from time to time, we may enter into other joint ventures with other entities. Establishment of a joint venture involves significant risks and uncertainties, including (i) our ability to cooperate with our local partner, (ii) our local partner having economic, business, or legal interests or goals that are inconsistent with ours, and (iii) the potential that our local partner may be unable to meet its economic or other obligations, which may require us to fulfill those obligations alone. In any joint venture we engage in, we will rely on our local partner for the implementation of much of any such joint venture operation, and the success of any such operation is thus not entirely within our control. Any failure or perceived failure of a joint venture may have a material impact on our operations and financial condition.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting.

Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to assess the effectiveness of our internal control over financial reporting and to disclose in our filing if such controls were unable to provide assurance that a material error would be prevented or detected in a timely manner. We have an ongoing program to review the design of our internal controls framework in keeping with changes in business needs, implement necessary changes to our controls design and test the system and process controls necessary to comply with these requirements. If in the future, our internal controls over financial reporting are determined to be not effective resulting in a material weakness or significant deficiency, investor perceptions regarding the reliability of our financial statements may be adversely affected which could cause a decline in the market price of our stock and otherwise negatively affect our liquidity and financial condition.

In Item 9A, we disclose that, with respect to the standards of Sarbanes-Oxley Section 404 and the internal controls standard to which we are subjected, we reported material weaknesses in our internal controls over financial reporting. For additional information on this item, please see Item 9A. Controls and Procedures.

Although we believe our historical efforts have strengthened our internal control over financial reporting (and we concluded that our financial statements were reliable, notwithstanding the material weakness we reported), we cannot be certain that our revised internal control practices will ensure that we will have or maintain adequate internal control over financial reporting in future periods. Any failure to have or maintain such internal controls could adversely impact our ability to report our financial results accurately and on a timely basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations.

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We may have risks associated with security of our information technology systems.

We make significant efforts to maintain the security and integrity of our information technology systems and data. Despite significant efforts to create security barriers to such systems, it is virtually impossible for us to entirely mitigate this risk. There is a risk of industrial espionage, cyber-attacks, misuse or theft of information or assets, or damage to assets by people who may gain unauthorized access to our facilities, systems, or information. Such cybersecurity breaches, misuse, or other disruptions could lead to the disclosure of confidential information; improper usage and distribution of our intellectual property; theft, manipulation, and destruction of private and proprietary data; and production downtimes. Although we actively employ measures to prevent unauthorized access to our information systems, preventing unauthorized use or infringement of our rights is inherently difficult. These events could adversely affect our financial results and any legal action in connection with any such cybersecurity breach could be costly and time-consuming and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, we must frequently expand our internal information system to meet increasing demand in storage, computing and communication, which may result in increased costs. Our internal information system is expensive to expand and must be highly secure due to the sensitive nature of our customers’ information that we transmit. Building and managing the support necessary for our growth places significant demands on our management and resources. These demands may divert such resources from the continued growth of our business and implementation of our business strategy.

RISKS RELATED TO OUR COMMON STOCK

Future equity financings or convertible debt would dilute your ownership and could adversely affect your common stock ownership rights in comparison with those of other security holders.

Our board of directors has the power to issue additional shares of common or preferred stock without stockholder approval. In general, stockholders do not have preemptive rights to any common stock issued by us in the future; therefore, stockholders may experience additional dilution of their equity investment if we issue additional shares of common stock in the future, including shares issuable under equity incentive plans, or if we issue securities that are convertible into shares of our common stock.

If additional funds are raised through the issuance of equity or convertible debt securities, the percentage of ownership of our existing stockholders will be reduced, and such newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we issue additional common stock or securities convertible into common stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. In addition, such stock issuances might result in a reduction of the market value of our common stock, which could make our stock unattractive to existing stockholders.

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Provisions in our articles of incorporation and bylaws could discourage a change in control, or an acquisition of us by a third party, even if the acquisition would be favorable to you, thereby adversely affecting existing stockholders.

Our articles of incorporation and bylaws contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our Company, even when these attempts may be in the best interests of stockholders. For example, our articles of incorporation authorize our Board of Directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests.

There is limited trading volume of our common stock, which could make it difficult for you to liquidate an investment in our common stock in a timely manner.

Since April 16, 2019, our common stock has been traded on Nasdaq Capital Market under the ticker LIQT. Because there is limited volume in our common stock, investors may not be able to liquidate their investments when they desire to do so.

In addition, if we fail to meet the criteria set forth in SEC and Nasdaq Capital Market rules and regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity.

If securities analysts do not publish research or reports about our business or if they downgrade us or our sector, the price of our common stock could decline.

The trading market for our common stock will depend in part on research and reports that industry or financial analysts publish about us or our business. Furthermore, if one or more of the analysts who cover us downgrades us, the industry in which we operate, or the stock of any of our competitors, the price of our common stock may decline. If one or more of these analysts ceases coverage altogether, we could lose visibility, which could also lead to a decline in the price of our common stock.

The market price of our common stock has been and may continue to be volatile.

The market price of our common stock has been volatile and fluctuates widely in response to various factors that are beyond our control. The price of our common stock is not necessarily indicative of our operating performance or long-term business prospects. In addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. Factors such as the following could cause the market price of our common stock to fluctuate substantially:

• the underlying price of the commodities that affect our key markets of industrial water filtration, marine, and oil and gas;

• announcements of capital budget changes by major customers;

• the introduction of new products by our competitors;

• announcements of technology advances by us or our competitors;

• current events affecting the political and economic environment in the United States, Europe or Asia;

• conditions or industry trends, including demand for our products, services and technological advances;

• changes to financial estimates by us or by any securities analysts who might cover our stock;

• additions or departures of our key personnel;

• government regulation of our industry;

• seasonal, economic, or financial conditions;

• our quarterly operating and financial results; or

• litigation or public concern about the safety of our products; or

• the effect of COVID-19.

The realization of any of these risks and other factors beyond our control could cause the market price of our common stock to decline significantly. In particular, the market price of our common stock may be influenced by changes in governmental regulations regarding diesel particles emissions and marine wastewater because demand for our products and services is closely related to those regulations. The stock market in general experiences, from time to time, extreme price and volume fluctuations. Periodic and/or continuous market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility may be worse if the trading volume of our common stock is low.

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Future sales of our common stock, or the perception that future sales may occur, may cause the market price of our common stock to decline.

If any significant number of our outstanding shares are sold, such sales could have a depressive effect on the market price of our stock. We are unable to predict the effect, if any, that the sale of shares, or the availability of shares for future sale, will have on the market price of the shares prevailing from time to time. Sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could depress prevailing market prices for the shares. Such sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we deem appropriate.

The Company is considered a “smaller reporting company” and is exempt from certain disclosure requirements, which could make our common stock less attractive to potential investors.

Rule 12b-2 of the Securities Exchange Act of 1934 ("Exchange Act") defines a “smaller reporting company” as an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent, that is not a smaller reporting company, and that:

| ● | Had a public float of less than $250 million as of the last business day of its most recently completed second fiscal quarter, computed by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity; or
| ● | In the case of an initial registration statement under the Securities Act or Exchange Act for shares of its common equity, had a public float of less than $250 million as of a date within 30 days of the date of the filing of the registration statement, computed by multiplying the aggregate worldwide number of such shares held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of such shares included in the registration statement by the estimated public offering price of the shares; or
| ● | In the case of an issuer whose public float as calculated under paragraph (1) or (2) of this definition was zero, had annual revenues of less than $100 million during the most recently completed fiscal year for which audited financial statements are available.

As a “smaller reporting company,” we are not required and may not include a Compensation Discussion and Analysis section in our proxy statements; we provide only three years of business information; provide fewer years of selected financial data; and have other “scaled” disclosure requirements that are less comprehensive than issuers that are not “smaller reporting companies,” which could make our stock less attractive to potential investors and could make it more difficult for shareholders to sell their shares.

We have no current plan to pay dividends on our common stock, and investors may lose the entire amount of their investment.

We have no current plans to pay dividends on our common stock; therefore, investors will not receive any funds absent a sale of their shares. We cannot assure investors of a positive return on their investment when they sell their shares, nor can we assure that investors will not lose the entire amount of their investment.

GENERAL RISK FACTORS

We will continue to incur significant costs as a result of operating as a public company, and our management may be required to devote substantial time to compliance initiatives that ultimately could have a material adverse effect on our financial condition and results of operations.

As a public company, we expect to continue to incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC, have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls as well as mandating certain corporate governance practices. Our management and other personnel will continue to devote a substantial amount of time and financial resources to these compliance initiatives.

Effective January 1, 2018, we are no longer an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, and as such we may no longer take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, such as exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. This increased burden will further increase our compliance burden. As a “smaller reporting company” we are still able to take advantage of certain exceptions available to both emerging growth companies and smaller reporting companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and the exemption from providing a “Compensation Discussion and Analysis” section in our proxy statements; providing only three years of business information; and other “scaled” disclosure requirements that are less comprehensive than issuers that are not smaller reporting companies.

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If we fail to staff our accounting and finance function adequately or maintain internal control systems adequate to meet the demands that are placed upon us as a public company, we may be unable to report our financial results accurately or in a timely manner and our business and stock price may suffer. The costs of being a public company, as well as diversion of management’s time and attention, may have a material adverse effect on our future business, financial condition and results of operations.

Our actual or perceived failure to adequately protect personal data could adversely affect our business, financial condition and results of operations.

A wide variety of provincial, state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data. These privacy- and data protection-related laws and regulations are evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. Further, our legal and regulatory obligations in foreign jurisdictions are subject to unexpected changes, including the potential for regulatory or other governmental entities to enact new or additional laws or regulations, to issues rulings that invalidate prior laws or regulations, or to increase penalties significantly. Compliance with these laws and regulations can be costly and can delay or impede the development and offering of new products and services.

For example, the General Data Protection Regulation, which became effective in May 2018, imposes more stringent data protection requirements, and provides for significantly greater penalties for noncompliance, than the European Union laws that previously applied. Additionally, California recently enacted legislation, the California Consumer Privacy Act, which became effective January 1, 2020. We may also be subject to additional obligations relating to personal data by contract that industry standards apply to our practices. Our actual or perceived failure to comply with applicable laws and regulations or other obligations to which we may be subject relating to personal data, or to protect personal data from unauthorized access, use, or other processing, could result in enforcement actions and regulatory investigations against us, claims for damages by customers and other affected individuals, fines, damage to our reputation, and loss of goodwill, any of which could have a material adverse effect on our operations, financial performance, and business. Further, evolving and changing definitions of personal data and personal information, including the classification of IP addresses, machine identification information, location data, and other information, may limit or inhibit our ability to operate or expand our business, including limiting business relationships and partnerships that may involve the sharing or uses of data, and may require significant costs, resources, and efforts in order to comply.

Changes in U.S. Generally Accepted Accounting Principles (“GAAP”) could adversely affect our financial results and may require significant changes to our internal accounting systems and processes.

We prepare our consolidated financial statements in conformity with GAAP. These principles are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC and various bodies formed to interpret and create appropriate accounting principles and guidance. The FASB periodically issues new accounting standards on a variety of topics. For information regarding new accounting standards, please refer to Note 1, “Description of Business and Significant Accounting Policies – Recent Accounting Pronouncements,” of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. These and other such standards generally result in different accounting principles, which may significantly impact our reported results or could result in variability of our financial results.

In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.

We make assumptions, judgments and estimates for a number of items, including the fair value of financial instruments, goodwill, long-lived assets and other intangible assets; the realizability of deferred tax assets; the recognition of revenue and the fair value of stock awards; and others. We also make assumptions, judgments and estimates in determining the accruals for employee-related liabilities, including commissions and variable compensation, and in determining the allowance or provisions for uncertain tax positions, doubtful accounts, excess or obsolete inventory, and legal contingencies. These assumptions, judgments and estimates are drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the consolidated financial statements. Actual results could differ materially from our estimates, and such differences could significantly impact our financial results.

Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.

In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists frequently propose to involve themselves in the governance, strategic direction and operations of the Company. Such proposals may disrupt our business and divert the attention of our Board of Directors, management and employees, and any perceived uncertainties as to our future direction resulting from such a situation could result in the loss of potential business opportunities, interfere with our ability to execute our strategic plan, be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel and business partners, all of which could adversely affect our business. A proxy contest for the election of directors at our annual meeting could also require us to incur significant legal fees and proxy solicitation expenses. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

Item 1B. | Unresolved Staff Comments

None.

