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 months~~quarterly period ended June 30, ~~2022~~2023

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

For the transition period from to 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 ~~11, 2022,~~10, 2023, there were ~~43,888,538~~5,700,226 shares of ~~common stock,~~Common Stock, $0.001 par value per share, outstanding.

Table of Contents

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 impacts from the ~~COVID-19 pandemic~~supply chain-related disruptions, inflationary pressure, prevailing macro-economic uncertainty, and European energy crisis 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. ~~Considering~~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:

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 such factors, nor can we 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.

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

	As of			As of			As of			As of
	June 30,			December 31,			June 30,			December 31,
	2022			2021			2023			2022
	(Unaudited)						(Unaudited)
Liabilities and Stockholders’ Equity

Current Liabilities:
Accounts payable	$	1,920,886		$	1,646,662		$	1,963,042		$	1,389,355
Accrued expenses		4,485,000			4,685,665			2,998,844			3,087,206
Current portion of finance lease obligations		344,528			373,824			413,505			399,198
Current portion of operating lease liabilities		552,400			846,544			589,127			561,182
Current portion of Convertible Note payable		0			8,400,000
Contract liabilities		595,150			914,828			878,201			649,557

Total Current Liabilities		7,897,964			16,867,523			6,842,719			6,086,498


Deferred tax liability	��	178,389			224,779			128,542			154,645
Other liabilities, net of current portion		0			346,939
Finance lease obligations, net of current portion		2,117,126			2,499,591			2,216,535			2,384,011
Operating lease liabilities, net of current portion		2,915,857			6,154,064			2,457,806			2,710,815
Senior Promissory Notes, net		5,342,187			0
Convertible Note payable, less current portion		0			6,186,936
Senior promissory notes payable, less current portion								5,651,632			5,480,314

Total Long-term Liabilities		10,553,559			15,412,309			10,454,515			10,729,785

Total Liabilities		18,451,523			32,279,832			17,297,234			16,816,283


Stockholders' Equity:
Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 shares issued and outstanding at June 30, 2022 and December 31, 2021		0			0
Common stock; par value $0.001, 100,000,000 shares authorized, 43,888,538 and 21,285,706 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively		43,888			21,285
Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 shares issued and outstanding at June 30, 2023 and December 31, 2022								-			-
Common stock; par value $0.001, 12,500,000 shares authorized, 5,700,226 and 5,498,260 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively								5,700			5,498
Additional paid-in capital		96,406,781			70,910,902			97,326,371			96,975,476
Accumulated deficit		(63,435,411	)		(53,181,928	)		(71,295,830	)		(67,351,035	)
Accumulated other comprehensive loss		(5,945,865	)		(4,975,399	)		(6,011,763	)		(6,320,567	)

Total Stockholders' Equity		27,069,393			12,774,860			20,024,478			23,309,372

Total Liabilities and Stockholders' Equity	$	45,520,916		$	45,054,692		$	37,321,712		$	40,125,655

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

	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,						June 30,						June 30,
	2022			2021			2022			2021			2023			2022			2023			2022

Revenue	$	5,018,292		$	4,016,563		$	8,655,528		$	8,014,440		$	4,990,019		$	5,018,292		$	9,001,538		$	8,655,528
Cost of Goods Sold		4,870,152			3,695,853			8,261,847			7,579,115			3,827,491			4,870,152			7,447,668			8,261,847

Gross Profit		148,140			320,710			393,681			435,325			1,162,528			148,140			1,553,870			393,681

Operating Expenses:
Selling expenses		1,196,513			1,202,586			2,256,461			2,212,084			1,028,225			1,196,513			2,210,660			2,256,461
General and administrative expenses		1,265,543			1,247,132			3,182,060			2,721,802			1,377,483			1,265,543			2,436,432			3,182,060
Research and development expenses		490,836			434,629			1,093,573			872,236			359,784			490,836			702,403			1,093,573
Restructuring costs		1,788,827			0			1,788,827			0			-			1,788,827			-			1,788,827

Total Operating Expense		4,741,719			2,884,347			8,320,921			5,806,122			2,765,492			4,741,719			5,349,495			8,320,921

Loss from Operations		(4,593,579	)		(2,563,637	)		(7,927,240	)		(5,370,797	)		(1,602,964	)		(4,593,579	)		(3,795,625	)		(7,927,240	)

Other Income (Expense)
Interest and other income		342,624			0			342,723			0			116,545			342,624			168,218			342,723
Interest expense		(159,557	)		(215,598	)		(366,018	)		(256,017	)		(45,898	)		(159,557	)		(57,899	)		(366,018	)
Amortization discount on Notes		(1,922,618	)		(251,804	)		(2,219,956	)		(251,804	)		(86,790	)		(1,922,618	)		(171,318	)		(2,219,956	)
Gain (Loss) on currency transactions		(342,202	)		(83,696	)		(266,209	)		287,988			49,494			(342,202	)		(116,784	)		(266,209	)
Gain on lease termination		153,575			0			153,575			0			-			153,575			-			153,575
Gain on sale of fixed assets		661			1,134			661			1,134			-			661			-			661

Total Other Income (Expense)		(1,927,517	)		(549,964	)		(2,355,224	)		(218,699	)		33,351			(1,927,517	)		(177,783	)		(2,355,224	)

Loss Before Income Taxes		(6,521,096	)		(3,113,601	)		(10,282,464	)		(5,589,496	)		(1,569,613	)		(6,521,096	)		(3,973,408	)		(10,282,464	)

Income Tax Benefit		(14,037	)		(15,493	)		(28,981	)		(31,959	)		(14,321	)		(14,037	)		(28,613	)		(28,981	)

Net Loss	$	(6,507,059	)	$	(3,098,108	)	$	(10,253,483	)	$	(5,557,537	)	$	(1,555,292	)	$	(6,507,059	)	$	(3,944,795	)	$	(10,253,483	)


Basic and Diluted Loss Per Share	$	(0.20	)	$	(0.14	)	$	(0.38	)	$	(0.26	)	$	(0.27	)	$	(1.62	)	$	(0.70	)	$	(3.07	)

Basic and Diluted Weighted Average Common Shares Outstanding		32,097,495			21,769,461			26,753,663			21,723,578			5,660,007			4,012,187			5,656,809			3,344,208

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

Accumulated
Other

Additional

Compre-

Common Stock

Paid-in

Accumulated

hensive

Shares

Amount

Capital

Deficit

Income/(Loss)

TOTAL

BALANCE, December 31, 2021
21,285,706 21,285 70,910,092 (53,181,928
)
(4,975,399
)
12,774,860

Common stock issued in settlement of RSUs
66,982 67 (67
)
-

Stock-based compensation
178,778 178,778

Currency translation, net
(355,891
)
(355,891
)

Net Loss
(3,746,424
)
(3,746,424
)

BALANCE, March 31, 2022
21,352,688 21,352 71,089,613 (56,928,352
)
(5,331,290
)
8,851,323

Common shares issued for cash at $0.50 per share, net of offering cost of $1,996,469, in May 2022
22,535,850 22,536 24,430,992 24,453,528

Warrants issued in connection with Senior Promissory Notes
664,704 664,704

Stock-based compensation
221,472 221,472

Currency translation, net
(614,575
)
(614,575
)

Net Loss
(6,507,059
)
(6,507,059
)

BALANCE, June 30, 2022
43,888,538 43,888 96,406,781 (63,435,411
)
(5,945,865
)
27,069,393

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 Income
(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

					Additional			Accumu-			Accumulated Other
	Common Stock				Paid-in			lated			Comprehensive
	Shares		Amount		Capital			Deficit			Income/(Loss)			TOTAL
BALANCE, December 31, 2022		5,498,260		5,498		96,975,476			(67,351,035	)		(6,320,567	)		23,309,372

Common Stock issued in settlement of RSUs		160,670		161		(161	)								-

Stock-based compensation						157,173									157,173

Currency translation, net												408,596			408,596

Net Loss									(2,389,503	)					(2,389,503	)

BALANCE, March 31, 2023		5,658,930		5,659		97,132,488			(69,740,538	)		(5,911,971	)		21,485,638

Common Stock issued in settlement of RSUs		24,500		24		(24	)								-

Fractional shares from individual shareholder round-up following reverse split		16,796		17		(17	)								-

Stock-based compensation						193,924									193,924

Currency translation, net												(99,792	)		(99,792	)

Net Loss									(1,555,292	)					(1,555,292	)

BALANCE, June 30, 2023		5,700,226		5,700		97,326,371			(71,295,830	)		(6,011,763	)		20,024,478

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

BALANCE, December 31, 2021	2,660,713	2,661	70,929,526		(53,181,928	)	(4,975,399	)	12,774,860

Common Stock issued in settlement of RSUs	8,373	8	(8	)					-

Stock-based compensation			178,778						178,778

Currency translation, net							(355,891	)	(355,891	)

Net Income					(3,746,424	)			(3,746,424	)

BALANCE, March 31, 2022	2,669,086	2,669	71,108,296		(56,928,352	)	(5,331,290	)	8,851,323

Common shares issued for cash at $0.50 per share, net of offering cost of $1,996,469, in May 2022	2,816,981	2,817	24,450,711						24,453,528

Warrants issued in connection with Senior Promissory Notes			664,704						664,704

Stock-based compensation			221,472						221,472

Currency translation, net							(614,575	)	(614,575	)

