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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-Q

(Mark One)

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

For the six month period ended June 30, 2021

or

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

For the transition period from _______________________ to _______________________

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 3131 5941

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 (Check one):

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

As of August 16, 2021, there were 21,777,373 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended June 30, 2021

TABLE OF CONTENTS

| Page
PART I. FINANCIAL INFORMATION |
Item 1. Financial Statements | 5
Condensed Consolidated Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020 | 5
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2021 and June 30, 2020 (unaudited) | 7
Condensed Consolidated Statement of Stockholder’s Equity for the period ended June 30, 2021 and June 30, 2020 (unaudited) | 9
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and June 30, 2020 (unaudited) | 10
Notes to Condensed Consolidated Financial Statements (unaudited) | 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation | 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 33
Item 4. Controls and Procedures | 33
PART II. OTHER INFORMATION |
Item 1. Legal Proceedings | 34
Item 1A. Risk Factors | 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 34
Item 3. Defaults Upon Senior Securities | 34
Item 4. Mine Safety Disclosures | 34
Item 5. Other Information | 34
Item 6. Exhibits | 35
SIGNATURES | 36

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FORWARD-LOOKING STATEMENTS

Certain statements made in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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.

Forward-looking statements include, but are not limited to, statements concerning:

| ● | Our dependence on a few major customers and our ability to develop and maintain relationships with additional customers;

| ● | Our anticipated need to raise funds through equity offerings or debt financings;

| ● | The expected impact on demand for our products due to limited marine transportation of goods in response to the COVID-19 pandemic;

| ● | The potential impact on our business operations of changes in national, regional, and global economic, legislative, and political landscapes;

| ● | Our dependence on experienced managers to attract and retain qualified personnel;

| ● | Our need and ability to hire additional qualified personnel as our business expands;

| ● | The dependence of our growth on the availability of funding for emissions control programs and the enforcement of emissions-related environmental regulations;

| ● | Our ability to manage our future growth through operational or financial system adaptations and by training an expanding employee base;

| ● | Our ability to adapt our products to adhere to evolving governmental emission-related standards;

| ● | Our ability to establish and enforce intellectual property rights and to prevent the disclosure or publication of our trade secrets and other confidential information;

| ● | Our ability to retain intellectual property that we develop during performance of our contracts with private and governmental third parties;

| ● | The potential cost and outcome of adversarial intellectual property litigation;

| ● | The possibility that customers may find our competitors’ products acceptable or superior to ours, which may adversely impact our sales;

| ● | The dependence of our manufacture and supply of products on our ability to source raw materials at acceptable prices;

| ● | The impact on our financial performance of foreign currency rate fluctuation;

| ● | The risk of liability arising from claims of environmental damage, personal injury, and property damages in connection with our manufacturing operations;

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| ● | The ability of an investor to obtain or enforce within the United States any judgment against us or our directors and assets located outside the United States;

| ● | Our realization of the expected benefits of our subsidiary’s active joint venture agreement to supply and operate water treatment systems for Middle Eastern oil and gas producers, or other joint ventures agreements we may enter into in the future;

| ● | Our ability to maintain and assess the effectiveness of our internal control over financial reporting, and in turn, our ability to make and disclose accurate financial reports, which may impact the market price of our stock and investor confidence in the reliability of our financial reports;

| ● | Our ability to maintain the security and integrity of our information technology systems;

| ● | The dilutive effect of an issuance of common or preferred stock in connection with future equity financing or equity debt agreements;

| ● | The fluctuation and volatility of the market price of our common stock; and

| ● | Such other factors as discussed throughout Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020.

Any forward-looking statement made by us herein speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

|  | As of |  |  | As of |
|  | June 30, |  |  | December 31, |
|  | 2021 |  |  | 2020 |
|  | (Unaudited) |  |  |  |  |
Assets |  |  |  |  |  |  |  |
Current Assets: |  |  |  |  |  |  |  |
Cash, Cash equivalents and Restricted cash |  | $ | 25,116,746 |  |  | $ | 13,264,449 |
Accounts receivable, net of allowance for doubtful accounts of $532,822 and $498,044 at June 30, 2021 and December 31, 2020, respectively |  |  | 2,404,608 |  |  |  | 3,129,109 |
Inventories, net of allowance for excess and obsolete inventory of $622,403 and $723,949 at June 30, 2021 and December 31, 2020, respectively |  |  | 5,574,487 |  |  |  | 5,522,038 |
Contract assets |  |  | 1,787,259 |  |  |  | 2,708,136 |
Prepaid expenses and other current assets |  |  | 828,881 |  |  |  | 1,031,194 |
Total Current Assets |  |  | 35,711,981 |  |  |  | 25,654,926 |
Long-Term Assets: |  |  |  |  |  |  |  |
Property and Equipment, net of accumulated depreciation of $8,099,277 and $8,908,145 at June 30, 2021 and December 31, 2020, respectively |  |  | 9,823,625 |  |  |  | 10,321,511 |
Operating lease right-of-use assets |  |  | 4,678,293 |  |  |  | 4,947,734 |
Deposits and other assets |  |  | 530,419 |  |  |  | 545,673 |
Intangible assets, net of accumulated amortization of $317,395 and $269,441 at June 30, 2021 and December 31, 2020, respectively |  |  | 408,186 |  |  |  | 480,060 |
Goodwill |  |  | 251,928 |  |  |  | 260,233 |
Total Long-Term Assets |  |  | 15,692,451 |  |  |  | 16,555,211 |
Total Assets |  | $ | 51,404,432 |  |  | $ | 42,210,137 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

|  | As of |  |  | As of |
|  | June 30, |  |  | December 31, |
|  | 2021 |  |  | 2020 |
|  | (Unaudited) |  |  |  |  |
Liabilities and Stockholders’ Equity |  |  |  |  |  |  |  |
Current Liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 1,761,217 |  |  | $ | 2,332,151 |
Accrued expenses |  |  | 5,925,004 |  |  |  | 4,908,961 |
Current portion of finance lease obligations |  |  | 387,999 |  |  |  | 394,839 |
Current portion of operating lease liabilities |  |  | 698,645 |  |  |  | 1,026,235 |
Current portion of Convertible Note payable |  |  | 3,360,000 |  |  |  | - |
Contract liabilities |  |  | 1,907,343 |  |  |  | 1,152,748 |
Total Current Liabilities |  |  | 14,040,208 |  |  |  | 9,814,934 |
Convertible Note payable, net of discount of $2,796,591 and $0 at June 30, 2021 and December 31, 2020, respectively |  |  | 10,643,409 |  |  |  | - |
Deferred tax liability |  |  | 267,564 |  |  |  | 305,167 |
Other liabilities, net of current portion |  |  | 579,482 |  |  |  | - |
Finance lease obligations, net of current portion |  |  | 2,817,567 |  |  |  | 3,112,496 |
Operating lease liabilities, net of current portion |  |  | 3,979,648 |  |  |  | 4,159,225 |
Total Long-term Liabilities |  |  | 18,287,670 |  |  |  | 7,576,888 |
Total Liabilities |  |  | 32,327,878 |  |  |  | 17,391,822 |
Stockholders' Equity: |  |  |  |  |  |  |  |
Series A Mandatory Convertible Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 shares issued and outstanding at June 30, 2021 and December 31, 2020 |  |  | - |  |  |  | - |
Common stock; par value $0.001, 100,000,000 shares authorized, 21,777,373 and 21,655,461 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively |  |  | 21,777 |  |  |  | 21,655 |
Additional paid-in capital |  |  | 70,656,769 |  |  |  | 69,897,698 |
Accumulated deficit |  |  | (47,612,505 | ) |  |  | (42,054,968 | )
Accumulated other comprehensive loss |  |  | (3,989,487 | ) |  |  | (3,046,070 | )
Total Stockholders' Equity |  |  | 19,076,554 |  |  |  | 24,818,315 |
Total Liabilities and Stockholders' Equity |  | $ | 51,404,432 |  |  | $ | 42,210,137 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