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Item 2. | Properties

Our corporate headquarters are located at Industriparken 22C, 2750 Ballerup, Denmark. We lease approximately 67,000 square feet at our Ballerup location, of which approximately 10,000 square feet is used for office space and 57,000 square feet is used for production. The lease will expire on August 31, 2024. We also conduct operations at Benshøj Industrivej 24, 9500 Hobro, Denmark where we lease approximately 45,750 square feet, of which approximately 10,750 square feet is used for office space and 35,000 square feet is used for production. The lease will expire on November 30, 2034. Other operations are located at Sindalsvej 38-40, Risskov, Denmark where we lease approximately 19,500 square feet, of which approximately 2,200 square feet is used for office space and 17,300 square feet is used for production. The leases will expire on August 31, 2024.

Item 3. | Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business: Please reference Note 7 - Agreements, commitments and contingencies for details on such litigation.

Item 4. | Mine Safety Disclosures.

Not applicable.

Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is currently quoted on the Nasdaq Capital Market under the symbol LIQT.

As of December 31, 2020, there were approximately 30 stockholders of record of our common stock as reported by our transfer agent, one of which is Cede & Co., a nominee for Depository Trust Company (“DTC”). All of the shares of common stock held by brokerage firms, banks, and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC and are therefore considered to be held of record by Cede & Co. as one stockholder.

Subject to Nevada law, our Board of Directors will determine the payment of future dividends on our common stock, if any, and the amount of any dividends in light of:

| ● | any contractual restrictions limiting our ability to pay dividends that may be applicable at such time;
| ● | our earnings and cash flow;
| ● | our capital requirements;
| ● | our financial condition; and
| ● | other factors that our Board of Directors deems relevant.

Item 6. | Selected Financial Data

We are not required to provide selected financial data disclosures because we are a smaller reporting company.

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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a Nevada corporation, formerly named Blue Moose Media, Inc. In October 2011, we changed our name to LiqTech International, Inc. For more than two decades we have developed and provided state-of-the-art technologies for gas and liquid purification using silicon carbide ceramic filters, particularly highly specialized filters for the control of soot exhaust particles from diesel engines and for liquid filtration. Using nanotechnology, LiqTech develops products using proprietary silicon carbide technology. LiqTech's products are based on unique silicon carbide membranes that facilitate new applications and improve existing technologies. In particular, the Company has developed a new standard of water filtration technology to meet the ever-increasing demand for higher water quality. By incorporating LiqTech's SiC liquid membrane technology with its long-standing systems design experience and capabilities, the Company offers solutions to the most difficult water pollution problems.

Acquisition of BS Plastic

On August 31, 2019, the Company, through its subsidiary, LiqTech Holding, completed the acquisition of all of the issued and outstanding capital stock (the "Shares") of BS Plastic A/S, from JS Holding Risskov A/S, a Danish company ("JS Holding") controlled by Steen Simonsen. In consideration for the Shares, JS Holding received cash consideration in the amount of DKK 9,000,000, or approximately $1,332,090 (at the exchange rate on August 31, 2019). Further JS Holding was entitled to an additional DKK 6,000,000 or $888,060 (at the exchange rate on August 31, 2019) if certain financial targets are met with DKK 2,000,000 ($296,020) for the period July 2019 to June 2020, DKK 2,000,000 ($296,020) for the period July 2020 to June 2021 and DKK2,000,000 ($296,020) for the period July 2021 to June 2022. In July 2020 it was agreed between LiqTech Holding and JS Holding that the contingent earn-out was replaced by fixed and final agreement to pay DKK 2,000,000 in July 2020 and DKK 2,000,000 in July 2021 without any conditions.

2020 Developments

On January 2, 2020 the Company announced the successful installation of a new customized furnace for use in the manufacture of the Company’s proprietary silicon carbide membrane filters. The new furnace has throughput that will more than triple the Company’s existing furnace capacity due to its size and efficiency.

On May 21, 2020 the Company announced that it had entered into a definitive securities purchase agreement with certain institutional investors. The Private Placement consisted of common stock and pre-funded warrants totaling 1.6 million shares issued to the investors at $5.00 per share, resulting in aggregate gross proceeds of $8 million to the Company.

On August 26, 2020 the Company announced the appointment of Richard Meeusen to its Board of Directors.

On November 9, 2020 the Company announced the launch of its next-generation membrane with a pore size of 60 nanometers.

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Results of Operations

Results of Operations for the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

The following table sets forth our revenues, expenses and net income for the year ended December 31, 2020 and 2019 in U.S. dollars, except for percentages.

|  | For the Year Ending December 31, |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Period to Period Change |
|  | 2020 |  |  | As a % of Sales |  |  | 2019 |  |  | As a % of Sales |  |  | $ |  |  | Percent % |
Revenue |  |  | 22,526,201 |  |  |  | 100.0 |  |  |  | 32,637,484 |  |  |  | 100.0 | % |  |  | (10,111,283 | ) |  |  | (31.0 | )%
Cost of Goods Sold |  |  | 20,379,519 |  |  |  | 90.5 |  |  |  | 25,475,170 |  |  |  | 78.1 |  |  |  | (5,095,651 | ) |  |  | (20.0 | )
Gross Profit |  |  | 2,146,882 |  |  |  | 9.5 |  |  |  | 7,162,314 |  |  |  | 21.9 |  |  |  | (5,015,632 | ) |  |  | (70 | )
Operating Expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling expenses |  |  | 2,918,418 |  |  |  | 13.0 |  |  |  | 2,426,971 |  |  |  | 7.4 |  |  |  | 491,447 |  |  |  | 20.2 |
General and administrative expenses |  |  | 6,205,040 |  |  |  | 27.5 |  |  |  | 4,563,216 |  |  |  | 14.0 |  |  |  | 1,641,824 |  |  |  | 36.0 |
Research and development expenses |  |  | 1,278,331 |  |  |  | 5.7 |  |  |  | 749,249 |  |  |  | 2.3 |  |  |  | 529,082 |  |  |  | 70.6 |
Total Operating Expenses |  |  | 10,401,789 |  |  |  | 46.2 |  |  |  | 7,739,436 |  |  |  | 23.7 |  |  |  | 2,662,353 |  |  |  | 34.4 |
Loss from Operations |  |  | (8,255,107 | ) |  |  | (36.6 | ) |  |  | (577,122 | ) |  |  | (1.8 | ) |  |  | (7,677,985 | ) |  |  | 1,330.4 |
Other Income (Expense) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gain on modification of earn-out liability |  |  | 306,073 |  |  |  | 1.4 |  |  |  | - |  |  |  | - |  |  |  | 306,077 |  |  |  | - |
Interest and other income |  |  | 139,513 |  |  |  | 0.6 |  |  |  | 73,635 |  |  |  | 0.2 |  |  |  | 65,878 |  |  |  | 89.5 |
Interest expense |  |  | (120,903 | ) |  |  | (0.5 | ) |  |  | (18,831 | ) |  |  | (0.1 | ) |  |  | (102,072 | ) |  |  | 542.0 |
Fair value adjustment of warrants |  |  | (901,250 | ) |  |  | (4.0 | ) |  |  | - |  |  |  | - |  |  |  | (901,250 | ) |  |  | - |
Gain (Loss) on currency transactions |  |  | (1,469,607 | ) |  |  | (6.5 | ) |  |  | 285,742 |  |  |  | 0.9 |  |  |  | (1,755,349 | ) |  |  | (614.3 | )
Gain (Loss) on sale of fixed assets |  |  | 27,772 |  |  |  | 0.1 |  |  |  | (21,060 | ) |  |  | (0.1 | ) |  |  | 48,832 |  |  |  | (231.9 | )
Total Other Income (Expense) |  |  | (2,018,398 | ) |  |  | (9.0 | ) |  |  | 319,486 |  |  |  | 1.0 |  |  |  | (2,337,884 | ) |  |  | (731.8 | )
Loss Before Income Taxes |  |  | (10,273,505 | ) |  |  | (45.6 | ) |  |  | (257,636 | ) |  |  | (0.8 | ) |  |  | (10,015,869 | ) |  |  | 3,887.6 |
Income Taxes Provision (Benefit) |  |  | (465,145 | ) |  |  | (2.1 | ) |  |  | (297,252 | ) |  |  | (0.9 | ) |  |  | (167,893 | ) |  |  | 56.5 |
Net Income/(Loss) |  |  | (9,808,360 | ) |  |  | (43.5 | ) |  |  | 39,616 |  |  |  | 0.1 |  |  |  | (9,847,976 | ) |  |  | (24,858.7 | )

Revenues

Revenue for the year ended December 31, 2020 was $22,526,201 compared to $32,637,484 for the same period in 2019, representing a decrease of $10,111,283, or 31%. The change in revenue consists of a decrease in sales of liquid filters and water treatment systems of $11,316,772 and in sales of DPFs of $520,794, offset by an increase in sales of plastics of $1,752,162. The decrease in sales of liquid filters and water treatment systems is a result of the negative impact of the ongoing COVID-19 pandemic, which has resulted in significant restrictions and business limitations across the globe and caused a substantial decline in the demand and delivery of water treatment systems for the marine scrubber industry. The demand for our DPFs also decreased in the period, but we see increased interest in environmental solutions to reduce global CO2-emissions. The increase in sales of plastic components is related to the business acquired in September 2019.

Gross Profit

Gross profit for the year ended December 31, 2020 was $2,146,682 compared to $7,162,314 for the same period in 2019, representing a decrease of $5,015,632, or approximately 70%. The decrease in gross profit is due to the decline in sales of liquid filters and water treatment systems where sales command a higher gross margin. Gross profit was further impaired by increased costs related to decisions made prior to the impact of COVID-19, where the Company had invested in the expansion and improvement of production facilities along with additional employees. Further the initial effect of closing our activities in North America has resulted in a write-off of inventory, equipment, and other items in the amount of $450,000, which has been expensed in the current period. Included in the gross profit for the year ended December 31, 2020 is depreciation of $2,204,917 compared to $1,131,008 for the same period in 2019, reflecting the increased investment in production capacity.

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Expenses

Total operating expenses for the year ended December 31, 2020 were $10,401,789, representing an increase of $2,662,353, or approximately 34%, compared to $7,739,436 for the same period in 2019.

Selling expenses for the year ended December 31, 2020 were $2,918,418 compared to $2,426,971 for the same period in 2019, representing an increase of $491,477 or approximately 20%. This change is attributable to the pre COVID-19 decision to hire new sales employees and average number of sales employees therefore increased from 9 in 2019 to 13 in 2020. Other expenses related to the update of the Company’s website and other marketing materials have also resulted in increased selling expenses.

General and administrative expenses for the year ended December 31, 2020 were $6,205,040 compared to $4,563,216 for the same period in 2019, representing an increase of $1,641,824, or 36%. The increase in general and administrative expenses is attributable to the addition of administrative employees, for which the number of employees increased from 16 in 2019 to 22 in 2020. The increase in the number of employees also created additional IT and office costs. As part of the cost reductions implemented after the impact of COVID-19, several employees have exited the Company, and at the end of 2020, the number of administrative employees was back to 16. Included in general and administrative expenses is non-cash compensation expenses of $343,780 and $197,945 for the years ended December 31, 2020 and December 31, 2019, representing an increase of $145,835, or 74%, attributable to stock grants to members of the Board and management.

The following is a summary of our non-cash compensation:

|  | 2020 |  |  | 2019 |
Compensation for vesting of restricted stock awards issued to the Board of Directors |  | $ | 163,224 |  |  | $ | 122,945 |
Compensation for vesting of restricted stock awards issued to management |  |  | 180,556 |  |  |  | 75,000 |
Total Non-Cash Compensation |  | $ | 343,780 |  |  | $ | 197,945 |

Research and development expenses for the year ended December 31, 2020 were $1,278,331 compared to $749,249 for the same period in 2019, representing an increase of $529,082, or 71%. This change is attributable to an increase in the number of employees engaged in research and development activities as the Company focuses on the further development of existing and new products for the marine industry. The average number of employees in Research and development is 14 in 2020 compared to 11 in 2019.

Other income (expenses)

Total Other income (expense) for the year ended December 31, 2020 was $(2,018,398) compared to $319,486 for the comparable period in 2019, representing a decrease of $2,337,884. Included in the net other income (expenses) for the year ended December 31, 2020 is the negative effect of $901,250 resulting from the fair value measurement of the prefunded warrants issued in May 2020. Additionally, the loss on currency transactions due to the negative impact of the USD/DKK exchange rate has impacted net other income (expenses) by $(1,469,607) compared to income of $285,742 in the comparable period, representing a decrease of $1,755,349. Further, net income (expenses) is positively affected by $306,077 relating to the gain on modification of the earn-out agreement with the former owner of LiqTech Plastics A/S (former BS Plastic A/S), where the former owner has agreed to reduce the earn-out consideration from a total of DKK 6 million over three years to a fixed earn-out of DKK 4 million over a period of two years.

Net Income taxes

Net income taxes for the year ended December 31, 2020 was a benefit of $465,145 compared to $297,252 for the comparable period in 2019, representing an increase in benefit of $167,893.