Net Income					(6,507,059	)			(6,507,059	)

BALANCE, June 30, 2022	5,486,067	5,486	96,445,183		(63,435,411	)	(5,945,865	)	27,069,393

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

	For the Six Months Ended						For the Six Months Ended
	June 30,						June 30,
	2022			2021			2023			2022
Cash Flows from Operating Activities:
Net Loss	$	(10,253,483	)	$	(5,557,537	)	$	(3,944,795	)	$	(10,253,483	)
Adjustments to reconcile net loss to net cash provided by (used in) operations:
Depreciation and amortization		1,683,679			1,298,815			1,530,282			1,683,679
Amortization of discount on Notes payable		2,219,956			251,804
Amortization of discount on convertible notes payable								171,318			2,219,956
Stock-based compensation		400,250			227,464			351,097			400,250
Change in deferred tax asset / liability		(28,981	)		(31,959	)		(28,613	)		(28,981	)
Gain on lease termination		(153,575	)		0			-			(153,575	)
Gain on sale of fixed assets		(661	)		(1,134	)		-			(661	)
Changes in operating assets and liabilities:
Changes in assets and liabilities:
Accounts receivable		(660,578	)		633,533			(606,781	)		(660,578	)
Inventory		(504,315	)		(231,899	)		(289,557	)		(504,315	)
Contract assets		(1,102,662	)		855,558			(113,442	)		(1,102,662	)
Prepaid expenses and other current assets		(2,360,975	)		174,731			(1,061,699	)		(2,360,975	)
Accounts payable		432,337			(504,841	)		548,581			432,337
Accrued expenses		(178,716	)		1,754,808			(135,214	)		(178,716	)
Operating lease liabilities		(268,816	)		(582,679	)		(279,983	)		(268,816	)
Contract liabilities		(255,701	)		803,077			60,584			(255,701	)
Assets held for sale								41,534			-

Total Adjustments		(778,758	)		4,647,278			188,109			(778,758	)

Net Cash used in Operating Activities		(11,032,241	)		(910,259	)		(3,756,688	)		(11,032,241	)

Cash Flows from Investing Activities:
Purchase of property and equipment		(229,865	)		(718,366	)		(290,468	)		(229,865	)
Proceeds from sale of fixed assets		661			1,134			-			661

Net Cash used in Investing Activities		(229,204	)		(717,232	)		(290,468	)		(229,204	)

Cash Flows from Financing Activities:
Payments on finance lease obligation		(179,689	)		(192,504	)		(200,095	)		(179,689	)
Proceeds from issuance of common stock and prefunded warrants		24,453,528			0
Proceeds from issuance of Common Stock and prefunded warrants								-			24,453,528
Proceeds from issuance of Senior Promissory Notes		6,000,000			0			-			6,000,000
Payments on Convertible Note		(16,800,000	)		14,283,333			-			(16,800,000	)

Net Cash provided by Financing Activities		13,473,839			14,090,829
Net Cash used in Financing Activities								(200,095	)		13,473,839

Gain (Loss) on Currency Translation		(6,052	)		(611,041	)		244,569			(6,052	)

Net change in Cash and Restricted Cash		2,206,342			11,852,297			(4,002,682	)		2,206,342

Cash and Restricted Cash at Beginning of Period		17,489,380			13,264,449			16,597,371			17,489,380

Cash and Restricted Cash at End of Period	$	19,695,722		$	25,116,746		$	12,594,689		$	19,695,722

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

For the Six Months Ended
June 30,

2022

2021

Supplemental Disclosures of Cash Flow Information:

Cash paid during the period for:

Interest
$ 444,297 $ 79,448
Income Taxes
0 0

Non-cash financing activities

Original issue discount on Convertible Note
0 1,800,000
Convertible Note debt conversion feature
0 3,048,396
Debt issuance costs on Convertible Note
0 716,667
Common Stock issued for conversion of Convertible Note
0 531,729
Debt discount on Senior Promissory Notes
664,704 0

	For the six Months Ended June 30,
	2023			2022
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	(98,069	)	$	444,297
Income Taxes		-			-

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

The consolidated financial statements include the accounts of LiqTech International, Inc., ~~the~~(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 in Item 2, ~~Management's Discussion~~the management's discussion and ~~Analysis of Financial Condition and Results of Operation.~~analysis section. The Company engages in the development, design, production, marketing and sale of automated filtering systems, ceramic silicon carbide ~~liquid~~membrane applications and diesel particulate air filters in North America, Europe, Asia, Australia, and South America.

These interim consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the ~~Americas, Asia-Pacific, Europe,~~United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the ~~Middle East & Africa.~~ Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations for the period ended June 30, 2023 are not necessarily indicative of the operating results for the full year and are unaudited. In the opinion of management, all adjustments consisting of a normal recurring nature and necessary for a fair presentation have been included.

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

Reverse Stock Split -- On May 26, 2023, the Company effected a 1-for-8 reverse split of its outstanding Common Stock. All outstanding Common Stock, warrants, and RSUs were adjusted to reflect the 1-for-8 reverse split, with respective exercise prices of the warrants proportionately increased. All stock and per share data throughout these condensed consolidated financial statements have been retroactively adjusted to reflect the reverse share split. The total number of authorized Common Stock was adjusted to reflect the 1-for-8 reverse split.

As a result of the reverse Common Stock split, an amount equal to the decreased value of Common Stock was reclassified from “Common Stock” to “additional paid-in capital.”

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

Functional Currency / Foreign currency translation -- The functional currency of LiqTech International, Inc., 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 China is the Renminbi (“RMB”); ~~the functional currency of LiqTech Germany is the Euro;~~ and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is the U.S. Dollar for the purpose of these consolidated financial statements. The balance sheet accounts of the foreign subsidiaries are translated into U.S. Dollars at the period-end exchange rates, and all revenue and expenses are translated into U.S. Dollars at the average exchange rates prevailing during the six months ended June 30, ~~2022~~2023 and ~~2021.~~2022. 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 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, ~~2022~~2023, and December 31, ~~2021,~~2022, the Company held ~~$1,817,444~~$1,469,032 and ~~$2,125,695,~~$1,440,394, respectively, of restricted cash. The restricted cash is held as security by a local financial institution ~~for insuring~~against a leasing facility and for ~~payment~~bank guarantees issued for the benefit of customers in connection with prepayments of sales orders and ~~for warranties after the delivery of products.~~general product warranties.

Accounts held in each U.S. institution are insured by the Federal Deposit Insurance Company (“FDIC”) up to $250,000. At June 30, ~~2022~~2023 and December 31, ~~2021~~2022 the Company had ~~respectively $15,697,922~~$14,711, and ~~$11,346,826~~$12,999,271 in excess of the FDIC insured ~~limit.~~limit, respectively.

Accounts Receivable -- Accounts receivable consist of trade receivables arising in the normal course of business. The Company establishes an allowance for doubtful accounts that reflects the Company’s best estimate of probable losses inherent in the ~~Accounts~~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 periods ended June 30, ~~2022~~2023 and December 31, ~~2021~~2022 ~~are~~is as follows:

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

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

Work in process and finished goods include material, labor, and production overhead costs. The Company adjusts the value of its inventory to the extent management determines that the cost cannot be recovered due to obsolescence or other factors.

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

Contracts Assets / Liabilities – Contract assets are the Company’s rights to consideration in exchange for goods or services and isare 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 ~~often~~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~~value-added tax (VAT) and other receivables.

Assets Held for Sale -- Assets are classified as held for sale when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. When all of these criteria have been met, the assets are classified as held for sale on the balance sheet. Assets classified as held for sale are reported at the lower of their carrying value or fair value less costs to sell. Depreciation and amortization of assets ceases upon designation as held for sale.

Leases -- The Company has elected to not recognize lease assets and liabilities with an initial term of 12 months or less and to not separate lease and non-lease components. The Company’s accounting for finance leases ~~(formerly called capital lease obligations)~~ remains substantially unchanged. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date is used in determining the present value. The Company will use the implicit rate when readily determinable. The operating lease ROU asset also ~~included~~includes prepaid lease payments, reduced by accrued lease payments. The Company’s lease terms may include options to extend or terminate the lease, for which the Company will reflect the change when it is reasonably certain that those options will be exercised. Operating lease ~~costs~~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 ~~the~~ estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. The evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not limited to, revenue growth rates, gross profit margins, and operating expenses over the expected remaining useful life of the related asset. A shortfall in these estimated operating cash flows could result in an impairment charge in the future.

Goodwill is not amortized but is evaluated annually for impairment at the reporting unit level or when indicators of a potential impairment are present. The Company estimates the fair value of the reporting unit using the discounted cash flow and market approaches. Forecasts of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, using primarily expected category expansion, pricing, market segment fundamentals, and general economic conditions.