|  | For the Three Months Ended |  |  | For the Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Revenue |  | $ | 4,016,563 |  |  | $ | 4,641,483 |  |  | $ | 8,014,440 |  |  | $ | 14,923,327 |
Cost of Goods Sold |  |  | 3,695,853 |  |  |  | 4,147,020 |  |  |  | 7,579,115 |  |  |  | 11,789,788 |
Gross Profit |  |  | 320,710 |  |  |  | 494,463 |  |  |  | 435,325 |  |  |  | 3,133,539 |
Operating Expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling expenses |  |  | 1,202,586 |  |  |  | 605,947 |  |  |  | 2,212,084 |  |  |  | 1,282,747 |
General and administrative expenses |  |  | 1,247,132 |  |  |  | 1,509,772 |  |  |  | 2,721,802 |  |  |  | 3,059,530 |
Research and development expenses |  |  | 434,629 |  |  |  | 316,559 |  |  |  | 872,236 |  |  |  | 627,513 |
Total Operating Expense |  |  | 2,884,347 |  |  |  | 2,432,278 |  |  |  | 5,806,122 |  |  |  | 4,969,790 |
Loss from Operations |  |  | (2,563,637 | ) |  |  | (1,937,815 | ) |  |  | (5,370,797 | ) |  |  | (1,836,251 | )
Other Income (Expense) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest and other income |  |  | - |  |  |  | 247 |  |  |  | - |  |  |  | 4,737 |
Interest expense |  |  | (215,598 | ) |  |  | (36,047 | ) |  |  | (256,017 | ) |  |  | (61,538 | )
Amortization discount on Convertible Note |  |  | (251,804 | ) |  |  | - |  |  |  | (251,804 | ) |  |  | - |
Fair value adjustment of warrants |  |  | - |  |  |  | (236,900 | ) |  |  | - |  |  |  | (236,900 | )
Gain (Loss) on currency transactions |  |  | (83,696 | ) |  |  | (368,561 | ) |  |  | 287,988 |  |  |  | (160,934 | )
Gain on sale of fixed assets |  |  | 1,134 |  |  |  | - |  |  |  | 1,134 |  |  |  | - |
Total Other Income (Expense) |  |  | (549,964 | ) |  |  | (641,261 | ) |  |  | (218,699 | ) |  |  | (454,635 | )
Loss Before Income Taxes |  |  | (3,113,601 | ) |  |  | (2,579,076 | ) |  |  | (5,589,496 | ) |  |  | (2,290,886 | )
Income Tax Benefit |  |  | (15,493 | ) |  |  | (15,265 | ) |  |  | (31,959 | ) |  |  | (30,574 | )
Net Loss |  | $ | (3,098,108 | ) |  | $ | (2,563,811 | ) |  | $ | (5,557,537 | ) |  | $ | (2,260,312 | )
Basic and Diluted Loss Per Share |  | $ | (0.14 | ) |  | $ | (0.12 | ) |  | $ | (0.26 | ) |  | $ | (0.11 | )
Basic and Diluted Weighted Average Common Shares Outstanding |  |  | 21,769,461 |  |  |  | 20,963,186 |  |  |  | 21,723,578 |  |  |  | 20,758,855 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE LOSS (UNAUDITED)

|  | For the Three Months Ended |  |  | For the Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Net Loss |  |  | (3,098,108 | ) |  |  | (2,563,811 | ) |  |  | (5,557,537 | ) |  |  | (2,260,312 | )
Other Comprehensive Income - Currency Translation, Net |  |  | 368,104 |  |  |  | 739,777 |  |  |  | (943,417 | ) |  |  | 243,818 |
Total Comprehensive Loss |  | $ | (2,730,004 | ) |  | $ | (1,824,034 | ) |  | $ | (6,500,954 | ) |  | $ | (2,016,494 | )

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

For the period ended June 30, 2021 and June 30, 2020

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated Other |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Additional |  |  |  |  |  |  | Compre- |  |  |  |  |
|  | Common Stock |  |  | Paid-in |  |  | Accumulated |  |  | hensive |  |  |  |  |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Income/(Loss) |  |  | TOTAL |
BALANCE, December 31, 2020 |  |  | 21,655,461 |  |  |  | 21,655 |  |  |  | 69,897,698 |  |  |  | (42,054,968 | ) |  |  | (3,046,070 | ) |  |  | 24,818,315 |
Common stock issued in settlement of RSUs |  |  | 41,912 |  |  |  | 42 |  |  |  | (42 | ) |  |  |  |  |  |  |  |  |  |  | - |
Stock-based compensation |  |  |  |  |  |  |  |  |  |  | 102,388 |  |  |  |  |  |  |  |  |  |  |  | 102,388 |
Currency translation, net |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (1,311,521 | ) |  |  | (1,311,521 | )
Net Loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (2,459,429 | ) |  |  |  |  |  |  | (2,459,429 | )
BALANCE, March 31, 2021 |  |  | 21,697,373 |  |  |  | 21,697 |  |  |  | 70,000,044 |  |  |  | (44,514,397 | ) |  |  | (4,357,591 | ) |  |  | 21,149,753 |
Common stock issued as commitment fee for Convertible Note |  |  | 80,000 |  |  |  | 80 |  |  |  | 531,649 |  |  |  |  |  |  |  |  |  |  |  | 531,729 |
Stock-based compensation |  |  |  |  |  |  |  |  |  |  | 125,076 |  |  |  |  |  |  |  |  |  |  |  | 125,076 |
Currency translation, net |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 368,104 |  |  |  | 368,104 |
Net Loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (3,098,108 | ) |  |  |  |  |  |  | (3,098,108 | )
BALANCE, June 30, 2021 |  |  | 21,777,373 |  |  |  | 21,777 |  |  |  | 70,656,769 |  |  |  | (47,612,505 | ) |  |  | (3,989,487 | ) |  |  | 19,076,554 |
BALANCE, December 31, 2019 |  |  | 20,547,668 |  |  |  | 20,548 |  |  |  | 61,398,150 |  |  |  | (32,246,608 | ) |  |  | (6,166,559 | ) |  |  | 23,005,531 |
Common stock issued in settlement of RSUs |  |  | 8,212 |  |  |  | 8 |  |  |  | 44,992 |  |  |  |  |  |  |  |  |  |  |  | 45,000 |
Stock-based compensation |  |  |  |  |  |  |  |  |  |  | 96,222 |  |  |  |  |  |  |  |  |  |  |  | 96,222 |
Currency translation, net |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (495,959 | ) |  |  | (495,959 | )
Net Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 303,499 |  |  |  |  |  |  |  | 303,499 |
BALANCE, March 31, 2020 |  |  | 20,555,880 |  |  |  | 20,556 |  |  |  | 61,539,364 |  |  |  | (31,943,109 | ) |  |  | (6,662,518 | ) |  |  | 22,954,293 |
Common stock issued in settlement of RSUs |  |  | 8,333 |  |  |  | 8 |  |  |  | (8 | ) |  |  |  |  |  |  |  |  |  |  | - |
Common shares issued for cash at $5.00 per share, net of offering cost of $680,952 |  |  | 1,085,000 |  |  |  | 1,085 |  |  |  | 4,742,963 |  |  |  |  |  |  |  |  |  |  |  | 4,744,048 |
Stock-based compensation |  |  |  |  |  |  |  |  |  |  | 82,335 |  |  |  |  |  |  |  |  |  |  |  | 82,335 |
Currency translation, net |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 739,777 |  |  |  | 739,777 |
Net Loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (2,563,811 | ) |  |  |  |  |  |  | (2,563,811 | )
BALANCE, June 30, 2020 |  |  | 21,649,213 |  |  |  | 21,649 |  |  |  | 66,364,654 |  |  |  | (34,506,920 | ) |  |  | (5,922,741 | ) |  |  | 25,956,642 |