Net Income/(Loss)

Net income/(loss) attributable to the Company for the year ended December 31, 2020 was $(9,808,360) compared to income of $39,616 for the comparable period in 2019, representing a decline of $9,847,976.

This change was primarily attributable to the significant decrease in revenue due to decreased demand for marine scrubbers, higher relative costs of goods sold as a percentage of revenue due to investments in production capacity, and the increase in operating expenses caused primarily by the growth in headcount to support additional sales and production. Further losses on currency translations due to the negative impact of the USD/DKK exchange rate and the negative fair value adjustment related to the prefunded warrant liability have exacerbated the net loss for the period.

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Liquidity and Capital Resources

In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid-March 2020, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who must work at our production facilities. Otherwise, most of our employees worked remotely during the shutdown. At the beginning of May 2020, businesses in Denmark began re-opening as the effect of COVID-19 had largely been contained and the number of infections and fatalities decreased significantly. Since August 2020, however, we again experienced a resurgence in the number of infections and fatalities and the re-introduction of tight restrictions in many countries. Since the start of September 2020, we re-introduced limitations in the number of employees working directly at our production sites. All employees who can work from home are encouraged to do so.

We are unable to predict the full impact that COVID-19 will have on our long-term financial condition, results of operations, liquidity and cash flows due to uncertainties. Our compliance with the measures implemented to avoid the spread of the virus have had a material adverse impact on our financial results since March 2020. To the extent possible, we have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for at least the next 12 months from the issuance of this report. In addition, as a result of the reduced order intake and decreased manufacturing levels, our future gross profit will also likely be unfavorably impacted until such time that we are able to operate our manufacturing facilities at higher capacity levels as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2021.

While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and how our business may be adversely affected as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products, especially if it results in a global recession. It could also lead to limitations in our ability to produce and ship products caused by governmental actions and regulations to contain the spread of the virus.

We have historically satisfied our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. At the filing date, the Company had an available line of credit amounting to DKK 20,000,000 ($3,000,000), which is used for a leasing arrangement and guarantees issued to customers for prepayments and for warranties after delivery.

Additionally, on May 21, 2020, the Company completed a private placement with certain accredited investors pursuant to which the Company issued and sold an aggregate of 1,085,000 shares of common stock, par value $0.001 per share, at a purchase price of $5.00 per share for gross proceeds of $4,662,125, including costs of $762,875 for placement fees, legal fees, auditor fees and other cost related to the capital raise, and a prefunded warrant to purchase an aggregate of 515,000 shares of Common Stock, at a purchase price of $5.00 per share, for gross proceeds of $2,575,000, which together represents total gross proceeds of $7,237,125.

On December 31, 2020, we had cash of $13,264,449 and net working capital of $15,839,992, and at December 31, 2019, we had cash of $9,783,932 and net working capital of $17,155,126. Our net working capital has decreased by $1,315,134 compared to December 31, 2019 primarily related to the decline in revenue resulting in lower receivables and contract assets.

In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or a security bond. For that purpose, we maintain a guaranteed credit line of DKK10,000,000 (approximately $1,500,000). The credit line is secured by a cash deposit of $1,500,000. Further, we have a guarantee for a specific project delivered in 2016 of DKK 94,620 (approximately $15,620 at December 31, 2020) with a bank, subject to certain base limitations. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Systems such as receivables, inventory, and equipment.

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Cash Flows

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Cash used by operating activities is net income (losses) adjusted for certain non-cash items and changes in assets and liabilities. Cash used by operating activities for the year ended December 31, 2020 was $2,598,865, representing an improvement of $1,947,896 compared to cash used by operating activities of $4,546,761 for the year ended December 31, 2019. The cash used by operating activities for the year ended December 31, 2020 consists mainly of the net loss for the year of $(9,808,360) adjusted by depreciations and other non-cash related items of $3,675,322. Further changes in assets and liabilities include decreased accounts receivables of $3,143,651, a decline in contract assets/liabilities of $2,253,077, and an increase in accrued expenses of $1,355,846, off-set by a decrease in accounts payable of $2,006,919.

Net cash used in investing activities was $4,008,521 for the year ended December 31, 2020 as compared to net cash used in investing activities of $3,700,675 for the year ended December 31, 2019, representing an increase of $307,846. The investing activities include the purchase of property and equipment especially related to the installation of new furnaces in Ballerup to increase production capacity. For the year ended December 31, 2019, the investing activities was mainly the initial payment for the acquisition of LiqTech Plastics A/S of $1,154,902 and investments of $2,542,757 made to prepare the installation of new furnaces in Ballerup.

Cash provided by financing activities was $7,216,902 for the year ended December 31, 2020, as compared to cash provided by financing activities of $14,627,470 for the year ended December 31, 2019. This change of $7,410,568 was mainly due to net cash proceeds of $7,237,125 related to the capital raise in May 2020 compared to net proceeds of $14,601,554 from the capital raise in May 2019.

Off Balance Sheet Arrangements

As of December 31, 2020, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in our consolidated financial statements.

Significant Accounting Policies and Critical Accounting Estimates

The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical accounting estimates include:

| ● | The assessment of revenue recognition, which impacts revenue and cost of sales;
| ● | The assessment of allowance for product warranties, which impacts gross margin;
| ● | The assessment of collectability of accounts receivable, which impacts operating expenses when and if we record bad debt or adjust the allowance for doubtful accounts;
| ● | The assessment of recoverability of long-lived assets, which impacts gross margin or operating expenses when and if we record asset impairments or accelerate their depreciation;
| ● | The recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes;
| ● | The valuation of inventory, which impacts gross profit; and
| ● | The recognition and measurement of loss contingencies, which impact gross margin or operating expenses when we recognize a loss contingency, revise the estimate for a loss contingency, or record an asset impairment.

We discuss these policies further below, as well as the estimates and judgments involved.

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Accounts Receivable / Long Term Receivable / Allowance for Doubtful Accounts / Bad Debt

We assess the collectability of accounts receivable and long-term receivable on an ongoing basis and establish an allowance for doubtful accounts when collection is no longer reasonably assured. In establishing the allowance, we consider factors such as known troubled accounts, historical experience, age of receivables, financial and liquidity information that is publicly accessible, and other currently available evidence.

The roll-forward of the allowance for doubtful accounts for the year ended December 31, 2020 and December 31, 2019 was as follows:

|  | 2020 |  |  | 2019 |
Allowance for doubtful accounts at the beginning of the period |  | $ | 612,434 |  |  | $ | 971,772 |
Bad debt expense |  |  | 320,270 |  |  |  | 25,044 |
Receivables written off during the periods |  |  | (484,265 | ) |  |  | (362,244 | )
Effect of currency translation |  |  | 49,605 |  |  |  | (22,138 | )
Allowance for doubtful accounts at the end of the period |  | $ | 498,044 |  |  | $ | 612,434 |

Goodwill and Definite-life intangible assets

The Company accounts for Goodwill and definite-life intangible assets in accordance with provisions of the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles, Goodwill and Other. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of Topic 350. Impairment losses arising from this impairment test, if any, are included in operating expenses in the period of impairment. Topic 350 requires that definite intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with Topic 360, criteria for recognition of an impairment of Long-Lived Assets.

The Company did not record an impairment charge on goodwill during the years ended December 31, 2020 and 2019, as management's estimated fair value of the reporting unit exceeded its carrying value determined during impairment testing in the fourth quarters of 2020 and 2019.

Long-Lived Assets

We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. We measure the recoverability of assets that will continue to be used in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows. If an asset grouping’s carrying value is not recoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is measured by comparing the difference between the asset grouping’s carrying value and its fair value.

Impairments of long-lived assets are determined for groups of assets related to the lowest level of identifiable independent cash flows. Due to our asset usage model and the interchangeable nature of our ceramic filter manufacturing capacity, we must make subjective judgments in determining the independent cash flows that can be related to specific asset groupings. In addition, as we make manufacturing process conversions and other factory planning decisions, we must make subjective judgments regarding the remaining useful lives of assets, primarily process-specific filter manufacturing tools and building improvements. If we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of depreciation over the assets’ new, shorter useful lives.

Management has analyzed the impact of the COVID-19 pandemic on its financial statements as of December 31, 2020 and has determined that the changes to its significant judgements and estimates did not have a material impact with respect to goodwill, intangible assets or long-lived assets. During the years ended December 31, 2020 and 2019, no impairment charge of long-lived assets has been recorded.

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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 new revenue standard did not have a material impact on revenue recognition.

The Company sells products throughout the world; sales by geographical region are as follows:

|  | For the Year Ended December 31 |
|  | 2020 |  |  | 2019 |
United States and Canada |  | $ | 656,032 |  |  | $ | 1,600,298 |
Australia |  |  | 524,255 |  |  |  | 425,560 |
Asia |  |  | 3,372,286 |  |  |  | 5,991,440 |
Europe |  |  | 17,973,628 |  |  |  | 24,620,186 |
|  | $ | 22,526,201 |  |  | $ | 32,637,484 |

The Company’s sales by product line are as follows for the years ended December 31, 2020 and 2019:

|  | For the Year Ended December 31 |
|  | 2020 |  |  | 2019 |
Liquid filters and systems |  | $ | 14,147,842 |  |  | $ | 25,464,614 |
Diesel particulate filters |  |  | 5,131,891 |  |  |  | 5,652,686 |
Plastics components |  |  | 2,647,366 |  |  |  | 895,203 |
Development projects |  |  | 599,102 |  |  |  | 625,981 |
|  | $ | 22,526,201 |  |  | $ | 32,637,484 |

For membranes, diesel particulate filters and plastic components, revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied, which occurs when control of the product transfers to the customer or when services are rendered by the Company. The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and risks and rewards of ownership have transferred to the customer. This generally occurs when the product is shipped or accepted by the customer. Revenue for service contracts is recognized as the services are provided. Revenue is measured as the amount of consideration expected to be received in exchange for transferring the goods or providing services. The satisfaction of performance obligations under the terms of a revenue contract generally gives rise to the right for payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Pre-payments received prior to satisfaction of performance obligations are recorded as a Contract liability. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers.

For contracts with customers that include multiple performance obligations, judgment is required to determine whether performance obligations specified in these contracts are distinct and should be accounted for as separate revenue transactions for recognition purposes. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are generally determined based on the prices charged to customers or using expected cost-plus margin.

System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer, which typically occurs upon shipment of the system in accordance with the terms of the contract. In connection with the system sale, it is normal procedure to issue a FAT (Factory Acceptance Test) stating that the customer has accepted the performance of the system as it is being shipped from our production facility in Hobro. As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer), and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of provision of the commissioning services together with the cost incurred. Part of the invoicing to the customer is also attributed to the commissioning, and at transfer of the control of the system (i.e. the first performance obligation), some of the invoicing will still be awaiting commissioning and is therefore recognized as Contract assets.

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Aftermarket sales represent parts, extended warranties and maintenance services. For the sale of aftermarket parts, the Company transfers control and recognizes revenue when parts are shipped to the customer. When customers are given the right to return eligible parts and accessories, the Company estimates the expected returns based on an analysis of historical experience. The Company adjusts estimated revenues at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. The Company recognizes revenue for extended warranty and maintenance agreements based on the standalone selling price over the life of the contract.

The Company has received long-term contracts for grants from government entities for the development and use of silicon carbide membranes in various water filtration and treatment applications and historically in the installation of various water filtrations systems. We measure transfer of control of the performance obligation on long-term contracts utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs, such as labor and materials. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and a significant factor in the accounting for such performance obligations. The timing of when we bill our customers is generally dependent upon advance billings terms, milestone billings based on completion of certain phases of the work or when services are provided, or products are shipped. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported on our balance sheet as Contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported on our balance sheet as Contract liabilities.

Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract liabilities are payments received from customers prior to satisfaction of performance obligations, and these balances are typically related to prepayments for third-party expenses that are incurred shortly after billing. Contract liabilities also include deferred revenue related to the second performance obligation stated under Revenue Recognition, where the obligation is attributed to the commissioning of the water treatment system.

The roll-forward of Contract assets / liabilities for the period ended December 31, 2020 and December 31, 2019 is as follows:

|  | December 31, 2020 |  |  | December 31, 2019 |
Cost incurred |  | $ | 3,997,161 |  |  | $ | 3,960,199 |
Unbilled project deliveries |  |  | 1,015,977 |  |  |  | 1,971,106 |
VAT |  |  | 446,608 |  |  |  | 862,368 |
Other receivables |  |  | 75,010 |  |  |  | 58,397 |
Prepayments |  |  | (3,112,118 | ) |  |  | (1,732,231 | )
Deferred Revenue |  |  | (866,680 | ) |  |  | (876,286 | )
|  | $ | 1,555,958 |  |  | $ | 4,243,553 |
Distributed as follows: |  |  |  |  |  |  |  |
Contract assets |  | $ | 2,708,136 |  |  | $ | 5,664,929 |
Contract liabilities |  |  | (1,152,178 | ) |  |  | (1,421,376 | )
|  | $ | 1,555,958 |  |  | $ | 4,243,553 |

Income Taxes

We must make estimates and judgments in determining the provision for taxes for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions and in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes in these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that we will ultimately recover the deferred tax assets recorded on our consolidated balance sheets. Should there be a change in our ability to recover our deferred tax assets, however, our tax provision would increase in the period in which we determined that the recovery was not likely. Recovery of a portion of our deferred tax assets is impacted by management's plans and methods of allocating research and development costs to the underlying reporting units.