Revenue Recognition -- On ~~January 1, 2018,~~ ~~the Company adopted Accounting Standards Codification Topic~~ ~~606,~~ ~~“Revenue from Contracts with Customers,” which includes clarifying ASUs issued in~~ ~~2015,~~~~2016~~ ~~and~~ ~~2017~~ ~~(“new revenue standard”). The new revenue standard was applied to all open revenue contracts using the modified retrospective method as of~~ ~~January 1, 2018.~~

The Company sells products throughout the world, and sales by geographical region are as follows for the three and six months ended June 30, ~~2022~~2023 and ~~2021:~~2022:

The Company’s sales by product line are as follows for the three and six months ended June 30, ~~2022~~2023 and ~~2021:~~2022:

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

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

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

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

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

~~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, for which the obligation is attributed to the commissioning of the water treatment system.~~

The roll-forward of Contract assets / liabilities for the periods ended June 30, ~~2022,~~2023 and December 31, ~~2021~~2022 ~~are~~is as ~~follow:~~follows:

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, ~~2022~~2023 and ~~2021~~2022 were ~~$47,904~~$12,167 and ~~$42,843,~~$47,904, respectively. Total advertising costs amounted to ~~$103,428~~$44,766 and ~~$125,235~~$103,428 for the six months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

Research and Development Cost -- The Company expenses research and development costs as incurred. Included in operating expense for the three-month periods ended June 30, ~~2022,~~2023, and ~~2021~~2022 were research and development costs of ~~$490,836~~$359,784 and ~~$434,629,~~$490,836, respectively. For the six-month periods ended June 30, ~~2022,~~2023, and ~~2021,~~2022, research and development costs were ~~$1,093,573~~$702,403 and ~~$872,236,~~$1,093,573, respectively.

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 with respect to 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 shares of Common Stock 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 shares of Common Stock included in the diluted earnings per share calculation include in-the-money stock options, ~~RSU’s~~RSUs and warrants that have been granted but have not yet been exercised.

Stock Awards -- During the years presented in the accompanying consolidated financial statements, the Company has granted stock awards. The Company accounts for stock awards in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation.

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:

Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, other receivables, prepaid expenses, accounts payable, accrued expenses, ~~Senior Promissory Notes~~convertible notes payable, and ~~Convertible Notes~~senior promissory 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~~ ~~November 2021,~~ ~~the FASB issued ASU~~ ~~2021~~-~~10,~~ ~~Disclosures by Business Entities about Government Assistance. The FASB is issuing this Update to increase the transparency of government assistance including the disclosure of (~~1~~) the types of assistance, (~~2~~) an entity’s accounting for the assistance, and (~~3~~) the effect of the assistance on an entity’s financial statements. The ASU will be effective for annual reporting periods after~~ ~~January 1, 2022.~~ ~~We are still assessing the impact of ASU~~ ~~2021~~-10 ~~on our consolidated financial statements.~~

In ~~August 2020,~~ ~~the FASB issued ASU~~ ~~2020~~-06 ~~Accounting for Convertible Instruments and Contracts In An Entity’s Own Equity. ASU~~ ~~2020~~-06 simplifies the accounting for certain convertible instruments by removing the separation models for convertible debt with a cash conversion feature and for convertible instruments with a beneficial conversion feature. As a result, more convertible debt instruments will be reported as a single liability instrument with no ~~separate accounting for embedded conversion features. Additionally, ASU~~ ~~2020~~-06 ~~amends the diluted earnings per share calculation for convertible instruments by requiring the use of the if-converted method. The treasury stock method is~~ no ~~longer available. For SEC filers, excluding smaller reporting companies, ASU~~ ~~2020~~-06 ~~is effective for fiscal years beginning after~~ ~~December 15, 2021~~ ~~including interim periods within those fiscal years. For all other entities, ASU~~ ~~2020~~-06 ~~is effective for fiscal years beginning after~~ ~~December 15, 2023,~~ ~~including interim periods within those fiscal years. Early adoption is permitted, but~~ no ~~earlier than fiscal years beginning after~~ ~~December 15, 2020,~~ ~~including interim periods within those fiscal years. The Company early adopted ASU~~ ~~2020~~-06 on ~~January 1, 2022~~ ~~using a modified retrospective approach.~~

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

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

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States of America, which contemplate continuation of the Company as a going ~~concern,~~concern; however, the Company has incurred significant recent losses, which raises substantial doubt about the ability of the Company to continue as a going concern for a period of one year from the issuance of these financial statements. There is no assurance that the Company will be successful in executing the proposed cost reductions, strategy, and ~~revenue growth,~~profitability improvement measures, thus achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

During the quarter, the Company completed a restructuring program to reduce costs, decrease operating losses and improve cash flow. Total restructuring and restructuring-related net charges pursuant to this program were $1,788,827, which were recorded separately in the income statement as “restructuring costs”, and allocated as follows:

~~CEO separation~~ ~~-- On~~ ~~May 10, 2022,~~ ~~the Board of Directors accepted the resignation of Sune Mathiesen as Chief Executive Officer and a director of the Company, effective~~ ~~May 12, 2022.~~ ~~As previously announced, Mr. Mathiesen had been on a medical leave of absence since~~ ~~March 17, 2022.~~ In connection with Mr. Mathiesen’s resignation, Mr. Mathiesen and the Company entered into a Separation Agreement and Release (the “Separation Agreement”). Under the Separation Agreement, Mr. Mathiesen received ~~DKK1,605,000~~ ~~(equivalent to $235,139), which is the equivalent of~~ ~~six~~ ~~months of salary, car allowance and pension contributions, in a lump-sum payment, less applicable deductions and withholdings.~~

~~Terminated employees~~ ~~– In the~~ ~~second~~ ~~quarter of~~ ~~2022,~~ the Company re-aligned its corporate management structure, which involved a reduction in headcount and labor costs of approximately 25%. The new organization reflects a focused effort to align key leaders with strategic imperatives, inspire greater accountability and performance management, eliminate silos and layers of middle management, and operate a leaner, more efficient business. Provisions for salary obligations to employees amounted to $164,673, reflecting the costs related to select employees released from duties with immediate effect. No ~~provisions made for the employees working during the notice period.~~

~~China close-down~~ ~~– In the~~ ~~second~~ ~~quarter of~~ ~~2022,~~ the Company reduced and suspended planned capital investments, including the Company’s program to build a manufacturing and service center in China. Pursuant to the suspended plans, the Company terminated and settled agreements with consultants, select project employees, and domestic property development providers, resulting in a net payment of termination and cancellation charges of $286,807.

~~Capex commitments~~ -- As part of efforts to balance future investments with expected demands and cash flow, the Company commenced the renegotiation of all material Capex commitments during the quarter, with the ambition to reduce, cancel, or delay deliveries under the contracts, which initially amounted to approximately $9,000,000. Substantial progress was made during the quarter. with expected closure of the renegotiation in the ~~second~~ ~~half of~~ ~~2022.~~ ~~As part of the renegotiation, a provision was made during the quarter of $668,606 regarding expected cancellation charges and contractual termination costs.~~

~~Write-downs --~~ The re-routing of production equipment and machinery to Denmark (originally planned for China), resulted in a write-down of $250,424 on legacy installed equipment and machinery that was decommissioned as part of the arrival and implementation of new and more efficient equipment. Furthermore, review of obsolete inventory and existing product offering resulted in a write-down of $183,179.

~~The Company’s restructuring costs are as follows for the~~ ~~six~~ ~~months ended~~ ~~June 30, 2022,~~ ~~of which 1,491,889 were settled during the quarter resulting in 296,938 remaining unsettled as of~~ ~~June 30, 2022:~~

~~The following table displays a roll-forward of the restructuring accruals, presented within “accrued expenses”, for the~~ ~~six~~ ~~months ended~~ ~~June 30, 2022~~ ~~and~~ ~~2021:~~

Inventory consisted of the following on June 30, ~~2022,~~2023, and December 31, ~~2021:~~2022:

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

The 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. ~~During the quarter, the Company terminated the lease agreement for the office and production space in Taicang, China.~~

During the six months ended June 30, ~~2022,~~2023, cash paid for amounts included for the measurement of finance lease liabilities was ~~$217,473,~~$268,001, and the Company recorded finance lease expenses in other income (expenses) of ~~$148,157.~~$221,751.

During the six months ended June 30, ~~2022,~~2023, cash paid for amounts included for the measurement of operating lease liabilities was ~~$546,530,~~$378,055, and the Company recorded operating lease expense of ~~$627,549.~~$378,055.

~~Supplemental balance sheet~~Other information related to leases as of June 30, ~~2022,~~2023 and December 31, ~~2021~~2022 was as follows:

In connection with certain orders, we provide the ~~Company provides to customers~~customer with a working guarantee, prepayment guarantee, or a security bond. For that purpose, the Company has a ~~guaranteed~~ credit line of EUR ~~1,750,000 (approx. $1,820,000)~~1,350,000 (approximately $1,480,000) secured by a cash ~~deposit.~~deposit, available for issuance of trade finance products. As of June 30, ~~2022,~~2023, ~~our bank has issued working~~the Company had guaranties of ~~$480,979 to customers~~$112,355 issued against the credit line.

On March 24, 2021, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which the Company agreed to issue and sell a $15.0 million principal amount senior ~~Convertible Note~~convertible note (the ~~“Note”~~“Convertible Note”) ~~was due~~maturing on October 1, 2023 and ~~80,000~~10,000 shares of our ~~common stock,~~Common Stock, $0.001 par value (“Common Stock”), for an aggregate purchase price of $15.0 million upon the satisfaction of the closing conditions set forth in the ~~Securitires~~Securities Purchase Agreement. The Closing occurred on April 8, 2021, and the Company issued to the Investor the securities in connection with the Closing.