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

|  | For the Six Months Ended |
|  | June 30, |
|  | 2021 |  |  | 2020 |
Cash Flows from Operating Activities: |  |  |  |  |  |  |  |
Net Loss |  | $ | (5,557,537 | ) |  | $ | (2,260,312 | )
Adjustments to reconcile net loss to net cash provided by (used in) operations: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 1,298,815 |  |  |  | 1,183,441 |
Amortization of discount on convertible notes payable |  |  | 251,804 |  |  |  | - |
Stock-based compensation |  |  | 227,464 |  |  |  | 223,557 |
Change in fair value of warrant liability |  |  | - |  |  |  | 236,900 |
Change in deferred tax asset / liability |  |  | (31,959 | ) |  |  | (30,574 | )
Gain on sale of fixed assets |  |  | (1,134 | ) |  |  | - |
Changes in assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | 633,533 |  |  |  | 1,820,234 |
Inventory |  |  | (231,899 | ) |  |  | (157,376 | )
Contract assets |  |  | 855,558 |  |  |  | 1,141,799 |
Prepaid expenses and other current assets |  |  | 174,731 |  |  |  | (184,328 | )
Accounts payable |  |  | (504,841 | ) |  |  | (2,265,228 | )
Accrued expenses |  |  | 1,754,808 |  |  |  | 1,986,152 |
Operating lease liabilities |  |  | (582,679 | ) |  |  | (366,198 | )
Contract liabilities |  |  | 803,077 |  |  |  | (98,131 | )
Total Adjustments |  |  | 4,647,278 |  |  |  | 3,490,248 |
Net Cash provided by (used in) Operating Activities |  |  | (910,259 | ) |  |  | 1,229,936 |
Cash Flows from Investing Activities: |  |  |  |  |  |  |  |
Purchase of property and equipment |  |  | (718,366 | ) |  |  | (2,171,172 | )
Purchase of other intangible assets |  |  | - |  |  |  | (23,446 | )
Proceeds from sale of fixed assets |  |  | 1,134 |  |  |  | - |
Net Cash used in Investing Activities |  |  | (717,232 | ) |  |  | (2,194,618 | )
Cash Flows from Financing Activities: |  |  |  |  |  |  |  |
Payments on finance lease obligation |  |  | (192,504 | ) |  |  | (16,973 | )
Proceeds from convertible notes payable, net |  |  | 14,283,333 |  |  |  | - |
Proceeds from issuance of prefunded warrants |  |  | - |  |  |  | 2,575,000 |
Proceeds from issuance of common stock, net |  |  | - |  |  |  | 4,744,048 |
Net Cash provided by Financing Activities |  |  | 14,090,829 |  |  |  | 7,302,075 |
Gain (Loss) on Currency Translation |  |  | (611,041 | ) |  |  | 108,944 |
Net change in Cash, Cash Equivalents and Restricted Cash |  |  | 11,852,297 |  |  |  | 6,446,337 |
Cash, Cash Equivalents and Restricted Cash at Beginning of Period |  |  | 13,264,449 |  |  |  | 9,783,932 |
Cash, Cash Equivalents and Restricted Cash at End of Period |  | $ | 25,116,746 |  |  | $ | 16,230,269 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

|  | For the Six Months Ended June 30, |
|  | 2021 |  |  | 2020 |
Supplemental Disclosures of Cash Flow Information: |  |  |  |  |  |  |  |
Cash paid during the period for: |  |  |  |  |  |  |  |
Interest |  | $ | 79,448 |  |  | $ | 45,471 |
Income Taxes |  | $ | - |  |  | $ | - |
Non-cash financing activities |  |  |  |  |  |  |  |
Original issue discount on convertible note |  |  | 1,800,000 |  |  |  | - |
Convertible Note debt conversion feature |  |  | 3,048,396 |  |  |  | - |
Debt issuance costs on convertible note |  |  | 716,667 |  |  |  | - |
Common Stock issued for conversion of convertible note |  |  | 531,729 |  |  |  | - |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation

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

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

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

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

LiqTech NA, Inc. (“LiqTech NA”), incorporated in Delaware on July 1, 2005, a 100% owned subsidiary of LiqTech USA, engaged in the production, marketing and sale of ceramic diesel particulate and liquid filters in the United States and Canada. LiqTech NA has closed operations in January 2021, and all activity in this company has ceased.

LiqTech Water A/S (formerly known as LiqTech Systems A/S), a Danish Corporation (“LiqTech Water”), incorporated on September 1, 2009, engaged in the manufacture of fully automated filtering systems for use within marine applications, municipal pool and spa applications, and other industrial applications within Denmark and international markets.

LiqTech Plastics A/S (formerly known as BS Plastic A/S), a Danish Corporation (“LiqTech Plastics”), acquired on September 1, 2019, engaged in the manufacture of specialized machined and welded plastic parts within Denmark and international markets.

LiqTech Ceramics A/S, a Danish corporation (“LiqTech Ceramics”), incorporated on December 20, 2019, engaged in the development, design, application, marketing and sales of membranes, ceramic diesel particulate and liquid filters, and catalytic converters in Europe, Asia and South America.

LiqTech Water Projects A/S, a Danish corporation (“LiqTech Water Projects”), incorporated on July 28, 2020 that is a dormant company without activity. The Company was formed to include the investments for our joint venture in the Middle East.

LiqTech Emission Control A/S, a Danish corporation (“LiqTech Emission Control”), incorporated on March 1, 2021 that is a dormant company without activity. The Company was formed to include the investments for our joint venture in China.

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, and all activity in this company has ceased.

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

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

Reclassification – Certain amounts presented in previously issued financial statements have been reclassified to be consistent with the current period presentation. In the statement of operations and comprehensive income (loss), the company has reclassified the prior year comparative amounts of general and administrative expenses and other expenses to be consistent with the current classification.

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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, LiqTech Water Projects and LiqTech Emission Control 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 six months ended June 30, 2021 and 2020. Translation gains and losses are deferred and accumulated as a component of other comprehensive income (loss) in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.

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 June 30, 2021 and December 31, 2020, the Company held $1,500,000 and $1,515,620, respectively, of restricted cash. The restricted cash is held as security by a local financial institution for ensuring a leasing facility and for payment guarantees issued for the benefit of customers in connection with prepayments of sales orders and for warranties after the delivery of sales orders. The Company had no balances held in a financial institution in the United States in excess of federally insured amounts at June 30, 2021 and December 31, 2020.

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

The roll-forward of the allowance for doubtful accounts for the period ended June 30, 2021 and December 31, 2020 is as follows:

|  | June 30, 2021 |  |  | December 31, 2020 |
Allowance for doubtful accounts at the beginning of the period |  | $ | 498,044 |  |  | $ | 612,434 |
Bad debt expense |  |  | 76,280 |  |  |  | 320,270 |
Receivables written off during the periods |  |  | (24,895 | ) |  |  | (484,265 | )
Effect of currency translation |  |  | (16,607 | ) |  |  | 49,605 |
Allowance for doubtful accounts at the end of the period |  | $ | 532,822 |  |  | $ | 498,044 |

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

For inventory produced, standard costs that approximate actual cost on the FIFO method are used to value inventory. Standard costs are reviewed at least annually by management or more often in the event that circumstances indicate a change in cost has occurred.

Work in process and finished goods include material, labor, and production overhead costs. The Company adjusts the value of its inventory to the extent 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. Also included in Contract assets are short-term receivables such as VAT and other receivables.

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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.

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.

Goodwill and Intangible Assets -- The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business, with the residual purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.

Acquired intangible assets with determinable useful lives are amortized on a straight-line or accelerated basis over the estimated periods benefited, ranging from one to ten years. Customer relationships and other non-contractual intangible assets with determinable lives are amortized over periods of five years.

The Company evaluates the recoverability of long-lived assets by comparing the carrying amount of an asset to estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. The evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not limited to, revenue growth rates, gross profit margins, and operating expenses over the expected remaining useful life of the related asset. A shortfall in these estimated operating cash flows could result in an impairment charge in the future.