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The calculation of our tax liabilities involves uncertainties in the application of complex tax regulations in Denmark and the United States. When a tax position is determined uncertain, we recognize liabilities based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. If uncertainties arise, we re-evaluate the tax positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

Inventory

The valuation of inventory requires us to estimate excess or obsolete inventory as well as inventory that is not of saleable quality. The determination of excess or obsolete inventory requires us to estimate the future demand for our products. The estimate of future demand is compared to work-in-process and finished goods inventory levels to determine the amount, if any, of excess or obsolete inventory. As of December 31, 2020, we had total furnace parts and supplies of $471,622, raw materials of $1,955,713, work-in-process inventory of $2,394,481, total finished goods inventory of $1,424,171 and a reserve for obsolescence of $723,949. The estimated future demand is included in the development of our short-term manufacturing plans to enable consistency between inventory valuation and production decisions. Product-specific facts and circumstances reviewed in the inventory valuation process include a review of the customer base, acceptance of the product by the customer and the various environmental authorities, competitor’s products, as well as an assessment of the selling price in relation to the product cost. If our demand forecast for specific products is greater than actual demand, and we fail to reduce manufacturing output accordingly, we could be required to write off inventory, which would negatively impact our gross profit.

In order to determine what costs can be included in the valuation of inventory, we must determine normal capacity at our manufacturing, assembly and test facilities, based on historical production, compared to total available capacity. If the factory production is below the established normal capacity level, a portion of our manufacturing overhead costs would not be included in the cost of inventory, and therefore would be recognized as cost of sales in that period, which would negatively impact our gross profit. We refer to these costs as excess capacity charges. The Company has been operating below capacity and excess capacity charges have been recognized as cost of sales.

Loss Contingencies

We are subject to various legal and administrative proceedings along with asserted and potential claims, accruals related to product warranties and potential asset impairments (loss contingencies) that arise in the ordinary course of business. An estimated loss from such contingencies is recognized as a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a loss contingency is required if there is at least a reasonable possibility that a loss has been incurred. The outcomes of legal and administrative proceedings and claims, and the estimation of product warranties and asset impairments, are subject to significant uncertainty. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. To estimate the losses associated with repairing and replacing parts in connection with product warranty, we make judgments with respect to customer claim rates. At least quarterly, we review the status of each significant matter, and we may revise our estimates. These revisions could have a material impact on our results of operations and financial position.

Item 7A. | Quantitative and Qualitative Disclosures about Market Risk.

We are not required to provide quantitative and qualitative disclosures about market risk because we are a smaller reporting company.

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Item 8. | Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements

| Page
Report of Independent Registered Public Accounting Firm | 33
Consolidated Balance Sheets at December 31, 2020 and 2019 | 35
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 | 37
Consolidated Statement of Comprehensive Income (Loss) for the years ended December 31, 2020 and 2019 | 38
Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2020 and 2019 | 39
Consolidated Statement of Cash Flows for the years ended December 31, 2020 and 2019 | 41
Notes to the Consolidated Financial Statements | 43

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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, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Inventory Costing

As described in Notes 1 and 2 to the consolidated financial statements, the Company uses a standard costing method to value inventory. Management reviews and assesses the standard costing estimates annually or more frequently in the event circumstances indicate a change in cost structure or material variance from actual has occurred. In addition to raw materials and labor, the Company applies a production overhead allocation cost to each item.

We identified the auditing of inventory costing as a critical audit matter because of the significant estimates and assumptions management used in the determination of the standard costing allocation and overhead allocations. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.

Our audit procedures consisted of the following:

| • | Obtaining an understanding and testing management’s process for developing the standard costing model and overhead allocations.

| • | Assessing the accuracy, completeness, and reasonableness of the costs included in the standard costing model and overhead allocation to ensure all costs capitalized were appropriate, complete and proper.

| • | Evaluating the appropriateness and reasonableness of the assumptions used by management to allocate costs to specific costs, including assessing the reasonableness of production times, labor requirement and energy usage.

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

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Revenue Recognition – Contracts with Multiple Performance Obligations

As described in Note 1 to the consolidated financial statements, the Company has some contracts with customers that contain multiple performance obligations. For these contracts, management accounts for individual performance obligations separately if they are distinct. As described by management, management exercises judgment and uses estimates in order to (1) determine whether performance obligations are distinct and should be accounted for separately; (2) determine the standalone selling price of each performance obligation; (3) allocate the transaction price among the various performance obligations on a relative standalone selling price basis; and (4) determine whether revenue for each performance obligation should be recognized at a point in time or over time. Revenue recognized in 2020 related to contracts with multiple performance obligations was approximately $13.6 million.

We identified the auditing of revenue from contracts with multiple performance obligations as a critical audit matter because there was significant judgments by management in identifying, evaluating and accounting for performance obligations in contracts with multiple performance obligations, which led to significant auditor judgment and effort in performing procedures to evaluate whether contracts with multiple performance obligations were appropriately identified, evaluated and accounted for by management.

Our audit procedures consisted of the following:

| • | Obtaining an understanding and testing management’s process for identifying, evaluating, and accounting for contracts with multiple performance obligations.

| • | Examining revenue arrangements on a test basis, including evaluating the terms and conditions of the arrangements and testing the identification, evaluation and accounting of the performance obligation.

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

| • | Evaluating the reasonableness of the approach used to determine stand-alone selling price.

/s/ Sadler, Gibb & Associates, LLC

We have served as the Company’s auditor since 2018.

Draper, UT

March 31, 2021

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|  | As of |  |  | As of |
|  | December 31, |  |  | December 31, |
|  | 2020 |  |  | 2019 |
Current Assets: |  |  |  |  |  |  |  |
Cash, cash equivalents and Restricted cash |  | $ | 13,264,449 |  |  | $ | 9,783,932 |
Accounts receivable, net of allowance for doubtful accounts of $498,044 and $612,434 at December 31, 2020 and December 31, 2019, respectively |  |  | 3,129,109 |  |  |  | 6,272,760 |
Inventories, net of allowance for excess and obsolete inventory of $723,949 and $665,308 at December 31, 2020 and December 31, 2019, respectively |  |  | 5,522,038 |  |  |  | 5,199,238 |
Contract assets |  |  | 2,708,136 |  |  |  | 5,664,929 |
Prepaid expenses and other current assets |  |  | 1,031,194 |  |  |  | 566,398 |
Total Current Assets |  |  | 25,654,926 |  |  |  | 27,487,257 |
Long-Term Assets: |  |  |  |  |  |  |  |
Property and Equipment, net of accumulated depreciation of $8,908,145 and $10,815,995 at December 31, 2020 and December 31, 2019, respectively |  |  | 10,321,511 |  |  |  | 4,825,952 |
Operating lease right-of-use assets |  |  | 4,947,734 |  |  |  | 5,053,614 |
Deposits and other assets |  |  | 545,673 |  |  |  | 498,053 |
Intangible assets, net of accumulated amortization of $269,441 and $141,282 at December 31, 2020 and December 31, 2019, respectively |  |  | 480,060 |  |  |  | 488,716 |
Goodwill |  |  | 260,233 |  |  |  | 236,131 |
Total Long-term Assets |  |  | 16,555,211 |  |  |  | 11,102,466 |
Total Assets |  | $ | 42,210,137 |  |  | $ | 38,589,723 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|  | As of |  |  | As of |
|  | December 31, |  |  | December 31, |
|  | 2020 |  |  | 2019 |
Current Liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 2,332,151 |  |  | $ | 4,339,070 |
Accrued expenses |  |  | 4,908,961 |  |  |  | 3,222,951 |
Current portion of finance lease obligations |  |  | 394,839 |  |  |  | 34,772 |
Current portion of operating lease liabilities |  |  | 1,026,235 |  |  |  | 999,685 |
Current portion of contingent earn-out liability |  |  | - |  |  |  | 299,585 |
Contract liabilities |  |  | 1,152,178 |  |  |  | 1,421,376 |
Income taxes payable |  |  | 570 |  |  |  | 14,692 |
Total Current Liabilities |  |  | 9,814,934 |  |  |  | 10,332,131 |
Deferred tax liability |  |  | 305,167 |  |  |  | 338,763 |
Finance lease obligation, net of current portion |  |  | 3,112,496 |  |  |  | 172,273 |
Operating lease liability, net of current portion |  |  | 4,159,225 |  |  |  | 4,141,855 |
Contingent earn-out, net of current portion |  |  | - |  |  |  | 599,170 |
Total Long-term liabilities |  |  | 7,576,888 |  |  |  | 5,252,061 |
Total Liabilities |  |  | 17,391,822 |  |  |  | 15,584,192 |
Stockholders' Equity: |  |  |  |  |  |  |  |
Series A Mandatory Convertible Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 and 0 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively |  |  | - |  |  |  | - |
Common stock; par value $0.001, 25,000,000 shares authorized 21,655,461 and 20,547,668 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively |  |  | 21,655 |  |  |  | 20,548 |
Additional paid-in capital |  |  | 69,897,698 |  |  |  | 61,398,150 |
Accumulated deficit |  |  | (42,054,968 | ) |  |  | (32,246,608 | )
Accumulated other comprehensive loss |  |  | (3,046,070 | ) |  |  | (6,166,559 | )
Total Stockholders' Equity |  |  | 24,818,315 |  |  |  | 23,005,531 |
Total Liabilities and Stockholders' Equity |  | $ | 42,210,137 |  |  | $ | 38,589,723 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

|  | For the Years Ended |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Revenue |  | $ | 22,526,201 |  |  | $ | 32,637,484 |
Cost of Goods Sold |  |  | 20,379,519 |  |  |  | 25,475,170 |
Gross Profit |  |  | 2,146,682 |  |  |  | 7,162,314 |
Operating Expenses: |  |  |  |  |  |  |  |
Selling expenses |  |  | 2,918,418 |  |  |  | 2,426,971 |
General and administrative expenses |  |  | 6,205,040 |  |  |  | 4,563,216 |
Research and development expenses |  |  | 1,278,331 |  |  |  | 749,249 |
Total Operating Expenses |  |  | 10,401,789 |  |  |  | 7,739,436 |
Loss from Operations |  |  | (8,255,107 | ) |  |  | (577,122 | )
Other Income (Expense) |  |  |  |  |  |  |  |
Gain on modification of earn-out liability |  |  | 306,077 |  |  |  | - |
Interest and other income |  |  | 139,513 |  |  |  | 73,635 |
Interest expense |  |  | (120,903 | ) |  |  | (18,831 | )
Fair value adjustment of warrants |  |  | (901,250 | ) |  |  | - |
Gain (Loss) on currency transactions |  |  | (1,469,607 | ) |  |  | 285,742 |
Gain (Loss) on sale of fixed assets |  |  | 27,772 |  |  |  | (21,060 | )
Total Other Income (Expense) |  |  | (2,018,398 | ) |  |  | 319,486 |
Loss Before Income Taxes |  |  | (10,273,505 | ) |  |  | (257,636 | )
Income Tax Benefit |  |  | (465,145 | ) |  |  | (297,252 | )
Net Income (Loss) |  |  | (9,808,360 | ) |  |  | 39,616 |
Basic Income (Loss) Per Share |  | $ | (0.46 | ) |  | $ | 0.00 |
Diluted Income (Loss) Per Share |  | $ | (0.46 | ) |  | $ | 0.00 |
Basic Weighted Average Common Shares Outstanding |  |  | 21,209,118 |  |  |  | 19,652,277 |
Diluted Weighted Average Common Shares Outstanding |  |  | 21,209,118 |  |  |  | 19,667,752 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

|  | For the Years Ended |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Net Income (Loss) |  |  | (9,808,360 | ) |  |  | 39,616 |
Other Comprehensive Income (Loss) - Currency Translation, net |  |  | 3,120,489 |  |  |  | (421,703 | )
Total Comprehensive Loss |  | $ | (6,687,871 | ) |  | $ | (382,087 | )