The Convertible Note was a senior, unsecured obligation of the Company, payable at 112% of the principal amount at maturity ( October 1, 2023), or earlier upon redemption or repurchase as set forth in the Convertible Note. The Convertible Note was convertible into shares of Common Stock pursuant to the terms of the Convertible Note, in part or in whole, from time to time, at the election of the Investor. The initial conversion rate was ~~100.6749~~805.3992 shares of Common Stock per $1,000 of principal amount of the Convertible Note. The conversion rate was subject to anti-dilution adjustments, including for stock dividends, splits, and combinations; issuances of options, warrants, or similar rights; spin-offs and distributions of property; cash dividends or distributions; and tender or exchange offers, in each case as further described in and pursuant to the terms of the Convertible Note.

~~The Note had 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.~~

Beginning on March 1, 2022, and on the first day of each calendar month thereafter, at the election of the Investor or Holder, if applicable, the Company was required to redeem $840,000 of the amounts due under the Convertible 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~~$14.00 per share. OnBeginning on March 1, 2022, the Company paid the first monthly installment of $840,000 in cash.

As of June 22, 2022, the Convertible Note, including accrued interest and all relevant obligations, was repaid in full, amounting to $13,446,875, allocated between a principal repayment of $11,640,000 and contractual repayment premium of $1,806,875. ~~During the quarter prior to the repayment, the Company paid the second, third, and~~ ~~fourth~~ ~~installments totaling $2,520,000 in cash according to the original payment schedule.~~

For the three months ended June 30, ~~2022~~2023 and ~~2021,~~2022, the Company recognized interest expense of ~~$121,458~~$0 and ~~$170,834,~~$121,458, respectively, and ~~$1,915,727~~$0 and ~~$251,804,~~$1,915,727, respectively, related to the amortization of debt issuance costs.

For the six months ended June 30, ~~2022~~2023 and ~~2021,~~2022, the Company recognized interest expense of ~~$308,958~~$0 and ~~$170,834,~~$308,958, respectively, and ~~$2,213,065~~$0 and ~~$251,804,~~$2,213,065, respectively, related to the amortization of debt issuance costs.

On June 22, 2022, the Company issued and sold Senior Promissory Notes in an aggregate principal amount of $6.0 million (the ~~"Notes"~~“Notes”) and issued warrants to purchase ~~4,250,000~~531,250 shares of ~~common stock~~Common Stock of the Company to affiliates of Bleichroeder L.P., 21 April Fund, L.P., and 21 April Fund, Ltd. (together, the ~~"Purchasers"~~“Purchasers”), pursuant to a note and warrant purchase agreement entered into with the Purchasers. The warrants issued in this transaction have an exercise price of $5.20 per share, a term of five years and are exercisable for cash at any time.

The Notes have a term of 24 months and do not bear interest during this period. ~~However, if~~If the ~~notes~~Notes are not repaid on or before the second anniversary of issuance, however, the Notes will thereafter bear interest of 10% per annum, which will increase by 1% each month the Notes remain unpaid, up to a maximum of 16% per annum, payable monthly.

Additionally, as part of the transaction, the Company issued ~~230,000~~28,750 warrants to the placement agent. ~~All of the~~The warrants issued in this transaction have an exercise price of ~~$0.65~~$5.20 per share, a term of five years and are exercisable for cash at any time.

As a result, the Company recorded an initial debt discount of ~~$664,704,~~$695,749, based on the relative fair value of the warrants and ~~notes~~Notes issued. The Company determined the fair value of the warrants by using the Black-Scholes Option Pricing Model, with the following assumptions: expected term of 2.5 years, stock price of ~~$0.43,~~$3.44, exercise price of ~~$0.65,~~$5.20, volatility of 80.8%, risk-free rate of 3.13%, and no forfeiture rate. The debt discount will be accreted according to the effective interest method over the contractual term of the note. The warrants qualified for equity classification and were reported within Additional Paid-In Capital.

For the three months ended June 30, 2023 and 2022, the Company recognized interest expense of $0 and $0, respectively, and $86,790 and $7,235, respectively, on the Senior Promissory Notes, related to the amortization of debt issuance costs.

For the six months ended June 30, ~~2022,~~2023 and ~~2021,~~2022, the Company recognized interest expense of ~~$6,891~~$0 and ~~$0,~~$0, respectively, and $171,318 and $7,235, respectively, on the Senior Promissory Notes, related to the amortization of ~~the~~ debt ~~discount.~~issuance costs.

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.

OnIn ~~February 27, 2019,~~November 2022, ~~LiqTech was contacted by a former supplier alleging that~~ the Company ~~owed DKK 543,905 ($81,177) for services rendered~~entered into a commercial settlement agreement regarding marine wastewater treatment systems delivered in ~~2017.~~2019 and associated, potential warranty claims related to alleged corrosion on certain parts and components. The Company disputed the claim in full, subsequently reaching an amicable settlement agreement with expected remediation work to be conducted in 2023. The ~~claimant has previously filed a lawsuit to claim payment for~~cost of any remediation work is shared between the services, which was denied by the Company due to severe errors in the services rendered. The claim was settled out of court and the Company agreed to pay DKK 400,000 ($59,700) for full and final settlement during the period ending ~~March 31, 2022.~~two

~~The Company entered arbitration on~~ ~~March 31, 2022~~ regarding a commercial dispute related to the delivery of a water treatment system installed on a commercial power plant. The parties disagree on whether the supplied equipment performs according to the agreed performance criteria. The dispute also relates to equipment downtime and the use of additives to operate the equipment. The claim against LiqTech amounts to DKK 1,671,768 ($249,510) with the addition of interest. LiqTech is disputing the claim while having filed a counterclaim regarding unpaid invoices. The claim was settled out of court and the Company agreed to pay DKK 600,000 ($83,799), including decommissioning of the installed system, for full and final settlement during the period ending ~~June 30, 2022.~~ parties.

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 installation occurred. 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~~Company’s current and long-term warranty obligations included in accrued expenses on the balance sheet, as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, were as follows:

The utilization charges against the reserve for the six months ended June 30, 2023 relate to the commercial settlement agreement as described under “Contingencies”.

Basic and diluted net income (loss) per common share is determined by dividing net income (loss) by the weighted average number of shares of Common Stock outstanding during the period. For the periods where there is a net loss, stock options, warrants and Restricted Stock Units (“RSUs”) have been excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive. Consequently, the weighted average number of shares of Common Stock used to calculate both basic and diluted net loss per common share isare the same for the reported periods.

~~For~~ As of June 30, 2023, the ~~period ended~~Company had outstanding balances of 341,545 RSUs, 3,930,000 prefunded warrants, and 560,000 warrants, all exercisable for shares of Common Stock.

As of June 30, 2022, the Company had ~~2,587,009~~outstanding balances of 323,377 RSUs, ~~outstanding, 31,440,000~~3,930,000 prefunded warrants, and ~~4,480,000~~560,000 warrants, ~~both~~all exercisable for shares of Common ~~Stock outstanding.~~Stock.

The following table shows the amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive Common Stock for the three and six months ended June 30, ~~2022,~~2023 and ~~2021:~~2022:

For the three and six months ended June 30, ~~2022~~2023 and ~~2021~~2022, respectively, the Company had no options ~~outstanding.~~outstanding to purchase Common Stock.

Common Stock – The Company has ~~100,000,000~~12,500,000 authorized shares of ~~common stock,~~Common Stock, $0.001 par value ("(“Common ~~Stock"~~Stock”). As of June 30, ~~2022~~2023 and ~~2021,~~December 2022, there were ~~43,888,538~~5,700,226 and ~~21,777,373~~5,498,260 shares of Common Stock issued and outstanding, respectively.

Voting -- Holders of ~~common stock~~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~~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.~~Common Stock. All of the issued and outstanding shares of ~~common stock~~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, 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 shares of authorized Preferred stock, $0.001 par value. As of June 30, ~~2022,~~2023, there were 0no preferred shares issued and outstanding.

Since January 1, ~~2022,~~2023, the Company has made the following issuances of Common Stock:

On January 3, ~~2022,~~2023, the Company issued ~~18,641~~2,340 shares of Common Stock to settle RSUs. The RSUs were valued at $110,254 for services provided by the Board of Directors in ~~2021.~~2022. The Company recognized the stock-based compensation of the award over the requisite service period during the year ended December 31, 2022.

On January 3, ~~2022,~~2023, the Company issued ~~48,341~~158,330 shares of Common Stock to settle RSUs. The RSUs were valued at $674,164 for services provided by management in ~~2021.~~2022. The Company recognized the stock-based compensation of the award over the requisite service period during the year ended December 31, 2022.

On ~~May 17, 2022,~~June 26, 2023, the Company issued ~~15,635,850~~24,500 shares of Common Stock ~~as part~~to settle RSUs. The RSUs were valued at $73,500 for services provided by the Board of Directors in 2023. The Company recognized the stock-based compensation of the ~~$23,000,000 public offering of common stock and 30,425,000 prefunded warrants to fund working capital, general corporate purposes, and partial repayment of its Senior Convertible Note.~~award over the requisite service period during the period ended June 30, 2023.