Goodwill is not amortized but is evaluated annually for impairment at the reporting unit level or when indicators of a potential impairment are present. The Company estimates the fair value of the reporting unit using the discounted cash flow and market approaches. Forecasts of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, primarily using 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 three and six months ended June 30, 2021 and 2020:

|  | For the Three Months |  |  | For the Six Months |
|  | Ended June 30, |  |  | Ended June 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
United States and Canada |  | $ | 195,611 |  |  | $ | 307,480 |  |  | $ | 361,199 |  |  | $ | 433,962 |
Australia |  |  | 235,157 |  |  |  | 61,706 |  |  |  | 259,851 |  |  |  | 103,961 |
South America |  |  | 596 |  |  |  | 12,043 |  |  |  | 596 |  |  |  | 22,939 |
Asia |  |  | 1,223,875 |  |  |  | 292,756 |  |  |  | 2,329,217 |  |  |  | 2,326,044 |
Europe |  |  | 2,361,324 |  |  |  | 3,967,498 |  |  |  | 5,063,577 |  |  |  | 12,036,421 |
|  | $ | 4,016,563 |  |  | $ | 4,641,483 |  |  | $ | 8,014,440 |  |  | $ | 14,923,327 |

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The Company’s sales by product line are as follows for the three and six months ended June 30, 2021 and 2020:

|  | For the Three Months |  |  | For the Six Months |
|  | Ended June 30, |  |  | Ended June 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Liquid filters and systems |  | $ | 1,080,004 |  |  | $ | 2,551,710 |  |  | $ | 2,237,340 |  |  | $ | 10,531,998 |
Diesel particulate filters |  |  | 1,810,743 |  |  |  | 1,160,695 |  |  |  | 3,741,807 |  |  |  | 2,720,757 |
Plastic components |  |  | 1,016,370 |  |  |  | 762,384 |  |  |  | 1,830,396 |  |  |  | 1,343,794 |
Development projects |  |  | 109,446 |  |  |  | 166,694 |  |  |  | 204,897 |  |  |  | 326,778 |
|  | $ | 4,016,563 |  |  | $ | 4,641,483 |  |  | $ | 8,014,440 |  |  | $ | 14,923,327 |

For liquid filters and systems, 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 to receive payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Pre-payments received prior to satisfaction of performance obligations are recorded as a Contract liability. Given the insignificant days between revenue recognition and receipt of payment, financing 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 to the customer based upon sales and delivery conditions specified in the sales contract. This typically occurs upon shipment of the system from the production facility but can also occur upon other agreed delivery terms. In connection with the completion of the system, it is normal procedure to issue a FAT (Factory Acceptance Test) asserting that the customer has accepted the performance of the system as it is being shipped from our production facility in Hobro. As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer), and this commissioning is therefore considered a second performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of 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.

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Contract assets represent 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 period ended June 30, 2021 and December 31, 2020 is as follows:

|  | June 30, 2021 |  |  | December 31, 2020 |
Cost incurred |  | $ | 3,894,477 |  |  | $ | 3,997,161 |
Unbilled project deliveries |  |  | 524,288 |  |  |  | 1,015,977 |
VAT |  |  | 287,773 |  |  |  | 446,608 |
Other receivables |  |  | 110,364 |  |  |  | 75,010 |
Prepayments |  |  | (4,121,938 | ) |  |  | (3,112,118 | )
Deferred Revenue |  |  | (815,048 | ) |  |  | (866,680 | )
|  | $ | (120,084 | ) |  | $ | 1,555,958 |
Distributed as follows: |  |  |  |  |  |  |  |
Contract assets |  | $ | 1,787,259 |  |  | $ | 2,708,136 |
Contract liabilities |  |  | (1,907,343 | ) |  |  | (1,152,178 | )

|  | $ | (120,084 | ) |  | $ | 1,555,958 |

Advertising Cost -- Costs incurred in connection with advertising of the Company’s products are expensed as incurred. Advertising costs are included in sales expenses, and total advertising costs for the three-month periods ended June 30, 2021 and 2020 respectively, were $42,843 and $36,786. Total advertising costs amounted to $125,235 and $62,023 for the six months ended June 30, 2021 and 2020, respectively. Advertising cost has increased in 2021 due to the increased investment in sales and branding activities especially within SoMe advertising activities.

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 three-month period ended June 30, 2021 and 2020 were $434,629 and $316,559, respectively, of research and development costs. For the six month periods ended June 30, 2021 and 2020, research and development costs were $872,236 and $627,513.

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 yet 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 $125,076 and $82,335 have been recognized for the vesting of options and stock awards granted to Directors and management for the three-month periods ended June 30, 2021 and 2020, respectively. For the six month periods ended June 30, 2021 and 2020, stock-based compensation was $227,464 and $223,557 respectively.

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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 outside 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 was 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 non-recurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or 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 and convertible notes payable 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; contract assets; reserve for excess and obsolete inventory; depreciation and impairment of property, plant and equipment; goodwill; liabilities including contract liabilities and contingencies; the disclosures of contingent assets and liabilities at the date of the financial statements; and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.

Recent Accounting Pronouncements – In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods, and early adoption is permitted in annual reporting periods ending after December 15, 2020. We are still assessing the impact of ASU 2020-06 on our condensed consolidated financial statements.

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 rates 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.

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 have adopted the new standard effective January 1, 2021, and the adoption of this guidance did not have a material impact on our 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 June 30, 2021 and December 31, 2020:

|  | June 30, 2021 |  |  | December 31, 2020 |
Furnace parts and supplies |  | $ | 417,608 |  |  | $ | 471,622 |
Raw materials |  |  | 2,581,670 |  |  |  | 1,955,713 |
Work in process |  |  | 2,004,560 |  |  |  | 2,394,481 |
Finished goods and filtration systems |  |  | 1,193,052 |  |  |  | 1,424,171 |
Reserve for obsolescence |  |  | (622,403 | ) |  |  | (723,949 | )
Net Inventory |  | $ | 5,574,487 |  |  | $ | 5,522,038 |

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

NOTE 3 - 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 expired in February 2021, and due to the closure of the activity in North America, the lease has not been extended.

During the three months ended June 30, 2021, cash paid for amounts included for the measurement of finance lease liabilities was $239,818, and the Company recorded finance lease expenses included in other income (expenses) of $122,838.

During the six months ended June 30, 2021, cash paid for amounts included for the measurement of lease liabilities was $545,872, and the company recorded operating lease expense of $504,859.

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Supplemental balance sheet information related to leases as of June 30, 2021 and December 31, 2020 was as follows

|  | June 30, 2021 |  |  | December 31, 2020 |
Operating leases: |  |  |  |  |  |  |  |
Operating lease right-of-use |  | $ | 4,678,293 |  |  | $ | 4,947,734 |
Operating lease liabilities - current |  | $ | 698,645 |  |  | $ | 1,026,235 |
Operating lease liabilities – long-term |  |  | 3,979,648 |  |  |  | 4,159,225 |
Total operating lease liabilities |  | $ | 4,678,293 |  |  | $ | 5,185,460 |
Finance leases: |  |  |  |  |  |  |  |
Property and equipment, at cost |  | $ | 4,665,397 |  |  | $ | 4,819,201 |
Accumulated depreciation |  |  | (1,419,620 | ) |  |  | (1,389,488 | )
Property and equipment, net |  | $ | 3,245,777 |  |  | $ | 3,429,713 |
Finance lease liabilities - current |  | $ | 387,999 |  |  | $ | 394,839 |
Finance lease liabilities – long-term |  |  | 2,817,567 |  |  |  | 3,112,496 |
Total finance lease liabilities |  | $ | 3,205,566 |  |  | $ | 3,507,335 |
Weighted average remaining lease term: |  |  |  |  |  |  |  |
Operating leases |  |  | 9.8 |  |  |  | 10.0 |
Finance leases |  |  | 6.3 |  |  |  | 6.9 |
Weighted average discount rate: |  |  |  |  |  |  |  |
Operating leases |  |  | 6.2 | % |  |  | 6.2 | %
Finance leases |  |  | 2.9 | % |  |  | 2.8 | %

Maturities of lease liabilities at June 30, 2021 were as follows:

|  | Operating lease |  |  | Finance lease |
2021 (remaining 6 months) |  | $ | 488,964 |  |  | $ | 236,491 |
2022 |  |  | 932,806 |  |  |  | 471,310 |
2023 |  |  | 831,117 |  |  |  | 466,378 |
2024 |  |  | 673,369 |  |  |  | 467,383 |
2025 |  |  | 350,996 |  |  |  | 463,574 |
Thereafter |  |  | 2,969,711 |  |  |  | 1,447,967 |
Total payment under lease agreements |  |  | 6,246,963 |  |  |  | 3,553,103 |
Less imputed interest |  |  | (1,568,670 | ) |  |  | (347,537 | )
Total lease liability |  | $ | 4,678,293 |  |  | $ | 3,205,566 |

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NOTE 4 - 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 guaranteed credit line of DKK10,000,000 (approximately $1,650,000). As of June 30, 2021 our bank has issued working guaranties of $537,448 for our customer based on the credit line. The credit line is secured by a cash deposit of $1,500,000.