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Years Ended December 31, 2020 and 2019

|  | Common Stock |  |  | Additional Paid-in |  |  | Accumulated |  |  | Accumulated Other Compre- hensive |  |  |  |  |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Income (Loss) |  |  | TOTAL |
BALANCE, December 31, 2019 |  |  | 20,547,668 |  |  |  | 20,548 |  |  |  | 61,398,150 |  |  |  | (32,246,608 | ) |  |  | (6,166,559 | ) |  |  | 23,005,531 |
Common shares issued per Board authorization of RSUs for services by the board of directors |  |  | 8,212 |  |  |  | 8 |  |  |  | 44,992 |  |  |  |  |  |  |  |  |  |  |  | 45,000 |
Common shares issued to settle RSUs for services provided by the board of directors |  |  | 8,333 |  |  |  | 8 |  |  |  | (8 | ) |  |  |  |  |  |  |  |  |  |  | - |
Stock based compensation |  |  |  |  |  |  |  |  |  |  | 298,780 |  |  |  |  |  |  |  |  |  |  |  | 298,780 |
Exercise of stock options |  |  | 6,248 |  |  |  | 6 |  |  |  | 18,494 |  |  |  |  |  |  |  |  |  |  |  | 18,500 |
Common shares issued for cash at $5.00 per share, net of offering cost of $762,875, May 2020 |  |  | 1,085,000 |  |  |  | 1,085 |  |  |  | 4,661,040 |  |  |  |  |  |  |  |  |  |  |  | 4,662,125 |
Prefunded warrants, 515,000, transferred to equity upon modification in August 2020 |  |  |  |  |  |  |  |  |  |  | 3,476,250 |  |  |  |  |  |  |  |  |  |  |  | 3,476,250 |
Currency translation, net |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 3,120,489 |  |  |  | 3,120,489 |
Net Income for the year ended December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (9,808,360 | ) |  |  |  |  |  |  | (9,808,360 | )
BALANCE, December 31, 2020 |  |  | 21,655,461 |  |  |  | 21,655 |  |  |  | 69,897,698 |  |  |  | (42,054,968 | ) |  |  | (3,046,070 | ) |  |  | 24,818,315 |

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Years Ended December 31, 2020 and 2019

|  | Common Stock |  |  | Additional Paid-in |  |  | Accumulated |  |  | Accumulated Other Compre- hensive |  |  |  |  |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Income (Loss) |  |  | TOTAL |
BALANCE, December 31, 2018 |  |  | 18,228,887 |  |  |  | 18,229 |  |  |  | 46,552,487 |  |  |  | (32,286,224 | ) |  |  | (5,744,856 | ) |  |  | 8,539,636 |
Common shares issued per Board authorization of RSUs for services by the board of directors |  |  | 29,032 |  |  |  | 29 |  |  |  | 112,471 |  |  |  |  |  |  |  |  |  |  |  | 112,500 |
Stock based compensation |  |  |  |  |  |  |  |  |  |  | 85,443 |  |  |  |  |  |  |  |  |  |  |  | 85,443 |
Exercise of stock options |  |  | 45,000 |  |  |  | 45 |  |  |  | 133,155 |  |  |  |  |  |  |  |  |  |  |  | 133,200 |
Exercise of warrants |  |  | 28,887 |  |  |  | 29 |  |  |  | (29 | ) |  |  |  |  |  |  |  |  |  |  | - |
Common shares issued at $7.25 per share, net offering cost of $1,548,161 May 2019 |  |  | 2,215,862 |  |  |  | 2,216 |  |  |  | 14,514,623 |  |  |  |  |  |  |  |  |  |  |  | 14,516,839 |
Currency translation, net |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (421,703 | ) |  |  | (421,703 | )
Net Income for the year ended December 31, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 39,616 |  |  |  |  |  |  |  | 39,616 |
BALANCE, December 31, 2019 |  |  | 20,547,668 |  |  |  | 20,548 |  |  |  | 61,398,150 |  |  |  | (32,246,608 | ) |  |  | (6,166,559 | ) |  |  | 23,005,531 |

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|  | For the years Ended |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Cash Flows from Operating Activities: |  |  |  |  |  |  |  |
Net Income (Loss) |  | $ | (9,808,360 | ) |  | $ | 39,616 |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 2,827,341 |  |  |  | 1,343,252 |
Stock-based compensation |  |  | 343,780 |  |  |  | 197,943 |
Change in fair value of warrant liability |  |  | 901,250 |  |  |  | - |
Gain on modification of earn-out liability |  |  | (306,077 | ) |  |  | - |
Change in deferred tax asset / liability |  |  | (63,200 | ) |  |  | 13,926 |
Loss (Gain) on sale of equipment |  |  | (27,772 | ) |  |  | 21,060 |
Changes in assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | 3,143,651 |  |  |  | (4,364,197 | )
Inventory |  |  | (322,800 | ) |  |  | (443,780 | )
Contract assets |  |  | 2,522,275 |  |  |  | (4,247,679 | )
Prepaid expenses and other current assets |  |  | 565 |  |  |  | (165,383 | )
Accounts payable |  |  | (2,006,919 | ) |  |  | 2,117,101 |
Accrued expenses |  |  | 1,355,846 |  |  |  | 1,471,809 |
Operating lease payments |  |  | (874,441 | ) |  |  | (541,771 | )
Contract liabilities |  |  | (269,198 | ) |  |  | 28,755 |
Income taxes payable |  |  | (14,806 | ) |  |  | (17,413 | )
Total Adjustments |  |  | 7,209,495 |  |  |  | (4,586,377 | )
Net Cash (used in) Operating Activities |  |  | (2,598,865 | ) |  |  | (4,546,761 | )
Cash Flows from Investing Activities: |  |  |  |  |  |  |  |
Purchase of property and equipment |  |  | (3,754,166 | ) |  |  | (2,542,757 | )
Proceeds from sale of property and equipment |  |  | 102,416 |  |  |  | 24,362 |
Purchase of other intangible assets |  |  | (55,198 | ) |  |  | (27,378 | )
Net cash paid for acquisition |  |  | (301,573 | ) |  |  | (1,154,902 | )
Net Cash used in Investing Activities |  |  | (4,008,521 | ) |  |  | (3,700,675 | )
Cash Flows from Financing Activities: |  |  |  |  |  |  |  |
Payments on finance lease obligation |  |  | (38,725 | ) |  |  | (22,569 | )
Proceeds from exercise of stock options |  |  | 18,500 |  |  |  | 133,200 |
Proceeds from issuance of prefunded warrants |  |  | 2,575,000 |  |  |  | - |
Proceeds from issuance of common stock, net |  |  | 4,662,127 |  |  |  | 14,516,839 |
Net Cash Provided by Financing Activities |  |  | 7,216,902 |  |  |  | 14,627,470 |
Loss on Currency Translation |  |  | 2,871,001 |  |  |  | (372,213 | )
Net Change in Cash, Cash Equivalents and Restricted Cash |  |  | 3,480,517 |  |  |  | 6,007,821 |
Cash, Cash Equivalents and Restricted Cash at Beginning of Period |  |  | 9,783,932 |  |  |  | 3,776,111 |
Cash, Cash Equivalents and Restricted Cash at End of Period |  | $ | 13,264,449 |  |  | $ | 9,783,932 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

|  | For the Years Ended December 31, |
|  | 2020 |  |  | 2019 |
Supplemental Disclosures of Cash Flow Information: |  |  |  |  |  |  |  |
Cash paid during the period for: |  |  |  |  |  |  |  |
Interest |  | $ | 103,953 |  |  | $ | 8,810 |
Income Taxes |  | $ | 13,726 |  |  | $ | 17,413 |

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation

The consolidated financial statements include the accounts of LiqTech International, Inc., the “Company” and its subsidiaries. The terms "Company", “us", "we" and "our" as used in this report refer to the Company and its subsidiaries, which are set forth below. The Company engages in the development, design, production, marketing and sale of automated filtering systems, ceramic silicon carbide liquid applications and diesel particulate air filters in the United States, Canada, Europe, Asia and South America. Set forth below is a description of the Company and each of its subsidiaries:

LiqTech International, Inc., a Nevada corporation organized in July 2004, formerly known as Blue Moose Media, Inc.

LiqTech USA, a Delaware corporation and a 100% owned subsidiary of the Company formed in May 2011.

LiqTech Holding A/S (formerly known as LiqTech International A/S), a Danish corporation, incorporated on January 15, 2000 (“LiqTech Holding”), a 100% owned subsidiary of LiqTech USA, handling all joint group activities such as management, marketing, finance, IT etc.

LiqTech NA, Inc. (“LiqTech NA”), incorporated in Delaware on July 1, 2005, a 100% owned subsidiary of LiqTech USA, engaged in the production, marketing and sale of ceramic diesel particulate and liquid filters in the United States and Canada.

LiqTech 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. The Company is formed to include the investments in the Joint Venture in the Middle East.

LiqTech Germany (“LiqTech Germany”), a 100% owned subsidiary of LiqTech Holding, incorporated in Germany on December 9, 2011. The Company is in the process of closing operations as all activity in the company has ceased.

LiqTech PTE Ltd (“LiqTech Sing”), a 95% owned subsidiary of LiqTech Holding, incorporated in Singapore on January 19, 2012. The Company is in the process of closing operations as all activity in the company has ceased.

Consolidation -- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and its majority owned subsidiary. All material intercompany transactions and accounts have been eliminated in the consolidation.

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Reclassification – Certain amounts presented in previous issued financial statements have been reclassified to be consistent with the presentation in the current period. In the statement of operations and comprehensive income (loss), the Company has reclassified the prior year comparative amounts of general and administrative expenses (increased by $184,772) and other expenses (decreased by $184,772) to be consistent with the current classification. Further, contingent earn-out liability of $330,164 has been reclassified to accrued expenses considering an amendment to the original earn-out agreement from 2019 has changed the contingent liability to a fixed-amount liability.

Functional Currency / Foreign currency translation -- The functional currency of LiqTech International, Inc., LiqTech USA, Inc. and LiqTech NA is the U.S. Dollar. The Functional Currency of LiqTech Holding, LiqTech Water, LiqTech Plastics, LiqTech Ceramics and LiqTech Water Projects is the Danish Krone (“DKK”); 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, 2020 and 2019. Translation gains and losses are deferred and accumulated as a component of other comprehensive income (loss) in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.

Significant events -- In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid- March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, most of our employees were working remotely during the shutdown. Since the beginning of May, the businesses in Denmark have been re-opening as the effect of COVID-19 has largely been contained and the number of infections and fatalities decreased significantly. We now again see, however, the number of infections and fatalities increase, and tightening restrictions are again introduced in many countries. Since the start of September, we have re-introduced limitations on the number of employees working directly in our production sites, and all employees who can work from home are encouraged to do so.

We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, results of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures implemented to avoid the spread of the virus did have a material adverse impact on our financial results for the fiscal year 2020. We have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for the next 12 months from the issuance of this quarterly report. In addition, as a result of reduced order intake and decreased manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2020.

While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products and transportation restrictions, especially if it results in a prolonged global recession.

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, 2020, and 2019, the Company held $1,515,620 and $2,714,173, 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. The Company had no balances held in a financial institution in the United States in excess of federally insured amounts on December 31, 2020 and December 31, 2019.

Accounts Receivable -- Accounts receivables consist of trade receivables arising in the normal course of business. The Company establishes an allowance for doubtful accounts that reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, age, financial information that is publicly accessible and other currently available evidence.

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The roll-forward of the allowance for doubtful accounts for the year ended December 31, 2020 and December 31, 2019 is as follows:

|  | 2020 |  |  | 2019 |
Allowance for doubtful accounts at the beginning of the period |  | $ | 612,434 |  |  | $ | 971,772 |
Bad debt expense |  |  | 320,270 |  |  |  | 25,044 |
Receivables written off during the periods |  |  | (484,265 | ) |  |  | (362,244 | )
Effect of currency translation |  |  | 49,605 |  |  |  | (22,138 | )
Allowance for doubtful accounts at the end of the period |  | $ | 498,044 |  |  | $ | 612,434 |

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 that management determines that the cost cannot be recovered due to obsolescence or other factors.

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

Contracts Assets – Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. When the Company issues invoices to the customer, and the billing is higher than the capitalized Contract assets, the net amount is transferred to Contract liabilities. Contract assets/liabilities are transferred to revenue and cost of goods sold when the right to consideration is unconditional and billed per the terms of the contractual agreement.

Contract assets also include unbilled receivables, which usually comprise the last invoice remaining after the delivery of the water treatment unit, where revenue is recognized at the transfer of control based upon signed acceptance of the water treatment unit by the customer. Most commonly this invoice is sent to the customer at commissioning of the product or no later than 12 months after the delivery. Further included in Contract Assets are short-term receivables such as VAT and other receivables.

Leases -- In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Subsequent ASUs were issued to provide additional guidance.