On ~~May 19, 2022,~~ the Company exercised in full the option to issue 6,900,000 shares of Common Stock as part of the overallotment of $3,450,000 common stock, resulting in the closing of its previously announced public offering of $26,450,000, to fund working capital, general corporate purposes, and partial repayment of its Senior Convertible Note. Total transaction costs related to the combined public offering of ~~$26,450,000~~ ~~amounted to $1,996,472.~~

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

On ~~August 17, 2021,~~ ~~the Company entered an exchange agreement with an existing shareholder to exchange an aggregate of~~ ~~500,000~~ shares of Common Stock for equivalent shares of prefunded warrants (the “Exchange Agreement”). The prefunded warrants will be exercisable at an exercise price of $0.001 per share, subject to adjustments as provided under the terms of the prefunded warrants. The prefunded warrants will be exercisable at any time on or after the closing date. The Exchange Agreement contained additional terms typical of exchange agreements including representations and warranties of the parties. In connection with and as of the date of the Exchange Agreement, the Company issued the prefunded warrants to the shareholder, and the prefunded warrants are exercisable on ~~August 17, 2021,~~ subject to the limitations on exercise and conditions set forth by the prefunded warrants. The prefunded warrants became subject to customary adjustments in the event of stock splits and dividends, fundamental transactions, and subsequent offerings of rights to purchase stock.

On May 17, 2022, the Company entered a warrant purchase agreement with existing shareholders to purchase ~~30,425,000~~3,803,133 shares of ~~common stock~~Common Stock at an offering price of ~~$0.499~~$3.992 per prefunded warrant, which represents the offering price of ~~$0.50~~$4.00 per share of the Company’s ~~common stock~~Common Stock less the ~~$0.001~~$0.008 per share exercise price for each pre-funded ~~warrant for total~~warrant. The warrants represented gross proceeds of approximately $15,182,075 as part of the Company’s public offering of ~~common stock~~Common Stock and pre-funded warrants totaling $23,000,000 before underwriting discounts, commissions, and offering expenses payable by the Company.

On June 23, 2022, the Company completed a private placement of Senior Notes in an aggregate principal amount of $6,000,000 and warrants to purchase ~~4,250,000~~531,250 shares of ~~common stock~~Common Stock of the Company to affiliates of Bleichroeder L.P., 21 April Fund, L.P., and 21 April Fund, Ltd. (together, the "Purchasers"), pursuant to a ~~note~~Note and warrant purchase agreement. Additionally, as part of the transaction, the Company issued ~~230,000~~28,846 warrants to the placement agent. All warrants issued in this transaction have an exercise price of ~~$0.65~~$5.20 per share, a term of five years, and are exercisable for cash at any time.

~~Below~~The following is a summary of the periodic changes in warrants outstanding for the six months ended June 30, ~~2022~~2023 and ~~2021:~~2022:

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, directors, and ~~directors~~consultants of the Company. At June 30, ~~2022,~~2023, ~~2,587,009~~140,441 RSUs were granted and outstanding under the Incentive Plan. Directors of the Company receive share compensation ~~as follows: an initial grant~~consisting of ~~25,000 RSUs of Common Stock that vest over a~~ ~~three-year period upon appointment to the Board, followed by an~~ annual ~~grant~~grants of $36,750 ($73,500 for the Chairman of the Board) in RSUs per annum ~~after full vesting~~with one-year vesting.

In 2022, the Company’s Board of Directors adopted an Equity Incentive Plan (the “2022 Incentive Plan”). Under the terms and conditions of the ~~initial grant. Further,~~2022 Incentive Plan, the ~~Company has granted shares~~Board of ~~Common Stock in~~Directors is empowered to grant RSUs to officers and directors of the ~~period ending~~Company. At June 30, ~~2022~~2023, ~~to management as part of~~201,104 RSUs were granted and outstanding under the 2022Incentive ~~Plan, totaling 2,536,175 of which 80,000 shares vest in~~ ~~December 2023 (~~~~part of CEO separation agreement announced on~~ ~~May 11, 2022)~~ ~~and the remaining shares vesting over a~~ ~~three-year period.~~Plan.

The Company recognizes compensation costs for RSU grants to ~~directors~~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 ~~$221,472~~$193,924 and ~~$125,076~~$221,472 for the three-month ~~periods~~period ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. For the six months periods ended June 30, 2022, and 2021, respectively, the stock-based compensation related to share grants was ~~$400,249~~$351,097 and ~~$227,464.~~$400,249. On June 30, ~~2022,~~2023, the Company had ~~$1,243,836~~$965,796 of unrecognized compensation cost related to non-vested stock grants.

A summary of the status of the RSUs as of June 30, ~~2022~~2023 and changes during the period are presented below:

NOTE 1110 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE

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

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

As of June 30, ~~2022,~~2023, approximately ~~62%~~97% of the Company’s assets were located in Denmark, ~~36%~~1% were located in ~~US,~~the U.S., and 2% were located in China. As of December 31, ~~2021,~~2022, approximately ~~61%~~65% of the Company’s assets were located in Denmark, ~~26%~~33% were located in ~~US,~~the U.S., and ~~13%~~2% were located in China.

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

On ~~July 29, 2022,~~ None~~the Company announced the appointment of Fei Chen, as the new Chief Executive Officer (“CEO”), effective on or before~~ ~~November 1, 2022.~~ Effective on such date, Alexander J. Buehler, a member of LiqTech’s Board and Interim CEO will resign as Interim CEO and will continue to serve as a member of the Board of Directors. Ms. Chen brings more than 20 years of management experience with a demonstrated track record of success across a variety of global industrial companies, with an emphasis on water treatment, chemicals, and clean energy technologies.

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, 2022~~22, 2023, 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.

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.~~membranes while also providing engineered systems. For more than two decades, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in ~~three~~the following business areas: water treatment systems and services, ceramic membranes for liquid filtration, ~~systems,~~ diesel particulate filters (DPFs) to control soot exhaust particles from diesel engines, and plastic components for ~~usage in~~applications across 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 NA, Inc., a Delaware corporation (“LiqTech NA”) and 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”), 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 Environment Technologies (China) Co., Ltd. (“LiqTech China”), a Chinese company organized under the Chinese Act on Limited Companies in the Peoples Republic of China. Collectively, LiqTech USA, LiqTech NA, LiqTech Holding, LiqTech Ceramics, LiqTech Water, LiqTech Plastics, LiqTech Water Projects, LiqTech Emission Control and LiqTech China are referredwe collectively refer to herein as our “Subsidiaries”.

At present, we conduct our operations in the Kingdom of Denmark. Our Danish operations are located in the Copenhagen area, in Hobro, and in Aarhus.

Our strategy is to leverage our core competencies in material science, ~~advanced filtration,~~fluid dynamics, automation and systems integration, creating differentiated products with compelling value propositions to penetrate attractive end markets with regulatory and ESG tailwinds. Essential imperatives associated with our strategy include the following:

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 loss for the three months ended June 30, ~~2022~~2023 and ~~2021:~~2022:

	Three Months Ended June 30,																		Three Months Ended June 30,
													Period to Period Change																		Period to Period Change
	2022			As a % of Sales			2021			As a % of Sales			Variance			Percent %			2023			As a % of Sales			2022			As a % of Sales			Variance			Percent %
Revenue		5,018,292			100.0	%		4,016,563			100.0	%		1,001,729			24.9	%		4,990,019			100.0	%		5,018,292			100.0	%		(28,273	)		(0.6	)%
Cost of Goods Sold		4,870,152			97.0			3,695,853			92.0			1,174,299			31.8
Cost of goods sold																				3,827,491			76.7			4,870,152			97.0			(1,042,661	)		(21.4	)
Gross Profit		148,140			3.0			320,710			8.0			(172,570	)		(53.8	)		1,162,528			23.3			148,140			3.0			1,014,388			684.7

Operating Expenses
Selling expenses		1,196,513			23.8			1,202,586			29.9			(6,073	)		(0.5	)		1,028,225			20.6			1,196,513			23.8			(168,288	)		(14.1	)
General and administrative expenses		1,265,543			25.2			1,247,132			31.0			18,411			1.5			1,377,483			27.6			1,265,543			25.2			111,940			8.8
Research and development expenses		490,836			9.8			434,629			10.8			56,207			12.9			359,784			7.2			490,836			9.8			(131,052	)		(26.7	)
Restructuring costs		1,788,827			35.6			-			-			1,788,827			-			-			-			1,788,827			35.6			(1,788,827	)		(100.0	)
Total Operating Expenses		4,741,719			94.5			2,884,347			71.8			1,857,372			64.4			2,765,492			55.4			4,741,719			94.5			(1,976,227	)		(41.7	)

Loss from Operation		(4,593,579	)		(91.5	)		(2,563,637	)		(63.8	)		(2,029,942	)		79.2			(1,602,964	)		(32.1	)		(4,593,579	)		(91.5	)		2,990,615			(65.1	)

Other Income (Expense)
Interest and other income		342,624			6.8			-			-			342,624			-			116,545			2.3			342,624			6.8			(226,079	)		(66.0	)
Interest (expense)		(159,557	)		(3.2	)		(215,598	)		(5.4	)		56,041			(26.0	)		(45,898	)		(0.9	)		(159,557	)		(3.2	)		113,658			(71.2	)
Amortization discount, Notes		(1,922,618	)		(38.3	)		(251,804	)		(6.3	)		(1,670,814	)		663.5			(86,790	)		(1.7	)		(1,922,618	)		(38.3	)		(1,835,828	)		(95.5	)
Gain (loss) on currency transactions		(342,202	)		(6.8	)		(83,696	)		(2.1	)		(258,506	)		308.9			49,494			1.0			(342,202	)		(6.8	)		391,696			(114.5	)
Gain on lease termination		153,575			3.1			-			-			153,575			-			-			-			153,575			3.1			(153,575	)		(100.0	)
Gain (loss) on sale of fixed assets		661			-			1,134			-			(473	)		(41.7	)		-			-			661			-			(661	)		(100.0	)
Total Other Income (Expense)		(1,927,517	)		(38.4	)		(549,964	)		(13.7	)		(1,377,553	)		(250.5	)		33,351			0.7			(1,927,517	)		(38.4	)		1,960,868			(101.7	)