NOTE 5 – LONG-TERM DEBT

Convertible Note

On March 24, 2021, we entered into a Securities Purchase Agreement with an institutional investor pursuant to which the Company agreed to issue and sell a $15.0 million principal amount Senior Convertible Note due October 1, 2023 and 80,000 shares of Common Stock for an aggregate purchase price of $15.0 million upon the satisfaction of the closing conditions set forth in the Purchase Agreement. The Closing occurred on April 8, 2021, and the Company issued to the Investor the securities in connection with the Closing.

The Note is a senior, unsecured obligation of the Company, payable at 112% of the principal amount at maturity on October 1, 2023, or earlier upon redemption or repurchase as set forth in the Note. The Note is convertible into shares of Common Stock pursuant to the terms of the Note, in part or in whole, from time to time, at the election of the Investor. The initial conversion rate is 100.6749 shares of Common Stock per $1,000 of principal amount of the Note. The conversion rate is subject to anti-dilution adjustments including for stock dividends, splits and combinations; issuances of options, warrants or similar rights, spin-offs and distributions of property; cash dividends or distributions; and tender or exchange offers, in each case as further described in and pursuant to the terms of the Note.

Beginning on March 1, 2022, and on the first day of each calendar month thereafter, at the election of the Investor or Holder, if applicable, the Company shall be required to redeem $840,000 of the amounts due under the Note in cash or Common Stock at 90% of the lesser of (i) the volume-weighted average price (“VWAP”) of the Common Stock on the trading day immediately preceding the payment date and (ii) the average of the lowest three (3) VWAPs over the 10 trading days immediately preceding the payment date, which shall in no case be less than the floor price of $1.75 per share.

The Note has interest payable quarterly beginning June 1, 2021 at a rate of 5% per annum. The number of shares issuable if the Company elects to pay interest in shares of Common Stock shall be based on the Market Price.

The components of the Convertible Note are as follows:

|  | June 30, 2021 |  |  | December 31, 2020 |
Convertible Note |  | $ | 16,800,000 |  |  |  | - |
Less: unamortized debt issuance costs |  |  | (2,796,591 | ) |  |  | - |
Convertible Note payable |  | $ | 14,003,409 |  |  | $ | - |
Current portion of Convertible Note payable |  |  | 3,360,000 |  |  |  | - |
Convertible Note payable, less current portion |  |  | 10,643,409 |  |  |  | - |
Convertible Note payable |  | $ | 14,003,409 |  |  | $ | - |

For the three and six months ended June 30, 2021 and 2020, the Company recognized interest expense of $422,638 and $0, respectively, of which $251,804 and $0, respectively, was related to the amortization of debt issuance costs.

NOTE 6 - AGREEMENTS AND COMMITMENTS

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 three-month periods ended June 30, 2021 and 2020, matching contributions expensed totaled $0 and $3,949 respectively. For the six months ended June 30, 2021 and 2020, matching contributions were expensed and totaled $718 and $6,984, respectively.

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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 ordered to pay an amount totaling DKK 587,000 ($96,900) which included interest and court fees that were expensed in 2020. The amount was paid in January 2021.

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 June 30, 2021.

Product Warranties - The Company provides a standard warranty for 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, as of June 30, 2021 and December 31, 2020, were as follows:

|  | June 30, 2021 |  |  | December 31, 2020 |
Balance at January 1 |  | $ | 1,056,613 |  |  | $ | 813,288 |
Warranty costs charged to cost of goods sold |  |  | 51,552 |  |  |  | 348,241 |
Utilization charges against reserve |  |  | (102,455 | ) |  |  | (199,624 | )
Release of accrual related to expired warranties |  |  | - |  |  |  | - |
Foreign currency effect |  |  | (33,015 | ) |  |  | 94,708 |
Balance at the end of the period |  | $ | 972,695 |  |  | $ | 1,056,613 |

NOTE 7 - 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 period ended June 30, 2021, the Company had 145,460 stock grants outstanding to issue Common Stock (“RSUs”). Further, the Company had 515,000 prefunded warrants outstanding to issue Common Stock.

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The following data shows the amounts used in computing earnings per share and the weighted average number of shares of potential dilutive common stock for the six months ended June 30, 2021 and 2020:

|  | For the Six Months Ended June 30, |
|  | 2021 |  |  | 2020 |
Net Income (Loss) attributable to LiqTech International Inc. |  | $ | (5,557,537 | ) |  | $ | (2,260,312 | )
Weighted average number of common shares used in basic earnings per share |  |  | 21,723,578 |  |  |  | 20,758,855 |
Effect of dilutive securities, stock options, RSUs, and warrants |  |  | - |  |  |  | - |
Weighted average number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share |  |  | 21,723,578 |  |  |  | 20,758,855 |

For the six months ended June 30, 2021, the Company had no options outstanding to purchase common stock. For the six months ended June 30, 2020, the Company had 25,000 options outstanding to purchase common stock at $2.96 per share.

NOTE 8 - STOCKHOLDERS' EQUITY

Common Stock – The Company has 100,000,000 authorized shares of common stock, $0.001 par value ("Common Stock"). As of June 30, 2021 and 2020, respectively, there were 21,777,373 and 21,649,213 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 June 30, 2021, there were no mandatory convertible preferred shares issued and outstanding.

Stock Issuance

Since January 1, 2021, the Company has made the following issuances of common stock:

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

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

On April 9, 2021, the Company issued 80,000 restricted shares of Common Stocks pursuant to the Convertible Note agreement executed on April 8, 2021.

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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 six months ended June 30, 2021:

|  | 2021 |
Warrants outstanding at January 1 |  |  | 515,000 |
Exercises and conversions |  |  | - |
Warrants outstanding at June 30 |  |  | 515,000 |

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 June 30, 2021, 145,460 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 of Common Stock to management for 2020 as part of the Incentive Plan, totaling 40,432 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 $125,076 and $82,335 for the three-month periods ended June 30, 2021 and 2020, respectively. For the six months period ended June 30, 2021 and 2020 respectively, the stock-based compensation related to share grants was $227,464 and $223,557. On June 30, 2021, the Company had $771,035 of unrecognized compensation cost related to non-vested stock grants.

A summary of the status of the RSU's as of June 30, 2021 and changes during the period are presented below:

|  | June 30, 2021 |
|  | Number of units |  |  | Weighted Average Grant-Date Fair value |  |  | Aggregated Intrinsic Value |
Outstanding, December 31, 2020 |  |  | 128,299 |  |  | $ | 5.79 |  |  | $ | 283,541 |
Granted |  |  | 59,073 |  |  |  | 8.90 |  |  |  | - |
Vested and settled with share issuance |  |  | (41,912 | ) |  |  | (5.65 | ) |  |  | - |
Forfeited |  |  | - |  |  |  | - |  |  |  | - |
Outstanding, June 30, 2021 |  |  | 145,460 |  |  | $ | 7.09 |  |  | $ | 33,456 |

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. On June 30, 2021, 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 9 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE

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

|  | For the Three Months |  |  | For the Six Months |
|  | Ended June 30, |  |  | Ended June 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Customer A |  |  | 12 | % |  |  | - |  |  |  | 11 | % |  |  | - | %
Customer B |  |  | - |  |  |  | 18 | % |  |  | - |  |  |  | 30 | %
Customer C |  |  | - |  |  |  | 15 | % |  |  | - |  |  |  | 13 | %

* Zero or less than 10%

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

|  | June 30, 2021 |  |  | December 31, 2020 |
Customer A |  |  | 12 | % |  |  | 16 | %
Customer B |  |  | - |  |  |  | 39 | %
Customer D |  |  | 12 | % |  |  | 12 | %

* Zero or less than 10%

As of June 30, 2021, approximately 99% of the Company’s assets were located in Denmark and 1% in the United States. As of December 31, 2020, approximately 100% of the Company’s assets were located in Denmark and 0% in the United States.