On January 1, 2019, the Company adopted Topic 842 using the optional transition method of adoption, under which the new standards were applied prospectively rather than restating the prior periods presented. The Company elected the package of practical expedients permitted, which, among other things, allowed the Company to carry forward the historical lease classification. The Company made the accounting policy elections 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 were 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 was 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 was reduced by accrued lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Operating lease cost for lease payments will be recognized on a straight-line basis over the lease term. The impact of adoption on the Company’s consolidated balance sheet was the recognition of a ROU asset of $2.1 million and an operating lease liability of $2.1 million primarily for office space leases. The Company’s adoption of Topic 842 did not materially impact its results of operation.

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.

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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. Forecast 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 new revenue standard did not have a material impact on revenue recognition.

The Company sells products throughout the world; sales by geographical region are as follows for the year ended December 31, 2020 and 2019:

|  | For the Year Ended December 31 |
|  | 2020 |  |  | 2019 |
United States and Canada |  | $ | 656,032 |  |  | $ | 1,600,298 |
Australia |  |  | 524,255 |  |  |  | 425,560 |
Asia |  |  | 3,372,286 |  |  |  | 5,991,440 |
Europe |  |  | 17,973,628 |  |  |  | 24,620,186 |
|  | $ | 22,526,201 |  |  | $ | 32,637,484 |

The Company’s sales by product line are as follows for the years ended December 31, 2020 and 2019:

|  | For the Year Ended December 31 |
|  | 2020 |  |  | 2019 |
Liquid filters and systems |  | $ | 14,147,842 |  |  | $ | 25,464,614 |
Ceramic diesel particulate |  |  | 5,131,891 |  |  |  | 5,652,686 |
Plastics |  |  | 2,647,366 |  |  |  | 895,203 |
Development projects |  |  | 599,102 |  |  |  | 625,981 |
|  | $ | 22,526,201 |  |  | $ | 32,637,484 |

For membranes, diesel particulate filters and plastic components, revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied, which occurs when control of the product transfers to the customer or when services are rendered by the Company. The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and risks and rewards of ownership have transferred to the customer. This generally occurs when the product is shipped or accepted by the customer. Revenue for service contracts is recognized as the services are provided. Revenue is measured as the amount of consideration expected to be received in exchange for transferring the goods or providing services. The satisfaction of performance obligations under the terms of a revenue contract generally gives rise to the right for payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Pre-payments received prior to satisfaction of performance obligations are recorded as a Contract liability. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers.

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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 stated in the sales contract. This typically occurs upon shipment of the system from the production facility but can also occur upon other agreed delivery terms. In connection with the completion of the system, it is normal procedure to issue a FAT (Factory Acceptance Test) stating that the customer has accepted the performance of the system as it is being shipped from our production facility in Hobro. As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer), and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of provision of the commissioning services together with the cost incurred. Part of the invoicing to the customer is also attributed to the commissioning, and at transfer of the control of the system (i.e. the first performance obligation), some of the invoicing will still be awaiting commissioning and is therefore recognized as Contract assets.

Aftermarket sales represent parts, extended warranties and maintenance services. For the sale of aftermarket parts, the Company transfers control and recognizes revenue when parts are shipped to the customer. When customers are given the right to return eligible parts and accessories, the Company estimates the expected returns based on an analysis of historical experience. The Company adjusts estimated revenues at the earlier of when the most likely amount of consideration expected to be received changes or when the consideration becomes fixed. The Company recognizes revenue for extended warranty and maintenance agreements based on the standalone selling price over the life of the contract.

The Company has received long-term contracts for grants from government entities for the development and use of silicon carbide membranes in various water filtration and treatment applications and historically in the installation of various water filtrations systems. We measure transfer of control of the performance obligation on long-term contracts utilizing the cost-to-cost measure of progress, with cost of revenue including direct costs, such as labor and materials. Under the cost-to-cost approach, the use of estimated costs to complete each performance obligation is a significant variable in the process of determining recognized revenue and a significant factor in the accounting for such performance obligations. The timing of when we bill our customers is generally dependent upon advance billings terms, milestone billings based on completion of certain phases of the work or when services are provided, or products are shipped. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported on our balance sheet as Contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported on our balance sheet as Contract liabilities.

Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract liabilities are payments received from customers prior to satisfaction of performance obligations, and these balances are typically related to prepayments for third-party expenses that are incurred shortly after billing. 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 liabilities also include deferred revenue related to the second performance obligation stated under Revenue Recognition, where the obligation is attributed to the commissioning of the water treatment system.

The roll-forward of Contract Assets/Liabilities for the year ended December 31, 2020 and December 31, 2019 is as follows:

|  | 2020 |  |  | 2019 |
Cost incurred |  | $ | 3,997,161 |  |  | $ | 3,960,199 |
Unbilled project deliveries |  |  | 1,015,977 |  |  |  | 1,971,106 |
VAT |  |  | 446,608 |  |  |  | 862,368 |
Other receivables |  |  | 75,010 |  |  |  | 58,397 |
Prepayments |  |  | (3,112,118 | ) |  |  | (1,732,231 | )
Deferred Revenue |  |  | (866,680 | ) |  |  | (876,286 | )
|  | $ | 1,555,958 |  |  | $ | 4,243,553 |
Distributed as follows: |  |  |  |  |  |  |  |
Contract assets |  | $ | 2,708,136 |  |  | $ | 5,664,929 |
Contract liabilities |  |  | (1,152,178 | ) |  |  | (1,421,376 | )
|  | $ | 1,555,958 |  |  | $ | 4,243,553 |

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Advertising Cost -- Costs incurred in connection with advertising of the Company’s products is expensed as incurred. Advertising cost are included in sales expenses and total advertising costs amounted to $96,977 and $117,404 for the years ended December 31, 2020 and 2019, 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, 2020 and 2019 were $1,278,331 and $749,249, respectively, of research and development costs.

Income Taxes -- The Company accounts for income taxes in accordance with FASB ASC Topic 740: Accounting for Income Taxes. This statement requires an asset and liability approach for accounting for income taxes.

Income/(Loss) Per Share -- The Company calculates earnings (loss) per share in accordance with FASB ASC 260, Earnings Per Share. Basic earnings per common share (EPS) are based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share are based on shares outstanding (computed as under basic EPS) and potentially dilutive common shares. Potential common shares included in the diluted earnings per share calculation include in-the-money stock options and warrants that have been granted but have not been exercised.

Stock Options and Awards -- During the years presented in the accompanying consolidated financial statements, the Company has granted stock options and awards. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Stock-based compensation costs of $343,780 and $85,445 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, 2020 and 2019, respectively.

Warrant Liability -- The Company issued common stock warrants in May 2020 in conjunction with an equity financing. In accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), the fair value of these warrants was initially classified as a liability on the Company’s Consolidated Balance Sheet because, according to the original terms of the warrants, a fundamental transaction could have given rise to an obligation of the Company to pay cash to its warrant holders, which was out of the control of the Company. On August 12, 2020, the terms of the prefunded warrant were amended and the potential obligation of the Company to pay cash to its warrant holders were removed. From the date of the execution of the amended warrant, it qualifies as an equity instrument and the liability measured at fair value on August 12, 2020 of $3,476,250 has been reclassified to the Company´s Equity. Corresponding changes in the fair value measurement of the warrants are recognized in earnings on the Company’s Consolidated Statement of Operations in each subsequent period.

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, 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.

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Recent Accounting Pronouncements -- In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is intended to help stakeholders during the global market-wide reference rate transition period and will be in effect for a limited time through December 31, 2022. Adoption is permitted at any time. The Company is currently evaluating the impact on its financial statements.

On March 9, 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments.” This ASU was issued to clarify and improve various financial instruments topics. The guidance has various effective dates but is basically effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted ASU 2020-03 effective January 1, 2020 and concluded there was no material impact to the condensed consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We will adopt the new standard effective March 1, 2021 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurement by removing, modifying and adding certain disclosures. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. The Company adopted ASU 2018-13 effective January 1, 2020 and concluded there was no material impact to the condensed consolidated financial statements.

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash that requires companies, in the Statement of Cash Flows, to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Consequently, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. For the period ended December 31, 2020, the Company has recorded $1,515,620 as Restricted cash, $11,748,829 as Unrestricted cash, and a total of $13,264,449 as Cash, Cash equivalents and Restricted cash. For the period ended December 31, 2019, the amounts were $2,714,173 in Restricted cash and $7,069,759 in Unrestricted cash.

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, including subsequently issued ASUs to clarify the implementation guidance in ASU 2016-13. The amendment introduces new guidance for credit losses on financial assets measured at amortized cost, including finance receivables and trade receivables. Under this new model, expected credit losses are based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability, replacing the previous incurred loss model. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted ASU 2016-13 effective January 1, 2020 and concluded there was no material impact to the condensed consolidated financial statements.

Other recent accounting pronouncements issued by the FASB did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

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NOTE 2 - INVENTORY

Inventory consisted of the following at December 31, 2020 and December 31, 2019:

|  | 2020 |  |  | 2019 |
Furnace parts and supplies |  | $ | 471,622 |  |  | $ | 621,991 |
Raw materials |  |  | 1,955,713 |  |  |  | 2,125,921 |
Work in process |  |  | 2,394,481 |  |  |  | 1,624,499 |
Finished goods and filtration systems |  |  | 1,424,171 |  |  |  | 1,492,135 |
Reserve for excess and obsolescence |  |  | (723,949 | ) |  |  | (665,308 | )
Net Inventory |  | $ | 5,522,038 |  |  | $ | 5,199,238 |

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.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following on December 31, 2020 and December 31, 2019:

|  | Useful Life |  |  | 2020 |  |  | 2019 |
Production equipment |  |  | 3 | - | 10 |  |  | $ | 8,599,728 |  |  | $ | 10,228,216 |
Production equipment - finance lease |  |  | 3 | - | 10 |  |  |  | 4,528,695 |  |  |  | 1,113,412 |
Lab equipment |  |  | 3 | - | 10 |  |  |  | 127,560 |  |  |  | 99,831 |
Computer equipment |  |  | 3 | - | 5 |  |  |  | 805,001 |  |  |  | 484,943 |
Vehicles |  |  | 3 | - | 5 |  |  |  | 115,525 |  |  |  | 143,373 |
Vehicles - finance lease |  |  | 3 | - | 5 |  |  |  | - |  |  |  | 50,815 |
Furniture and fixture |  |  |  | 5 |  |  |  |  | 1,218,386 |  |  |  | 1,202,155 |
Furniture and fixture - finance lease |  |  |  | 5 |  |  |  |  | 290,505 |  |  |  | 198,045 |
Leasehold improvements |  |  | 5 | - | 10 |  |  |  | 3,544,256 |  |  |  | 2,121,157 |
|  |  |  |  |  |  |  |  | 19,229,656 |  |  |  | 15,641,947 |
Less Accumulated Depreciation |  |  |  |  |  |  |  |  | (7,518,657 | ) |  |  | (9,659,850 | )
Less Accumulated Depreciation - finance lease |  |  |  |  |  |  |  |  | (1,389,488 | ) |  |  | (1,156,145 | )
Net Property and Equipment |  |  |  |  |  |  |  | $ | 10,321,511 |  |  | $ | 4,825,952 |

Depreciation expense amounted to $1,857,111 and $737,007 for the year ended December 31, 2020 and 2019, respectively.

NOTE 4 - LEASES

The Company leases certain vehicles, real property, production equipment and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The majority of our operating leases are non-cancelable operating leases for production and office space in Hobro, Aarhus and Copenhagen, Denmark as well as in White Bear Lake, Minnesota. The lease in White Bear Lake will expire in February 2021 and due to the closure of the activity in North America, the lease has not been extended.

During the year ended December 31, 2020, cash paid for amounts included for the measurement of operating lease liabilities was $1,113,504, and the Company recorded operating lease expenses included in operating expenses of $1,290,362.

During the year ended December 31, 2020, cash paid for amounts included for the measurement of finance lease liabilities was $43,770, and the Company recorded operating lease expenses included in other income (expenses) of $114,792.