Loss Before Income Taxes		(6,521,096	)		(129.9	)		(3,113,601	)		(77.5	)		(3,407,495	)		109.4			(1,569,613	)		(31.5	)		(6,521,096	)		(129.9	)		4,951,483			(75.9	)
Income Tax Benefit		(14,037	)		(0.3	)		(15,493	)		(0.4	)		1,456			(0.1	)		(14,321	)		(0.3	)		(14,037	)		(0.3	)		(284	)		0.0

Net Loss		(6,507,059	)		(129.7	)		(3,098,108	)		(77.1	)		(3,408,951	)		110.0			(1,555,292	)		(31.2	)		(6,507,059	)		(129.7	)		4,951,767			(76.1	)

Revenue for the three months ended June 30, ~~2022~~2023, was ~~$5,018,292~~$4,990,019 compared to ~~$4,016,563~~$5,018,292 for the same period in ~~2021,~~2022, representing ~~an increase~~a decrease of ~~$1,001,729,~~$28,273, or ~~25%~~0.6%. ~~The increase~~While offset by lower system sales and DPFs, revenue stability was ~~particularly attributed~~attributable to an increase in system aftermarket activities, ceramic membranes sales, ~~of liquid filters~~ and ~~water treatment systems of $1,064,007,~~plastic products, reflecting a continued focus on strengthening the recurring business lines with a diversified and improved revenue mix that is better suited for the existing manufacturing setup. Furthermore, revenue in the current period benefitted from commissioning and contract work across key oil & gas projects and planned marine scrubber remediation work.

The positive development in the current quarter was partly offset by a year-on-year decrease in sales of ~~development projects~~liquid filtration systems and DPFs, as the quarter ended June 30, 2022, benefitted from the delivery of ~~$83,204. Sales~~a sizable oil & gas project in the Middle East, as well as the delivery of ~~DPFs and Plastics components were comparable to the same period~~a legacy DPF order for a transportation client in ~~2021, reflecting stable activity amid volatile market conditions and more recently, geopolitical unrest and macroeconomic uncertainty impacting demand.~~Asia.

Gross profit for the ~~three months~~quarter ended June 30, ~~2022, was $148,140~~2023, of $1,162,528, increased $1,014,388 or 685%, compared to a gross profit of ~~$320,710~~$148,140 for the same period in ~~2021, representing a decrease~~2022. Considering the comparable revenue levels, the increase was mainly driven by the reduction in cost of ~~$172,570. The decrease~~goods sold underpinned by improvements in product mix, pricing discipline, and operational optimization supported by the newly implemented ERP platform. Notably, the recurring business including sale of ceramic products and pool systems were the main drivers behind the improvement in gross profit, was mainly caused by reduced profitability in our Ceramics business driven by lower share of ceramic membranes, lost productivity linked to quality issues, and finally negative impact from rising input cost inflation associated with the production of our silicon carbide products, more specifically increased electricity and raw material prices, labor cost inflation, and general price increases on freight and logistic services. This was partly offset by ~~an increase in system sales with deliveries in both the Middle East~~cost related to ongoing remediation work and ~~Europe, coupled with elevated profitability from sales of plastics components, systems spare-parts,~~continued investments into manufacturing optimization initiatives, seeking to improve kiln utilization and general ~~commission activities.~~ manufacturing throughput.

Included in the gross profit was depreciation of ~~$473,697~~$636,985 and ~~$496,049~~$473,697 for the three months ended June 30, 2023, and 2022, respectively, with the increase reflecting investments in manufacturing equipment and ~~2021, respectively.~~facilities, as well as the accelerated depreciation schedule for select kiln equipment.

Total operating expenses for the three months ended June 30, ~~2022~~2023, were ~~$4,741,719,~~$2,765,492, representing ~~an increase~~a decrease of ~~$1,857,372,~~$1,976,227, or ~~64%~~42%, compared to ~~$2,884,347~~$4,741,719 for the same period in ~~2021, mainly driven by this quarter’s~~2022, predominantly attributable to the restructuring costs of ~~$1,788,827.~~$1,788,827 recorded in the second quarter of 2022. Adjusting for the restructuring costs, total operating expenses decreased $187,400, or 6%.

Selling expenses for the three months ended June 30, ~~2022~~2023, were $1,028,225 representing a decrease of ~~$1,196,513~~$168,288 or 14%, compared to ~~$1,202,586~~$1,196,513 for the same period in ~~2021, representing a decrease of $6,073, or 1%.~~2022. The ~~current quarter was negatively impacted by~~favorable variance reflects a bad debt ~~provision~~expense of ~~approximately $150,000 pertaining to a European Ceramics client,~~$148,571 recorded in the second quarter of 2022, coupled with ongoing focus on cost reduction and organizational streamlining, partly offset by ~~cost reductions associated with direct~~onboarding of new sales ~~and consulting activities.~~ leadership in 2023.

General and administrative expenses for the three months ended June 30, ~~2022,~~2023, were ~~$1,265,543 compared to $1,247,132 for the same period in 2021,~~$1,377,483, representing an increase of ~~$18,411,~~$111,940 or ~~2%.~~9%, compared to $1,265,543 for the quarter ended June 30, 2022. The increase was caused by termination of employees including severance costs, combined with the recruitment of key employees and the new board member, as well as general bonus provisions, partly offset by lower spend on legal and IT. Included in general and administrative expenses ~~was increased cost associated with the CFO and CEO transition and~~were non-cash compensation of ~~$221,472~~$193,924 and ~~$125,076~~$221,472 for the three months ended June 30, 2023, and 2022, ~~and 2021,~~ respectively. Notably, the second quarter general and administrative expenses have decreased by $650,974 compared to the first quarter, which was mainly driven by project management and leasehold expenses in China, coupled with the implementation of a new ERP platform and general recruitment costs, all underpinned by the Company’s cost reduction efforts.

Research and development expenses for the three months ended June 30, ~~2022,~~2023, were ~~$490,836~~$359,784 representing a decrease of $131,052 or 27% compared to ~~$434,629~~$490,836 for the same period in ~~2021, representing an increase~~2022. The change was attributable to more focused R&D efforts with fewer ongoing projects combined with a decrease in the average number of ~~$56,207, or 13%. The increase represents~~employees engaged in research and development activities from 14 as of June 30, 2022, to 9 as of June 30, 2023, as the ~~completion of several development projects during~~Company has streamlined and centralized the ~~quarter mainly related to improvement and optimization of filtration systems.~~R&D function.

Restructuring costs for the three months ended June 30, 2022, were $1,788,827 compared to $0 for the same period in 2021. During the quarter, the Company completed a restructuring program to reduce costs, decrease operating losses and improve cash flow. Total restructuring and restructuring-related net charges pursuant to this program were $1,788,827 (see Note 3).2023.

Other Income (Expenses) for the three months ended June 30, ~~2022~~2023, was ~~$(1,927,517)~~$33,351 representing a decrease in other expenses of $1,960,868, or 102%, compared to ~~$(549,964)~~$(1,927,517) for the comparable period in ~~2021, representing~~2022, with the change reflecting a ~~negative variance of $1,377,553. This change was mainly related to~~gain on currency transactions and the early repayment of the Convertible Note ~~issued~~ in ~~April 2021, with $1,922,618 for~~ the ~~amortization discount and $121,458 for interest expenses. Further, Other Income (Expenses) was positively affected by the receipt~~second quarter of ~~COVID-19 grants and the gain on lease termination related to the China closings, offset by a loss on currency transactions due to a less favorable DKK/USD exchange rate during the period.~~ 2022.

Net loss for the three months ended June 30, ~~2022,~~2023, was ~~$(6,507,059)~~$(1,555,292), representing an improvement $4,951,767 or 76% compared to ~~$(3,098,108) for~~$(6,507,059) recorded in the ~~comparable period in 2021, representing an~~quarter ended June 30, 2022. The change was attributable the increase in ~~net loss~~gross profit of ~~$3,408,951.~~

~~This change was primarily attributable to this quarter’s recognized~~$1,014,388 derived from an enhanced revenue mix, pricing discipline, and realization of manufacturing efficiencies and associated cost reductions along with the reduction in operating expenses of $1,976,227, predominantly caused by the restructuring ~~costs of $1,788,827~~cost incurred in quarter ended June 30, 2022, and coupled with a reduction in other expenses ~~including interest and amortization discount primarily related to~~of $1,960,868 benefitting from the repayment of the Convertible Note.