NOTE 10 – SEGMENT REPORTING

The Company operates in three main segments: Water, Ceramics and Plastics. With effect from January 1, 2020, the group structure was changed as shared group activities were transferred to an individual reporting unit separated from the business units. Costs and assets for these activities were therefore separated during 2020.

Segment information for the business areas is as follows:

|  | For the Three Months Ended |  |  | For the Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Revenue |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Water |  | $ | 1,152,422 |  |  | $ | 2,395,458 |  |  | $ | 2,309,758 |  |  | $ | 10,307,261 |
Ceramics |  |  | 2,102,693 |  |  |  | 1,614,135 |  |  |  | 4,033,757 |  |  |  | 4,063,731 |
Plastics |  |  | 1,064,219 |  |  |  | 911,751 |  |  |  | 1,966,388 |  |  |  | 1,716,914 |
Segment elimination |  |  | (302,771 | ) |  |  | (279,861 | ) |  |  | (295,463 | ) |  |  | (1,164,579 | )
Total consolidated Revenue |  |  | 4,016,563 |  |  |  | 4,641,483 |  |  |  | 8,014,440 |  |  |  | 14,923,327 |

For the three-month periods ended June 30, 2021 consolidated revenue declined by $624,920, corresponding to 13%, compared to the same period in 2020. Revenue from the Water segment declined by $1,243,036 as a result of the negative impact of the ongoing COVID-19 pandemic, which has caused a substantial decline in the demand and delivery of water treatment systems for the marine scrubber industry. Revenue from the Ceramics segment increased by $488,558 as a result of increased demand for our Diesel particulate filters and membranes used in various environmental solutions for the reduction of global CO2 emissions. Revenue in the Plastics segment increased by $152,468 due to the increase in sales activities which has brought in an increased number of new customers.

The consolidated revenue for the six months ended June 30, 2021 declined by $6,908,887 compared to the same period in 2020. The decline was primarily attributable to the Water segment, where revenue declined by $7,997,503. For Ceramics and Plastics, the revenue increased slightly for the six months ended June 30, 2021 compared to the same period in 2020, while revenue from Other increased significantly as this is mainly intercompany invoicing of management fees to the other segments as part of the new group structure that was implemented in 2020. For 2020 the related management fee was invoiced in the last quarter of 2020 and comparison is therefore not possible for Other revenue.

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|  | For the Three Months Ended |  |  | For the Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Income (Loss) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Water |  | $ | (944,122 | ) |  | $ | (506,209 | ) |  | $ | (1,580,562 | ) |  | $ | 110,758 |
Ceramics |  |  | (1,457,862 | ) |  |  | (874,606 | ) |  |  | (1,882,398 | ) |  |  | (975,701 | )
Plastics |  |  | (275,324 | ) |  |  | (35,809 | ) |  |  | (528,303 | ) |  |  | (67,656 | )
Other |  |  | (420,800 | ) |  |  | (1,147,187 | ) |  |  | (1,566,274 | ) |  |  | (1,327,713 | )
Total consolidated Loss |  |  | (3,098,108 | ) |  |  | (2,563,811 | ) |  |  | (5,557,537 | ) |  |  | (2,260,312 | )

Loss for the three-month periods ended June 30, 2021 was $(3,098,108) compared to $(2,563,811) for the corresponding period in 2020. The greater loss in the current year is mainly related to the Water segment due to the significant decline in revenue as noted above. Further, Water, Ceramics and Plastics have each been charged with intercompany management fees in the three-month period ended June 30, 2021 while the related management fee was invoiced in the last quarter of 2020 covering the full year. The loss for the three-month period ended June 30, 2021 is therefore not fully comparable with the corresponding loss for the three-month period ended June 30, 2020.

Income (Loss) for the six-month period ended June 30, 2021 was $(5,557,537) compared to $(2,260,312) for the corresponding period in 2020. The greater loss in the current year is mainly related to the Water segment due to the significant decline in revenue as noted above. Further, Water, Ceramics and Plastics have each been charged with intercompany management fees in the six-month period ended June 30, 2021 while the related management fee was invoiced in the last quarter of 2020 covering the full year. The loss for the six-month period ended June 30, 2021 is therefore not fully comparable with the corresponding loss for the six month periods ended June 30, 2020.

|  | For the period ended |
Total assets |  | June 30, 2021 |  |  | December 31, 2020 |
Water |  | $ | 12,166,764 |  |  | $ | 14,033,107 |
Ceramics |  |  | 15,747,698 |  |  |  | 16,734,371 |
Plastics |  |  | 2,352,040 |  |  |  | 2,022,381 |
Other |  |  | 21,137,930 |  |  |  | 9,420,278 |
Total consolidated assets |  | $ | 51,404,432 |  |  | $ | 42,210,137 |

Total segment assets have increased from $42,210,137 at June 30, 2020 to $51,404,432 at June 30, 2021. The increase is especially related to the increased cash and cash equivalents as a result of proceeds from the issuance of the Convertible Note in April 2021. Segment assets in Water have decreased especially due to a decline in account receivables and contract assets as a result of the significant decline in activity.

NOTE 11 - SUBSEQUENT EVENTS

None.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report. In addition, the following discussion should be read in conjunction with our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 31, 2021 and the financial statements and notes thereto. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

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 Plastics A/S (“LiqTech Plastics”), LiqTech Water Projects A/S ("LiqTech Water Projects”) and LiqTech Emission Control A/S (“LiqTech Emission Control”), 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, LiqTech Water Projects, LiqTech Emission Control 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 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.

| ● | 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.

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Results of Operations

The financial information below is derived from our unaudited condensed consolidated financial statements included elsewhere in this report.

The following table sets forth our revenues, expenses and net income for the three months ended June 30, 2021 and 2020:

|  | Three Months Ended June 30, |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Period to Period Change |
|  | 2021 |  |  | As a % of Sales |  |  | 2020 |  |  | As a % of Sales |  |  | Variance |  |  | Percent % |
Revenue |  |  | 4,016,563 |  |  |  | 100.0 | % |  |  | 4,641,483 |  |  |  | 100.0 | % |  |  | (624,920 | ) |  |  | (13.5 | )%
Cost of Goods Sold |  |  | 3,695,853 |  |  |  | 92.0 |  |  |  | 4,147,020 |  |  |  | 89.3 |  |  |  | (451,167 | ) |  |  | (10.9 | )
Gross Profit |  |  | 320,710 |  |  |  | 8.0 |  |  |  | 494,463 |  |  |  | 10.7 |  |  |  | (173,753 | ) |  |  | (35.1 | )
Operating Expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling expenses |  |  | 1,202,586 |  |  |  | 29.9 |  |  |  | 605,947 |  |  |  | 13.1 |  |  |  | 596,639 |  |  |  | 98.5 |
General and administrative expenses |  |  | 1,247,132 |  |  |  | 31.0 |  |  |  | 1,509,772 |  |  |  | 32.5 |  |  |  | (262,640 | ) |  |  | (17.4 | )
Research and development expenses |  |  | 434,629 |  |  |  | 10.8 |  |  |  | 316,559 |  |  |  | 6.8 |  |  |  | 118,070 |  |  |  | 37.3 |
Total Operating Expenses |  |  | 2,884,347 |  |  |  | 71.8 |  |  |  | 2,432,278 |  |  |  | 52.4 |  |  |  | 452,069 |  |  |  | 18.6 |
Loss from Operation |  |  | (2,563,637 | ) |  |  | (63.8 | ) |  |  | (1,937,815 | ) |  |  | (41.7 | ) |  |  | (625,822 | ) |  |  | 32.3 |
Other Income (Expense) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest and other income |  |  | - |  |  |  | - |  |  |  | 247 |  |  |  | 0.0 |  |  |  | (247 | ) |  |  | (100.0 | )
Interest (expense) |  |  | (215,598 | ) |  |  | (5.4 | ) |  |  | (36,047 | ) |  |  | (0.8 | ) |  |  | (179,551 | ) |  |  | 498.1 |
Amortization discount, Convertible Note |  |  | (251,804 | ) |  |  | (6.3 | ) |  |  | - |  |  |  | - |  |  |  | (251,804 | ) |  |  | - |
Fair value adjustment of warrants |  |  | - |  |  |  | - |  |  |  | (236,900 | ) |  |  | (5.1 | ) |  |  | 236,900 |  |  |  | (100.0 | )
Gain (loss) on currency transactions |  |  | (83,696 | ) |  |  | (2.1 | ) |  |  | (368,561 | ) |  |  | (7.9 | ) |  |  | 284,865 |  |  |  | (77.3 | )
Gain (loss) on sale of fixed assets |  |  | 1,134 |  |  |  | 0.0 |  |  |  | - |  |  |  | - |  |  |  | 1,134 |  |  |  | - |
Total Other Income (Expense) |  |  | (549,964 | ) |  |  | (13.7 | ) |  |  | (641,261 | ) |  |  | (13.8 | ) |  |  | 91,297 |  |  |  | (14.2 | )
Loss Before Income Taxes |  |  | (3,113,601 | ) |  |  | (77.5 | ) |  |  | (2,579,076 | ) |  |  | (55.6 | ) |  |  | (534,525 | ) |  |  | 20.7 |
Income Tax Benefit |  |  | (15,493 | ) |  |  | (0.4 | ) |  |  | (15,265 | ) |  |  | (0.3 | ) |  |  | (228 | ) |  |  | 0.0 |
Net Loss |  |  | (3,098,108 | ) |  |  | (77.1 | ) |  |  | (2,563,811 | ) |  |  | (55.2 | ) |  |  | (534,297 | ) |  |  | 20.8 |