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Supplemental balance sheet information related to leases as of December 31, 2020 and 2019 was as follows:

|  | December 31, 2020 |  |  | December 31, 2019 |
Operating leases: |  |  |  |  |  |  |  |
Operating lease right-of-use assets |  | $ | 4,947,734 |  |  | $ | 5,053,614 |
Operating lease liabilities – current |  | $ | 1,026,235 |  |  | $ | 999,685 |
Operating lease liabilities – long-term |  |  | 4,159,225 |  |  |  | 4,141,855 |
Total operating lease liabilities |  | $ | 5,185,460 |  |  | $ | 5,141,540 |
Finance leases: |  |  |  |  |  |  |  |
Property and equipment, at cost |  | $ | 4,819,201 |  |  | $ | 1,362,272 |
Accumulated depreciation |  |  | (1,389,488 | ) |  |  | (1,156,145 | )
Property and equipment, net |  | $ | 3,429,713 |  |  | $ | 206,127 |
Finance lease liabilities - current |  | $ | 394,839 |  |  | $ | 34,772 |
Finance lease liabilities – long-term |  |  | 3,112,496 |  |  |  | 172,273 |
Total finance lease liabilities |  | $ | 3,507,335 |  |  | $ | 207,045 |
Weighted average remaining lease term: |  |  |  |  |  |  |  |
Operating leases |  |  | 10.0 |  |  |  | 10.2 |
Finance leases |  |  | 6.9 |  |  |  | 5.5 |
Weighted average discount rate: |  |  |  |  |  |  |  |
Operating leases |  |  | 6.2 | % |  |  | 6.4 | %
Finance leases |  |  | 2.8 | % |  |  | 3.9 | %

Maturities of lease liabilities at December 31, 2020 were as follows:

|  | Operating lease |  |  | Finance lease |
2021 |  | $ | 1,053,748 |  |  | $ | 488,952 |
2022 |  |  | 961,452 |  |  |  | 487,224 |
2023 |  |  | 854,547 |  |  |  | 482,130 |
2024 |  |  | 687,013 |  |  |  | 483,167 |
2025 |  |  | 354,907 |  |  |  | 479,233 |
Thereafter |  |  | 3,000,582 |  |  |  | 1,496,454 |
Total payment under lease agreements |  |  | 6,912,249 |  |  |  | 3,917,160 |
Less imputed interest |  |  | (1,726,789 | ) |  |  | (409,825 | )
Total lease liability |  | $ | 5,185,460 |  |  | $ | 3,507,335 |

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NOTE 5 - INTANGIBLE ASSETS

At December 31, 2020 and December 31, 2019, other intangible assets, net of accumulated amortization, consisted of customer relationships acquired in connection with the purchase of LiqTech Plastics A/S and patents on the Company’s products.

Intangible assets consisted of the following at December 31, 2020 and December 31, 2019:

|  | 2020 |  |  | 2019 |
Customer relationships |  | $ | 544,770 |  |  | $ | 494,315 |
Patent cost |  |  | 204,731 |  |  |  | 135,683 |
|  |  | 749,501 |  |  |  | 629,998 |
Less Accumulated amortization |  |  | (269,441 | ) |  |  | (141,282 | )
Intangible assets, net |  | $ | 480,060 |  |  | $ | 488,716 |

Expected future amortization expense for the years ended are as follows:

Year ending December 31, |  | Amortization Expenses |
2021 |  |  | 117,488 |
2022 |  |  | 117,489 |
2023 |  |  | 117,488 |
2024 |  |  | 81,171 |
2025 |  |  | 8,535 |
Thereafter |  |  | 37,889 |
|  | $ | 480,060 |

NOTE 6 - LINES OF CREDIT

In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or security bond. For that purpose, we have a guarantee credit line of DKK10,000,000 (approximately $1,650,000). The credit line is secured by a cash deposit of $1,500,000. Further, we have a guarantee for a specific project delivered in 2016 of DKK 94,620 (approximately $15,620 at December 31, 2020) with a bank, subject to certain base limitations. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Water such as receivables, inventory, and equipment.

NOTE 7 - AGREEMENTS, COMMITMENTS AND CONTINGENCIES

Agreements -- LiqTech Water Projects has entered into a joint venture agreement to supply and operate water treatment systems for oil and gas producers in the Middle East. The partner in the joint venture is a local company. LiqTech Water Projects expects to deliver technological know-how, design of water treatment systems and components to support potential projects in the Middle East. The joint venture will be established in the form of a jointly owned limited liability company, incorporated under the laws in the local country, and LiqTech Water Projects holds 49% of the shares. All profits of the company are to be allocated proportionally to the ownership share and none of the parties are liable for the company’s liabilities towards third parties.

401(K) Profit Sharing Plan -- LiqTech NA has a 401(k) profit sharing plan and trust covering certain eligible employees. The amount LiqTech NA contributes is discretionary. For the years ended December 31, 2020 and 2019, matching contributions were expensed and totaled $13,514 and $10,283, respectively.

Contingencies -- From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.

On November 20, 2018 a former supplier to Liqtech Ceramics contacted the Company with a claim of DKK 448,500 ($68,800) alleging that an agreement from 2016 had not been respected. The Company contested the claim but in December 2020 the court ruled in favor of the supplier and LiqTech was sentenced to pay amounts totaling DKK 587,000 ($96,900) which was expensed in 2020. The amount was paid in January 2021.

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On February 27, 2019, LiqTech Water was contacted by a former supplier alleging that the Company owed DKK 543,905 ($89,800) for services rendered in 2017. The claimant has previously filed a lawsuit to claim payment for the services, which was denied by the Company due to severe errors in the services rendered, and the claim was rejected by a court of law in 2018. Due to the nature of the claim and the previous ruling from the court of law, no provision has been made as of December 31, 2020.

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, 2020 and 2019, were as follows:

|  | 2020 |  |  | 2019 |
Balance at January 1, |  | $ | 813,288 |  |  | $ | 432,225 |
Warranty costs charged to cost of goods sold |  |  | 348,241 |  |  |  | 707,079 |
Utilization charges against reserve |  |  | (199,624 | ) |  |  | (315,556 | )
Release of accrual related to expired warranties |  |  | - |  |  |  | - |
Foreign currency effect |  |  | 94,708 |  |  |  | (10,460 | )
Balance at December 31, |  | $ | 1,056,613 |  |  | $ | 813,288 |

NOTE 8 - 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, 2020, the Company had net operating loss carry-forward of approximately $21,618,896 for U.S. federal tax purposes expiring through 2038; approximately $8,996,626 for Danish tax purposes, which do not expire; approximately $511,385 for German tax purposes, which do not expire; and approximately $664,423 for Singapore tax purposes, which do not expire.

As of December 31, 2020 and December 31, 2019, the Company established a valuation allowance of $5,394,000 and $3,845,000 for the tax components of LiqTech International Inc. and Liqtech NA, respectively; $1,682,000 and $1,209,000 for the tax components of LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics and LiqTech Water Projects, respectively, $143,000 and $129,000 for the tax components of LiqTech Germany and $113,000 and $102,000 for the tax components of LiqTech Singapore 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, 2020 was $1,549,000, $473,000, $14,000 and $11,000 for the US, Danish, German and Singapore components, respectively. The change in the valuation allowance for the year ended December 31, 2019 was 416,000, $(637,000), $(3,000) and $(2,000) for the US, Danish, German and Singapore components, respectively.

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The temporary differences, tax credits and carry forwards gave rise to the following deferred tax asset and liabilities at December 31, 2020 and December 31, 2019:

|  | 2020 |  |  | 2019 |
Excess of tax over financial accounting |  | $ | 624,154 |  |  | $ | - |
Vacation accrual |  |  | 1,971 |  |  |  | 3,908 |
Reserve for excess and obsolete inventory |  |  | 151,288 |  |  |  | 152,680 |
Business tax credit carryover |  |  | - |  |  |  | 30,935 |
Deferred compensation |  |  | 49,556 |  |  |  | 17,943 |
Net operating loss carryover |  |  | 7,627,046 |  |  |  | 5,889,088 |
Excess of book over tax depreciation |  |  | (610,694 | ) |  |  | (300,805 | )
Excess of book over tax work in progress |  |  | (817,131 | ) |  |  | (847,290 | )
Valuation allowance |  |  | (7,331,357 | ) |  |  | (5,285,222 | )
|  | $ | (305,167 | ) |  | $ | (338,763 | )
Distributed as: |  |  |  |  |  |  |  |
Long-term deferred tax asset |  |  | - |  |  |  | - |
Long-term deferred tax liability |  |  | (305,167 | ) |  |  | (338,763 | )
|  | $ | (305,167 | ) |  | $ | (338,763 | )

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, 2020 and 2019:

|  | 2020 |  |  | 2019 |
Computed tax at expected statutory rate |  | $ | (2,157,436 | ) |  | $ | (54,104 | )
State and local income taxes, net of federal benefit |  |  | (76,055 | ) |  |  | (2,971 | )
Non-US income taxed at different rates |  |  | (35,454 | ) |  |  | 14,635 | )
Deferred compensation |  |  | (52,165 | ) |  |  | (6,508 | )
Non-deductible expenses |  |  | 2,243 |  |  |  | 4,794 |
Non-taxable income |  |  | (75,562 | ) |  |  | - |
Valuation allowance |  |  | 1,918,579 |  |  |  | (227,182 | )
Other |  |  | 10,705 |  |  |  | (25,916 | )
Income tax expense (benefit) |  | $ | (465,145 | ) |  | $ | (297,252 | )

The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2020 and 2019 consisted of the following:

|  | 2020 |  |  | 2019 |
Current income taxes: |  |  |  |  |  |  |  |
Danish |  | $ | (401,945 | ) |  | $ | (311,189 | )
Federal |  |  | - |  |  |  | - |
State |  |  | - |  |  |  | - |
Current tax (benefit) |  | $ | (401,945 | ) |  | $ | (311,189 | )
Deferred income taxes: |  |  |  |  |  |  |  |
Book in excess of tax depreciation |  | $ | (419,523 | ) |  | $ | (61,808 | )
Allowance for doubtful accounts |  |  | - |  |  |  | 752 |
Work in progress |  |  | (44,862 | ) |  |  | 848,000 |
Net operating loss carryover |  |  | (389,616 | ) |  |  | (344,870 | )
Valuation allowance |  |  | 844,826 |  |  |  | (507,935 | )
Deferred compensation |  |  | (52,165 | ) |  |  | (6,508 | )
Accrued vacation |  |  | (16,707 | ) |  |  | (2 | )
Reserve for obsolete inventory |  |  | 14,847 |  |  |  | 86,308 |
Deferred tax expense (benefit) |  | $ | (63,200 | ) |  | $ | 13,937 |
Total tax expense (benefit) |  | $ | (465,145 | ) |  | $ | (297,252 | )

Deferred income tax expense / (benefit) results primarily from the reversal of temporary timing differences between tax and financial statement income.

The Company files Danish, U.S. federal and Minnesota state income tax returns. LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics and LiqTech Water Projects are generally no longer subject to tax examinations for years prior to 2015 for their Danish tax returns. LiqTech NA is generally no longer subject to tax examinations for years prior to 2015 for U.S. federal and state tax returns.

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NOTE 9 - 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, 2020, the Company had 128,299 stock grants outstanding to issue common stock (“RSUs”). Further, the Company had 515,000 prefunded warrants outstanding to issue common stock.

For the year ended December 31, 2019, the Company had 125,293 RSUs outstanding. Further, the Company had 25,000 options outstanding to purchase common stock at $2.96 per share.

The following data shows the amounts used in computing earnings per share, the effect on income and the weighted average number of shares of potential dilutive common stock for the years ended December 31, 2020 and 2019:

|  | For the Year Ended December 31 |
|  | 2020 |  |  | 2019 |
Net Income/(Loss) attributable to LiqTech International Inc. |  | $ | (9,808,360 | ) |  | $ | 39,616 |
Weighted average number of common shares used in basic earnings per share |  |  | 21,209,118 |  |  |  | 19,652,277 |
Effect of dilutive securities, stock options, warrants, and RSUs |  |  | - |  |  |  | 15,475 |
Weighted average number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share |  |  | 21,209,118 |  |  |  | 19,667,752 |

NOTE 10 - STOCKHOLDERS' EQUITY

Common Stock – The Company has 25,000,000 authorized shares of common stock, $0.001 par value. As of December 31, 2020 and 2019, respectively, there were 21,655,461 and 20,547,668 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 Preferred stock, $0.001 par value. As of December 31, 2020 and 2019 there were no mandatory convertible preferred shares issued and outstanding.

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Stock Issuances

Since January 1, 2020, the Company has made the following issuances of common stock:

On January 15, 2020, the Company issued 8,212 common shares per Board authorization valued at $45,000 for services provided by the Board of Directors. The Company recognized the stock-based compensation of the shares over the requisite service period.

On May 21, 2020, the Company completed a Securities Purchase Agreement with certain accredited investors in a private placement pursuant to which the Company issued and sold an aggregate of 1,085,000 shares of common stock, par value $0.001 per share, at a purchase price of $5.00 per share for gross proceeds of $4,662,125 including costs of $762,875 for placement fees, lawyer fees, auditor fees and other costs related to the capital raise, and a prefunded warrant to purchase an aggregate of 515,000 shares of Common Stock, at a purchase price of $5.00 per share, for gross proceeds of $2,575,000.

On June 6, 2020, the Company issued 8,333 common shares to settle RSUs. The RSUs were valued at $69,333 for services provided by the Board of Directors. The Company recognized the stock-based compensation of the award over the requisite service period.

On July 8 and August 18, 2020, the Company issued a total of 6,248 shares in connection with employees exercising stock options granted under the 2015 Stock Options Plan (the "2015 Plan"). The shares were issued at a share price of $2.96 and generated net proceeds of $18,500.