Comparison of the Six Months Ended June 30, ~~2022~~2023 and June 30, ~~2021~~2022

The following table sets forth our revenues, expenses and net loss for the six months ended June 30, ~~2022~~2023 and ~~2021:~~2022:

	Six Months Ended June 30,																		Six Months Ended June 30,
													Period to Period Change																		Period to Period Change
	2022			As a % of Sales			2021			As a % of Sales			Variance			Percent %			2023			As a % of Sales			2022			As a % of Sales			Variance			Percent %
Revenue		8,655,528			100.0	%		8,014,440			100.0	%		641,088			8.0	%		9,001,538			100.0	%		8,655,528			100.0	%		346,010			4.0	%
Cost of Goods Sold		8,261,847			95.5			7,579,118			94.6			682,732			9.0			7,447,668			82.7			8,261,847			95.5			(814,179	)		(9.9	)
Gross Profit		393,681			4.5			435,325			5.4			(41,644	)		(9.6	)		1,553,870			17.3			393,681			4.5			1,160,189			294.7

Operating Expenses
Selling expenses		2,256,461			26.1			2,212,084			27.6			44,377			2.0			2,210,660			24.6			2,256,461			26.1			(45,801	)		(2.0	)
General and administrative expenses		3,182,060			36.8			2,721,802			34.0			460,258			16.9			2,436,432			27.1			3,182,060			36.8			(745,628	)		(23.4	)
Research and development expenses		1,093,573			12.6			872,236			10.9			221,337			25.4			702,403			7.8			1,093,573			12.6			(391,170	)		(35.8	)
Restructuring costs		1,788,827			20.7			-			-			1,788,827			-			-			-			1,788,827			20.7			(1,788,827	)		(100.0	)
Total Operating Expenses		8,320,921			96.1			5,806,122			72.4			2,514,799			43.3			5,349,495			59.4			8,320,921			96.1			(2,971,426	)		(35.7	)

Loss from Operation		(7,927,240	)		(91.6	)		(5,370,797	)		(67.0	)		(2,556,443	)		47.6			(3,795,625	)		(42.2	)		(7,927,240	)		(91.6	)		4,131,615			(52.1	)

Other Income (Expense)
Interest and other income		342,729			4.0			-			-			342,624			-			168,218			1.9			342,723			4.0			(174,505	)		(50.9	)
Interest (expense)		(366,018	)		(4.2	)		(256,017	)		(3.2	)		110,001			43.0			(57,899	)		(0.6	)		(366,018	)		(4.2	)		308,119			(84.2	)
Amortization discount, Notes		(2,219,956	)		(25.6	)		(251,804	)		(3.1	)		(1,968,152	)		781.6			(171,318	)		(1.9	)		(2,219,956	)		(25.6	)		2,048,638			(92.3	)
Gain (loss) on currency transactions		(266,209	)		(3.1	)		287,988			3.6			(554,197	)		(192.4	)		(116,784	)		(1.3	)		(266,209	)		(3.1	)		149,425			(56.1	)
Gain on lease termination		153,575			1.8			-			-			153,575			-			-			-			153,575			1.8			(153,575	)		(100.0	)
Gain (loss) on sale of fixed assets		661			-			1,134			-			(473	)		(41.7	)		-			-			661			-			(661	)		(100.0	)
Total Other Income (Expense)		(2,355,244	)		(27.2	)		(218,699	)		(2.7	)		(2,136,525	)		976.9			(177,783	)		(2.0	)		(2,355,224	)		(27.2	)		2,177,441			(92.5	)

Loss Before Income Taxes		(10,282,464	)		(118.8	)		(5,589,496	)		(69.7	)		(4,692,968	)		84.0			(3,973,408	)		(44.1	)		(10,282,464	)		(118.8	)		6,309,056			(61.4	)
Income Tax Benefit		(28,981	)		0.3			(31,959	)		0.4			2,978			(9.3	)		(28,613	)		(0.3	)		(28,981	)		(0.3	)		368			(1.3	)

Net Loss		(10,253,483	)		(118.5	)		(5,557,537	)		(69.3	)		(4,695,946	)		84.5			(3,944,795	)		(43.8	)		(10,253,483	)		(118.5	)		6,308,688			(61.5	)

Revenue for the six months ended June 30, ~~2022,~~2023, was ~~$8,655,528~~$9,001,538, representing an increase of $346,010 or 4% compared to ~~$8,014,440~~$8,655,528 recorded in for the same period in ~~2021, representing an increase of $641,088, or 8%.~~2022. The ~~increase was particularly attributed to~~positive development reflects an increase in ~~sales~~system aftermarket activities underpinned by the establishment of ~~liquid filters~~a new dedicated aftermarket organization including onboarding of a new VP Aftermarket, as well as execution of key service and ~~water treatment systems~~aftermarket contracts. Furthermore, the quarter benefitted from a general increase in sale of ~~$499,661, and engineered~~ plastic products, due to a stable order intake combined with the delivery of ~~$343,906,~~a key order within the sustainable building material industry.

The positive development for the six months ended June 30, 2023 was partly offset by ~~lower share~~a decrease in sale of ~~completed development projects of $153,125~~ceramic products (DPF and ~~Ceramics products of $49,355 due to lower share of direct membrane sales~~membranes) caused by general market conditions, but also a strategic focus on increasing profitability by targeting higher profit orders through changes in revenue and ~~the continued negative impact from the USD appreciation against the EURO and DKK.~~pricing mix.

Gross profit for the six months ended June 30, ~~2022,~~2023, was ~~$393,681~~$1,553,870 representing an increase of $1,160,189 or 295% compared to the gross profit of ~~$435,325~~$393,681 reported for the same period in ~~2021, representing~~2022. The increase mainly reflects a ~~decrease~~reduction in cost of ~~$41,644. The decrease in gross profit was mainly caused~~goods sold derived from improved product mix and pricing discipline within the recurring ceramic DPF business, underpinned by ~~reduced profitability from~~ the ~~Ceramics~~recent implementation of the ERP platform, enhanced business ~~due to unfavorable mix further exacerbated by continued input cost inflation~~intelligence, and ~~the negative impact from the USD appreciation, but also the~~ delivery of ~~a significant water treatment~~profitable system ~~at comparatively lower margin during~~and aftermarket orders within the ~~second quarter~~pool and oil & gas segment.

The efforts overall resulted in improved profitability, despite ongoing remediation costs associated with ~~subsequent service~~legacy system deliveries and ~~commissioning revenue expected~~increased depreciation related to ~~elevate the full project margin. This was partly offset by continued resilient contribution from both the sale of plastics components, systems spare-parts,~~recent investments in manufacturing equipment and facilities to improve kiln utilization and general ~~commission activities during the period.~~manufacturing throughput. Included in the gross profit was depreciation of ~~$969,746~~$1,251,577 and ~~$967,055,~~$969,746 for the six months ended June 30, 2023, and 2022, ~~and 2021,~~ respectively.

Total operating expenses for the six months ended June 30, ~~2022~~2023, were ~~$8,320,921,~~$5,349,495, representing ~~an increase~~a decrease of ~~$2,514,799,~~$2,971,426, or ~~43%~~36%, compared to ~~$5,806,122~~$8,320,921 for the ~~same~~comparable period in ~~2021, mainly driven by~~2022, partly due to the ~~second quarter~~ restructuring costs of ~~$1,788,827.~~$1,788,827 incurred in the quarter ended June 30, 2022. Adjusting for the reported restructuring costs, total operating expenses decreased $1,182,599, or 18%.

Selling expenses for the six months ended June 30, ~~2022~~2023 were $2,210,660 representing a decrease of ~~$2,256,461~~$45,801 or 2% compared to ~~$2,212,084~~$2,256,461 for the same period in 2021, representing an increase of $44,377, or 2%. The current increase was a combination of increased costs associated with intensified direct sales efforts, consulting service engagements, and direct marketing activities during the period, combined with a2022, primarily explained by bad debt ~~provision booked~~expenses of $140,282 recorded in 2022, and the ~~second quarter.~~overall benefits from the cost reduction and reorganization efforts implemented in 2022, partly offset by onboarding of new sales and commercial leadership in 2023.

General and administrative expenses for the six months ended June 30, ~~2022,~~2023, were ~~$3,182,060~~$2,436,432 representing a decrease of $745,628 or 24% compared to ~~$2,721,802 for~~$3,182,060 recorded in the same period of 2022. The decrease reflects lower spend on legal and IT in ~~2021, representing an increase~~the first half of ~~$460,258, or 17%. The increase was mainly driven by increased headcounts and continued spend~~2023, coupled with costs associated with the China capacity expansion incurred in the first ~~quarter.~~quarter of 2022. Included in general and administrative expenses for the ~~period~~first half of 2022 was also increased cost associated with ~~recent~~the CEO transition and other management ~~changes as well as~~changes. Non-cash compensation included in general and ~~non-cash compensation of~~administrative expenses was $351,097 and $400,250 ~~and $227,464~~ for the six months ended June 30, ~~2022,~~2023, and ~~2021,~~2022, respectively.

Research and development expenses for the six months ended June 30, ~~2022, were $1,093,573~~2023, of $702,403 represented a decrease of $391,170, or 36%, compared to ~~$872,236~~$1,093,573 recorded for the same period in ~~2021, representing an increase~~2022. The decrease was attributable to the centralization of ~~$221,337, or 25%. The increase represents~~R&D, the ~~completion~~streamlining of ~~several development projects during the period.~~R&D resources, and more focused R&D efforts.

Restructuring costs for the six months ended June 30, ~~2022,~~2023, were ~~$1,788,827~~$0 compared to $0$1,788,827 for the same period in ~~2021.~~2022. The restructuring program was executed in the second ~~quarter.~~quarter of 2022.