Revenues

Revenue for the three months ended June 30, 2021 was $4,016,563 compared to $4,641,483 for the same period in 2020, representing a decrease of $624,920, or 13%. The change in sales mainly consists of a decrease in liquid filters and water treatment systems of $1,471,707, offset by an increase in sale of plastic components of $253,986 and DPFs and membranes of $650,048. 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 has caused a substantial decline in the demand and delivery of water treatment systems for the marine scrubber industry. The demand for our DPFs and membranes increased by 56% based on the favorable customer interest in environmental solutions to reduce global CO2 emissions. The increase in sales of plastic components is related to the onset of more programmatic sales efforts that started in 2020 and realized favorable effects in 2021.

Gross Profit

Gross profit for the three months ended June 30, 2021 was $320,710 compared to gross profit of $494,463 for the same period in 2020, representing a decrease of $173,753, or 35%. The decrease in gross profit is due largely to the decline in sales of liquid filters and water treatment systems, where sales command a higher gross margin. Additionally, gross profit in the water treatment business has been negatively impacted by more competitive market pricing during the COVID-19 economic downturn. Gross profit was further impaired by increased costs related to decisions made prior to the impact of COVID-19, when the Company had invested in the expansion and improvement of production facilities along with the hiring of additional employees. Included in the gross profit is depreciation of $512,736 and $491,374 for the three months ended June 30, 2021 and 2020, respectively.

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Expenses

Total operating expenses for the three months ended June 30, 2021 were $2,884,347, representing an increase of $452,069, or 19%, compared to $2,432,278 for the same period in 2020.

Selling expenses for the three months ended June 30, 2021 were $1,202,586 compared to $605,947 for the same period in 2020, representing an increase of $596,639, or 98%. This change is attributable to the hiring of additional sales employees to implement our growth strategy, increasing from an average of 11 in 2020 to an average of 20 in 2021. Further the company has invested in additional marketing activities to help increase future sales.

General and administrative expenses for the three months ended June 30, 2021 were $1,247,132 compared to $1,509,772 for the same period in 2020, representing a decrease of $262,640, or 17%. This change is attributable to various cost saving initiatives, including a reduction of the number of administrative employees from an average of 24 in 2020 to an average of 13 in 2021. Included in general and administrative expenses is non-cash compensation of $125,076 and $82,335 for the three months ended June 30, 2021 and 2020, respectively, representing an increase of $42,741, or 52%, attributable to stock grants to members of the Board and management.

The following is a summary of non-cash compensation:

|  | For the Three Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |
Compensation for vesting of restricted stock awards issued to the Board of Directors |  | $ | 49,375 |  |  | $ | 40,668 |
Compensation for vesting of restricted stock awards issued to management |  |  | 75,701 |  |  |  | 41,667 |
Total Non-Cash Compensation |  | $ | 125,076 |  |  | $ | 82,335 |

Research and development expenses for the three months ended June 30, 2021 were $434,629 compared to $316,559 for the same period in 2020, representing an increase of $118,070, or 37%. 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 and other markets.

Other Income (Expenses)

Other Income (Expenses) for the three months ended June 30, 2021 was $(549,964) compared to $(641,261) for the comparable period in 2020, representing a favorable variance of $91,297. The decrease in Other Income (Expenses) is mainly caused by a reduction in loss on currency transactions as a result of a less volatile development in the DKK/USD currency rate during the period. Included in Other Income (Expenses) is an expense of $251,804 related to the amortization of discount and interest expenses of $170,834 related to the Convertible Note issued in April 2021.

Net Loss

Net loss for the three months ended June 30, 2021 was $(3,098,108) compared to $(2,563,811) for the comparable period in 2020, representing an unfavorable variance of $534,297.

This change was primarily attributable to the decrease in revenue due to reduced 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.

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Comparison of the Six Months Ended June 30, 2021 and June 30, 2020

The following table sets forth our revenues, expenses and net income for the six months ended June 30, 2021 and 2020:

|  | Six Months Ended June 30, |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Period to Period Change |
|  | 2021 |  |  | As a % of Sales |  |  | 2020 |  |  | As a % of Sales |  |  | $ |  |  | Percent % |
Revenue |  |  | 8,014,440 |  |  |  | 100.0 | % |  |  | 14,923,327 |  |  |  | 100.0 | % |  |  | (6,908,887 | ) |  |  | (46.3 | )%
Cost of Goods Sold |  |  | 7,579,115 |  |  |  | 94.6 |  |  |  | 11,789,788 |  |  |  | 79.0 |  |  |  | (4,210,673 | ) |  |  | (35.7 | )
Gross Profit |  |  | 435,325 |  |  |  | 5.4 |  |  |  | 3,133,539 |  |  |  | 21.0 |  |  |  | (2,698,214 | ) |  |  | (86.1 | )
Operating Expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling expenses |  |  | 2,212,084 |  |  |  | 27.6 |  |  |  | 1,282,747 |  |  |  | 8.6 |  |  |  | 929,337 |  |  |  | 72.4 |
General and administrative expenses |  |  | 2,721,802 |  |  |  | 34.0 |  |  |  | 3,059,530 |  |  |  | 20.5 |  |  |  | (337,728 | ) |  |  | (11.0 | )
Research and development expenses |  |  | 872,236 |  |  |  | 10.9 |  |  |  | 627,513 |  |  |  | 4.2 |  |  |  | 244,723 |  |  |  | 39.0 |
Total Operating Expenses |  |  | 5,806,122 |  |  |  | 72.4 |  |  |  | 4,969,790 |  |  |  | 33.3 |  |  |  | 836,332 |  |  |  | 16.8 |
Loss from Operations |  |  | (5,370,797 | ) |  |  | (67.0 | ) |  |  | (1,836,251 | ) |  |  | (12.3 | ) |  |  | (3,534,546 | ) |  |  | 192.5 |
Other Income (Expense) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest and other income |  |  | - |  |  |  | - |  |  |  | 4,737 |  |  |  | 0.0 |  |  |  | (4,737 | ) |  |  | (100.0 | )
Interest expense |  |  | (256,017 | ) |  |  | (3.2 | ) |  |  | (61,538 | ) |  |  | (0.4 | ) |  |  | (194,479 | ) |  |  | 316.0 |
Amortization discount, Convertible Note |  |  | (251,804 | ) |  |  | (3.1 | ) |  |  | - |  |  |  | - |  |  |  | (251,804 | ) |  |  | - |
Fair value adjustment of warrants |  |  | - |  |  |  | - |  |  |  | (236,900 | ) |  |  | (1.6 | ) |  |  | 236,900 |  |  |  | (100.0 | )
Loss on currency transactions |  |  | 287,988 |  |  |  | 3.6 |  |  |  | (160,934 | ) |  |  | (1.1 | ) |  |  | 448,922 |  |  |  | (278.9 | )
Gain (loss) on sale of fixed assets |  |  | 1,134 |  |  |  | 0.0 |  |  |  | - |  |  |  | - |  |  |  | 1,134 |  |  |  | - |
Total Other Income (Expense) |  |  | (218,699 | ) |  |  | (2.7 | ) |  |  | (454,635 | ) |  |  | (3.0 | ) |  |  | 235,936 |  |  |  | (51.9 | )
Loss Before Income Taxes |  |  | (5,589,496 | ) |  |  | (69.7 | ) |  |  | (2,290,886 | ) |  |  | (15.4 | ) |  |  | (3,298,610 | ) |  |  | 144.0 |
Income Tax Benefit |  |  | (31,959 | ) |  |  | (0.4 | ) |  |  | (30,574 | ) |  |  | (0.2 | ) |  |  | (1,385 | ) |  |  | 4.5 |
Net Loss |  |  | (5,557,537 | ) |  |  | (69.3 | ) |  |  | (2,260,312 | ) |  |  | (15.1 | ) |  |  | (3,297,225 | ) |  |  | 145.9 |