For the years ended December 31, 2020 and 2019, the Company has recorded stock-based compensation expense of $343,780 and $197,945, respectively.

Warrants

In connection with the Securities Purchase Agreement entered into in May 2020, we issued a prefunded warrant (“the Warrant”) to purchase an aggregate of 515,000 shares of Common Stock at a purchase price of $5.00 per share. Subject to certain beneficial ownership limitations, the Warrant is immediately exercisable and may be exercised for no additional consideration. The Warrant does not expire. A holder of the Warrant will not have the right to exercise any portion of the Warrant if the holder, together with Affiliates and Attribution Parties (as such terms are defined in the Warrant), would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrant. Upon notice from the holder to the Company, however, the holder may decrease or increase the beneficial ownership limitation (but not above 9.99% of the number of shares of Common Stock outstanding).

The following is a summary of the periodic changes in warrants outstanding for the year ended December 31, 2020:

|  | 2020 |
Warrants outstanding at January 1 |  |  | - |
Prefunded warrants issued in May 2020 |  |  | 515,000 |
Exercises and conversions |  |  | - |
Warrants outstanding at December 31 |  |  | 515,000 |

On August 12, 2020 the Warrant was amended. In the Warrant pre-amendment, the warrant holder could request that the Company should repay the value of the unexercised portion of the Warrant upon the occurrence of a fundamental transaction. The Warrant, as amended, required the fundamental transaction to be approved by the Board of Directors before any repayment could take place. This amendment changed the classification of the Warrant from a liability to equity, and the following is a summary of the periodic changes in the fair value during the year ended December 31, 2020:

Base value of warrants, 515,000 warrants at $5 |  | $ | 2,575,000 |
Fair value adjustment |  |  | 901,250 |
Balance at August 12, 2020 reclassified to equity |  | $ | 3,476,250 |

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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, 2020, 128,299 RSUs were granted and outstanding under the Incentive Plan. Directors of the Company receive share compensation as follows: (i) an initial grant of 25,000 RSUs of common stock that vest over a three-year period upon appointment to the Board, followed by an annual grant of $35,000 ($70,000 for the Chairman of the Board) in RSUs per annum after full vesting of the initial grant. Further, the Company has granted shares to management for 2020 as part of the Incentive Plan, totaling 92,081 shares that vest over a three-year period.

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

The Company recognized stock-based compensation expense related to RSU grants of $343,780 and $197,945 for the years ended December 31, 2020 and 2019, respectively. On December 31, 2020, the Company had $472,778 of unrecognized compensation cost related to non-vested stock grants.

A summary of the status of the RSUs outstanding as of December 31, 2020 and changes during the period are presented below:

|  | December 31, 2020 |
|  | Number of units |  |  | Weighted Average Grant-Date Fair value |  |  | Aggregated Intrinsic Value |
Outstanding, December 31, 2019 |  |  | 133,747 |  |  | $ | 5.47 |  |  | $ | 50,824 |
Granted |  |  | 44,430 |  |  |  | 6.47 |  |  |  | - |
Vested and settled with share issuance |  |  | (33,211 | ) |  |  | 4.15 |  |  |  | - |
Forfeited |  |  | (16,667 | ) |  |  | 8.32 |  |  |  | - |
Outstanding, December 31, 2020 |  |  | 128,299 |  |  | $ | 5.79 |  |  | $ | 250,183 |

Stock Options

In August 2015, the Company’s Board of Directors adopted a Stock Option Plan (the “Plan”). Under the terms and conditions of the Plan, the Board of Directors is empowered to grant stock options to employees, officers, and directors of the Company. At December 31, 2020, no options were granted and outstanding under the Plan.

The Company recognizes compensation costs for stock option awards to employees based on their grant-date fair value. The value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model.

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NOTE 11 – SEGMENT REPORTING

The Company operates in 3 main segments, Water, Ceramics and Plastics. With effect from January 1, 2020, the group structure was changed as shared group activities was transferred to an individual reporting unit separated from the business units. Costs and assets for these activities were therefore separated in the fiscal year 2020 while they in 2019 was included in primarily Water and Ceramics.

Segment information for the business areas is as follows:

|  | For the Year Ended December 31, |
Revenues |  | 2020 |  |  | 2019 |
Water |  | $ | 13,615,904 |  |  | $ | 24,570,867 |
Ceramics |  |  | 5,663,830 |  |  |  | 6,546,432 |
Plastics |  |  | 2,647,366 |  |  |  | 895,203 |
Other |  |  | 599,101 |  |  |  | 624,982 |
Total consolidated revenue |  | $ | 22,526,201 |  |  | $ | 32,637,484 |

|  | For the Year Ended December 31, |
Income (Loss) |  | 2020 |  |  | 2019 |
Water |  | $ | (1,083,578 | ) |  | $ | 1,713,150 |
Ceramics |  |  | (3,532,137 | ) |  |  | (600,939 | )
Plastics |  |  | (882,038 | ) |  |  | 49,440 |
Other |  |  | (4,310,607 | ) |  |  | (1,122,035 | )
Total consolidated Income (Loss) |  | $ | (9,808,360 | ) |  | $ | 39,616 |

|  | For the Year Ended December 31, |
Total assets |  | 2020 |  |  | 2019 |
Water |  | $ | 14,033,107 |  |  | $ | 14,718,598 |
Ceramics |  |  | 16,734,371 |  |  |  | 21,499,120 |
Plastics |  |  | 2,022,381 |  |  |  | 2,177,791 |
Other |  |  | 9,420,278 |  |  |  | 193,543 |
Total consolidated assets |  | $ | 42,210,137 |  |  | $ | 38,589,723 |

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NOTE 12 - 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, |
|  | 2020 |  |  | 2019 |
Customer A |  |  | 27 | % |  |  | 29 | %
Customer B |  |  | 10 | % |  |  | 15 | %
Customer C |  |  | - | % |  |  | 18 | %

* Zero or less than 10%

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

|  | December 31, 2020 |  |  | December 31, 2019 |
Customer A |  |  | 39 | % |  |  | 39 | %
Customer B |  |  | 12 | % |  |  | - | %
Customer D |  |  | 16 | % |  |  | - | %
Customer E |  |  | - | % |  |  | 15 | %

As of December 31, 2020, approximately 100% and 0% of the Company’s assets were located in Denmark and the United States, respectively. As of December 31, 2019, approximately 91% and 9% of the Company’s assets were located in Denmark and the United States, respectively.

NOTE 13 - SUBSEQUENT EVENTS

On January 6, 2021, the Company issued 11,218 common shares to settle RSUs. The RSUs were valued at $70,000 for services provided by the Board of Directors in 2020. The Company recognized the stock-based compensation of the award over the requisite service period.

On February 26, 2021, the Company issued 30,694 common shares to settle RSUs. The RSUs were valued at $166,667 for services provided by management in 2020. The Company is recognizing the stock-based compensation of the award over the requisite service period.

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 $15,000,000 principal amount Senior Convertible Note due 2023 and an aggregate of 80,000 shares of common stock, par value $0.001 per share, for an aggregate purchase price of $15,000,000 million upon the satisfaction of the closing conditions set forth in the Purchase Agreement.

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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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, 2020 were not effective as of the period covered by this Annual Report 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, 2020, the Company was not subject to 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, 2020 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, 2020 were not effective as of the period covered by this Annual Report due to material weaknesses in internal controls over financial reporting.

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The implementation of the new ERP system from the beginning of 2020, together with implementation of additional internal control procedures, have strengthened the Company´s internal control environment. From the report received from the Company´s external auditor as a result of the audit of 2019, we have focused on improving controls to address each reported deficiency; however, the impact of COVID-19 restrictions has slowed the pace of progress significantly.

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 2019 hired additional employees into the finance department, and we plan to continue to work on remediating the material weaknesses during 2021 by improving competencies and processes. Further, an investment in a new ERP system has been made along with other supporting IT programs to support the controls and processes of the Company, and these investments are an important part of the remediation of the material weaknesses. 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, 2020. 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. Sadler, Gibb & Associates, LLC has issued an unqualified opinion on our financial statements, which is included in Item 8 of 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 plans 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

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Item 10. | Directors, Executive Officers and Corporate Governance

This information will be contained in our definitive proxy statement for our upcoming Annual Meeting of Stockholders, to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report, and incorporated herein by reference or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120-day period.

Item 11. | Executive Compensation

This information will be contained in our definitive proxy statement for our upcoming Annual Meeting of Stockholders, to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report, and incorporated herein by reference or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120-day period.

Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

This information will be contained in our definitive proxy statement for our upcoming Annual Meeting of Stockholders, to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report, and incorporated herein by reference or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120-day period.

Item 13. | Certain Relationships and Related Transactions, and Director Independence

This information will be contained in our definitive proxy statement for our upcoming Annual Meeting of Stockholders, to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report, and incorporated herein by reference or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120-day period.

Item 14. | Principal Accountant Fees and Services

This information will be contained in our definitive proxy statement for our upcoming Annual Meeting of Stockholders, to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report, and incorporated herein by reference or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120-day period.

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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, 2020 and December 31, 2019 is included in this Annual Report on Form 10-K:

a. Valuation and Qualifying Accounts for the years ended December 31, 2020 and December 31, 2019.

|  | 2020 |  |  | 2019 |
Bad debt expense |  |  | 320,270 |  |  |  | 25,044 |
Reserve for obsolete inventory |  |  | 266,021 |  |  |  | 127,293 |

|  | Balance Beginning of Year |  |  | Charges to Costs and Expenses |  |  | Deductions (1) |  |  | Balance End of Year |
Year Ended December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for inventory obsolescence |  | $ | 665,308 |  |  | $ | 266,021 |  |  | $ | (207,380 | ) |  | $ | 723,949 |
Allowance for doubtful accounts |  |  | 612,434 |  |  |  | 320,270 |  |  |  | (434,660 | ) |  |  | 498,044 |
Totals |  | $ | 1,277,742 |  |  | $ | 586,291 |  |  | $ | (642,040 | ) |  | $ | 1,221,993 |
Year Ended December 31, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for inventory obsolescence |  | $ | 1,111,795 |  |  | $ | 127,293 |  |  | $ | (573,780 | ) |  | $ | 665,308 |
Allowance for doubtful accounts |  |  | 971,772 |  |  |  | 25,044 |  |  |  | (384,382 | ) |  |  | 612,434 |
Totals |  | $ | 2,083,567 |  |  | $ | 152,337 |  |  | $ | (958,162 | ) |  | $ | 1,277,742 |

|  | 2020 |  |  | 2019 |
Allowance for doubtful accounts at the beginning of the period |  | $ | 612,434 |  |  | $ | 971,772 |
Bad debt expense |  |  | 320,270 |  |  |  | 25,044 |
Receivables written off during the periods |  |  | (484,265 | ) |  |  | (362,244 | )
Effect of currency translation |  |  | 49,605 |  |  |  | (22,138 | )
Allowance for doubtful accounts at the end of the period |  | $ | 498,044 |  |  | $ | 612,434 |

(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.

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(b) Exhibits

Exhibit No. |  | Description |  | Location
3.1 |  | Articles of Incorporation, as Amended |  | Filed herewith
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
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 |  | Director Contract, dated July 29, 2014, by and between LiqTech International A/S and Sune Mathiesen |  | Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K as filed with the SEC on August 1, 2014
10.3 |  | CFO Contract, dated August 1, 2018, by and between between LiqTech International A/S and Claus Toftegaard |  | Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K as filed with the SEC on April 1, 2019
10.4 |  | Director Contract, dated October 15, 2018, by and between LiqTech International A/S and Sune Mathiesen |  | Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K as filed with the SEC on April 1, 2019

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10.5 |  | 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
10.6 |  | 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
10.7 |  | Lease Contract for Benshoej Industrivej 24, 9500 Hobro |  | Incorporated by reference to the Company’s Form 8-K as filed with the SEC on December 5, 2019
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

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Item 16. | Form 10-K Summary

Not Applicable.

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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 31, 2021 |  |
| By: | /s/ Sune Mathiesen
|  | Sune Mathiesen Chief Executive Officer, Principal Executive Officer and Director

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/ Sune Mathiesen |  | Chief Executive Officer, Principal Executive Officer and Director |  | March 31, 2021
Sune Mathiesen |  |  |  |
/s/ Mark Vernon |  | Chairman of the Board of Directors |  | March 31, 2021
Mark Vernon |  |  |  |
/s/ Claus Toftegaard |  | Chief Financial Officer, Principal Financial and Accounting Officer |  | March 31, 2021
Claus Toftegaard |  |  |  |
/s/ Alexander Buehler |  | Director |  | March 31, 2021
Alexander Buehler |  |  |  |
/s/ Peyton Boswell |  | Director |  | March 31, 2021
Peyton Boswell |  |  |  |
/s/ Richard Meeusen |  | Director |  | March 31, 2021
Richard Meeusen |  |  |  |

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