Revenues

Revenue for the six months ended June 30, 2021 was $8,014,440 compared to $14,923,327 for the same period in 2020, representing a decrease of $6,908,887, or 46%. The change in revenue consists of a decrease in sales of liquid filters and water treatment systems of $8,294,657, offset by an increase of sales in DPFs and membranes of $1,021,050 and an increase in sales of plastic components of $486,601. The decrease in demand for our liquid filters and water treatment systems is mainly due to impacts of the ongoing COVID-19 pandemic, which have resulted in significant restrictions and business limitations across the globe causing a significant decline in delivery of water treatment systems for the marine scrubber industry. The demand for our DPFs and membranes increased by 38% based on favorable customer interest in environmental solutions to reduce global CO2 emissions. The increase in sales of plastic components is related to the onset of more programmatic sales efforts that started in 2020 and realized favorable effects in 2021.

Gross Profit

Gross profit for the six months ended June 30, 2021 was $435,325 compared to gross profit of $3,133,539 for the same period in 2020, representing a decrease of $2,698,214, or 86.1%. The decrease in gross profit is largely due to the decline in sales of liquid filters and water treatment systems, where sales command a higher gross margin. Additionally, gross profit in the water treatment business has been negatively impacted by more competitive market pricing during the COVID-19 economic downturn. Included in the gross profit is depreciation of $967,055 and $907,639 for the six months ended June 30, 2021 and 2020, respectively.

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Expenses

Total operating expenses for the six months ended June 30, 2021 were $5,806,122, representing an increase of $836,332, or 17%, compared to $4,969,790 for the same period in 2020.

Selling expenses for the six months ended June 30, 2021 were $2,212,084 compared to $1,282,747 for the same period in 2020, representing an increase of $929,337, or 72.4%. This change is attributable to the addition of new sales employees from an average of 12 in 2020 to an average of 19 in 2021. Further the Company has invested significantly in other sales and marketing activities including increased on-line advertising, a new CRM software, additional sales agents in various countries, and other measures.

General and administrative expenses for the six months ended June 30, 2021 were $2,721,802 compared to $3,059,530 for the same period in 2020, representing a decrease of $337,728, or 11%. This change is attributable to the various cost saving programs introduced as a result of the COVID-19 impact on the business. The primary impact is from the reduction in the number of administrative employees that decreased from 25 in 2020 to 13 in 2021. Included in general and administrative expenses is Non-cash compensation expenses, that were $227,464 and $223,557 for the six months ended June 30, 2021 and June 30, 2020, respectively, representing an increase of $3,907 or 2%, attributable to increased stock grants to members of the management, offset by reduced stock grants to the Board.

The following is a summary of non-cash compensation:

|  | For the Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2021 |  |  | 2020 |
Compensation for vesting of restricted stock awards issued to the Board of Directors |  | $ | 98,750 |  |  | $ | 126,334 |
Compensation for vesting of restricted stock awards issued to management |  |  | 128,714 |  |  |  | 97,223 |
Total Non-Cash Compensation |  | $ | 227,464 |  |  | $ | 223,557 |

Research and development expenses for the six months ended June 30, 2021 were $872,236 compared to $627,513 for the same period in 2020, representing an increase of $244,723, or 39%. 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 and other activities.

Net Loss

Net loss for the six months ended June 30, 2021 was $(5,557,537) compared to $(2,260,312) for the comparable period in 2020, representing an unfavorable variance of $3,297,225.

This change was primarily attributable to the significant decrease in revenue and the related decrease in gross profit. Further the increase in operating expenses caused primarily by the growth in headcount to support additional sales and production exacerbated the increased loss for the six months ended June 30, 2021 compared to the same period in 2020.

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Liquidity and Capital Resources

Based on the still ongoing negative effects of the global pandemic, 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 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 along with the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, 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. On June 30, 2021, we had cash of $25,116,746 and net working capital of $21,671,773, and on December 31, 2020, we had cash of $13,264,449 and net working capital of $15,839,992. On June 30, 2021, our net working capital had increased by $5,831,781 compared to December 31, 2020 as a result of an increase in cash and cash equivalents due to the proceeds from the issuance of a Convertible Note in April 2021 and an increase in accrued expenses. This was offset by a decrease in account receivables and contract assets/liabilities as well as a decrease in account payables.

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.

Cash Flows

Six months ended June 30, 2021 compared to six months ended June 30, 2020

Cash provided by (used in) operating activities is net loss adjusted for certain non-cash items and changes in assets and liabilities. Cash used in operating activities for the six months ended June 30, 2021 was $(910,259), representing a decrease of $(2,140,195) compared to cash provided by operating activities of $1,229,936 for the six months ended June 30, 2020. The cash used in operating activities for the six months ended June 30, 2021 consists mainly of the net loss for the period of $(5,557,537) adjusted for depreciation and other non-cash related items of $1,744,990. Further, changes in assets and liabilities include decreased accounts receivables of $633,533, a decline in net contract assets/liabilities of $1,658,635, an increase in accrued expenses of $1,754,808 and tax benefits of $336,395, offset by increased inventories of $231,899 and a decrease in accounts payable of $504,841.

Net cash used in investing activities was $717,232 for the six months ended June 30, 2021 as compared to net cash used in investing activities of $2,194,618 for the six months ended June 30, 2020, representing a decrease of $1,477,386. The investing activities include the purchase of equipment primarily related to the installation of new furnaces in Ballerup to increase production capacity and an amount of $180,045 for new machinery in Plastics to support customer needs for additional production capabilities.

Cash provided from financing activities was $14,090,829 for the six months ended June 30, 2021 as compared to net cash provided from financing activities of $7,302,075 for the six months ended June 30, 2020. Cash provided from financing activities for the period ended June 30, 2021 consisted primarily of the net funding from the Convertible Note issued in April 2021. The amount was $15,000,000 reduced by costs of $716,667 related to the agreement. Further, financing activities has been negatively impacted by the payment of $192,504 mainly related to the furnace lease agreement.

Off Balance Sheet Arrangements

As of June 30, 2021, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in our consolidated financial statements.

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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 profit;
| ● | 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 profit 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 profit or operating expenses when we recognize a loss contingency, revise the estimate for a loss contingency, or record an asset impairment.

Recently Enacted Accounting Standards

For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see “Note 1: Recently Enacted Accounting Standards” in the accompanying Financial Statements.

Subsequent Events

None.

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ITEM 3. 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.

ITEM 4. 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 Quarterly 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 June 30, 2021 were not effective as of the period covered by this Quarterly Report due to material weaknesses in internal controls over financial reporting. For more information on material weaknesses identified by management, please reference our Form 10-K filed on March 31, 2021 for the year ended December 31, 2020.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 has 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 systems 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.

Limitations on the Effectiveness of Internal Controls

An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

While management believes that the steps that we have taken and plan to 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.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not required for a “smaller reporting company.”

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

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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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

| LiqTech International, Inc. |
Dated: August 16, 2021 | /s/ Sune Mathiesen |
| Sune Mathiesen, Chief Executive Officer |
| (Principal Executive Officer) |
Dated: August 16, 2021 | /s/ Claus Toftegaard |
| Claus Toftegaard, Chief Financial Officer |
| (Principal Financial and Accounting Officer) |

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