Other Income (Expenses) for the six months ended June 30, ~~2022,~~2023, was ~~$(2,355,244)~~$(177,783) representing a decrease of $2,177,441 or 92% compared to ~~$(218,699)~~$(2,355,244) for the comparable period in ~~2021, representing a negative variance of $2,136,525.~~2022. The variance ~~was mainly related to~~is predominantly a result of the improved capital structure following the early repayment of the Convertible Note in the quarter ended June 30, 2022, including ~~interest and~~associated amortization cost ~~related to~~incurred. Furthermore, the ~~repayment with a combined expense of $1,968,152 compared to the same period in 2021. Further, the period was negatively impacted by loss~~positive trend reflects less expenses on currency transactions, ~~of $266,209 compared to a gain in the same period last year of $287,988, due to a less favorable DKK/USD exchange rate, partly~~ offset by the ~~receipt of COVID-19 grants~~non-recurring gain on lease termination related to China closure, in the ~~Danish entities.~~first half of 2022.

Net loss for the six months ended June 30, ~~2022,~~2023, was ~~$(10,253,483)~~$(3,944,795) compared to ~~$(5,557,537)~~$(10,253,483) for the comparable period in ~~2021,~~2022, representing an ~~increase~~improvement in net loss of ~~$4,695,946.~~$6,308,688 or 62%.

~~This~~The change was ~~primarily~~ attributable to the significant increase in gross profit of $1,160,189 due to improved revenue mix, better pricing discipline and more effective manufacturing throughput and kiln utilization; the reduction in operating ~~losses for~~expenses of $2,971,426 due to general cost savings and the ~~period, second~~restructuring cost incurred in the quarter ~~restructuring charges,~~ended June 30, 2022, and ~~refinancing cost related to~~the reduction in other expense of $2,177,441 following the repayment of the Convertible ~~Note.~~Note in 2022.

Based on the ~~prolonged negative effects of the global pandemic, continued~~prevailing market volatility and macro-economic uncertainty, including the geopolitical unrest pertaining to the Russia and Ukraine conflict, the Company is unable to predict the full impact this will have on ~~our~~its long-term financial condition, results of operations, liquidity, and cash flows. The Company has recently planned and executed on decisive measures ~~in the first half of 2022~~ to help safeguard the business and its financial position by reducing cost, headcount, and overall capex commitments, ~~which together~~improving the Company’s ability to fund investments and general operating expenses from anticipated future Company profits. This, combined with the successful completion of the ~~$26.45~~$26.5 million public offering of ~~common stock~~Common Stock and pre-funded warrants ~~substantially improves~~in May 2022, improved the near-term liquidity position of the Company.

Furthermore, in June 2022, the Company completed the refinancing of its $15 million Convertible Note due in 2023, partly funded by the issuance of the new $6 million Senior Promissory Notes due in June 2024 along with the proceeds from the public offering. The Senior Promissory Notes are interest-free, with full redemption after 24 months.

Based on current projections, which are subject to significant uncertainties, including the duration and severity of global macroeconomic issues, commodity price volatility, and continued global supply chain disruptions, the Company believes that the cash on hand, as well as ongoing cash generated from operations, will be sufficient to cover its capital requirements and committed investments for the next 12 months.

Continued market uncertainty and reduced order intake caused by weakening global macroeconomic conditions, recession, or a resurgence of the COVID-19 pandemic, however, could unfavorably impact the Company’s ability to generate positive cash flow and thereby significantly reduce ~~the~~its profitability and liquidity position.

While the Company anticipates that its proactive measures will be sufficient to protect ~~and fund~~ the business over the coming 12 months, the Company cannot predict the specific duration and severity of the unfavorable market dynamics that may adversely affect the ~~business as a result of these global economic issues and associated supply chain disruptions.~~business. In the future, the Company may experience reduced or changed demand characteristics for its products and services, especially if there is a global recession, or structural shift in regulation, or ~~demand for its products across its core markets.~~the continuation of escalating interest rates that adversely impacts the investment decisions of our customers.

~~The Company has~~We have historically satisfied ~~its~~our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. On June 30, ~~2022, the Company~~2023, we had cash of ~~$19,695,722~~$12,594,689 and net working capital of ~~$25,884,809,~~$19,053,497, and on December 31, ~~2021, the Company~~2022, we had cash of ~~$17,489,380~~$16,597,371 and net working capital of ~~$11,199,258. The increase in~~$21,581,287. On June 30, 2023, our net working capital ~~of $14,685,551~~had decreased by $2,527,790 compared to December 31, ~~2021 is~~2022, mainly due to a ~~result of the capital raise~~reduction in cash and ~~repayment of the Convertible Note.~~cash equivalents.

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 ~~EUR1,750,000~~EUR1,350,000 (approximately ~~$1,820,000)~~$1,480,000). The credit line is secured by a cash deposit.

The financial statements included elsewhere herein for the period ended June 30, 2023, were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. As of June 30, 2023, we had cash & cash equivalents of $12,594,689, net working capital of $19,053,497, accumulated deficit of $71,295,830, and total assets and liabilities of $37,321,712 and $17,297,234, respectively. We have incurred losses from continuing operations, used cash in our continuing operations, and remain dependent on additional financing to fund operations. These conditions raise substantial doubt about our ability to continue as a going concern for one year after the date the financial statements are issued. The financial statements included elsewhere herein do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

The Company has initiated substantial cost reductions and profitability improvement measures to help right size the business and develop a clear and sustainable path to profitability, further underpinned by an updated strategy and onboarding of key management resources. There can be no assurance, however, that the Company will be able to obtain any sources of funding. Such additional funding may not be available or may not be available on reasonable terms, and, in the case of equity financing transactions, could result in significant additional dilution to our stockholders. If we do not obtain required additional equity or debt funding, our cash resources could be depleted and we could be required to materially reduce or suspend operations, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that could result in our stockholders losing some or all of their investment in us.

On March 24, 2021, the Company entered into a Securities Purchase Agreement with an institutional investor pursuant to which the Company agreed to issue and sell a $15.0 million principal amount senior ~~Convertible Note~~convertible note (the ~~“Note”~~“Convertible Note”) ~~due~~maturing on October 1, 2023 and ~~80,000~~10,000 shares of ~~common stock,~~our Common Stock, $0.001 par value (“Common Stock”), for an aggregate purchase price of $15.0 million upon the satisfaction of the closing conditions set forth in the Securities Purchase Agreement. The Closing occurred on April 8, 2021, and the Company issued to the Investor the securities in connection with the Closing.

The Convertible Note iswas a senior, unsecured obligation of the Company, payable at 112% of the principal amount at maturity (October 1, 2023), or earlier upon redemption or repurchase as set forth in the Convertible Note. The Convertible Note iswas convertible into shares of Common Stock pursuant to the terms of the Convertible Note, in part or in whole, from time to time, at the election of the Investor. The initial conversion rate ~~is 100.6749~~was 805.3992 shares of Common Stock per $1,000 of principal amount of the Convertible Note. The conversion rate iswas 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 Convertible Note.

The Note has interest payable quarterly beginning on 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 Company may provide written notice to the Holder electing to convert the entire Principal Amount of the Note if (1) the Daily VWAP per share of Common Stock exceeds one hundred and seventy-five percent (175%) of the Conversion Price on each of twelve (12) consecutive VWAP Trading Days beginning after September 24, 2021; and (2) the Equity Conditions are satisfied on each of such twelve (12) consecutive VWAP Trading Days.

Beginning on March 1, 2022, and on the first day of each calendar month thereafter, at the election of the Investor or Holder, if applicable, the Company ~~shall be~~was required to redeem $840,000 of the amounts due under the Convertible 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~~$14.00 per share. OnBeginning on March 1, 2022, the Company paid the first monthly installment of $840,000 in cash.

As of June 22, 2022, the Note, including accrued ~~interests~~interest and all relevant obligations, was repaid in full, amounting to $13,446,875 and allocated tobetween a principal repayment of $11,640,000 and contractual repayment premium of $1,806,875. ~~During the quarter, the Company paid the second, third, and fourth installment, totaling $2,520,000, in cash according to the original payment schedule.~~

On June 22, 2022, the Company issued and sold Senior Promissory Notes in an aggregate principal amount of $6.0 million (the ~~"Notes"~~“Notes”) and issued warrants to purchase ~~4,250,000~~531,250 shares of ~~common stock~~Common Stock of the Company to affiliates of Bleichroeder L.P., 21 April Fund, L.P., and 21 April Fund, Ltd. (together, the ~~"Purchasers"~~“Purchasers”), pursuant to a ~~note~~Note and warrant purchase agreement entered into with the Purchasers.

The Notes have a term of 24 months and do not bear interest during this period. If the ~~notes~~Notes are not repaid on or before the second anniversary of issuance, however, the Notes will thereafter bear interest of 10% per annum, which will increase by 1% each month the Notes remain unpaid, up to a maximum of 16% per annum, payable monthly.

Additionally, as part of the transaction, the Company issued 230,000 warrants to the placement agent. All of the warrants issued in this transaction have an exercise price of $0.65 per share, a term of five years and are exercisable for cash at any time.

As a result, the Company recorded an initial debt discount of $664,704 based on the relative fair value of the warrants and notes issued. The Company determined the fair value of the warrants by using the Black-Scholes Option Pricing Model with the following assumptions: expected term of 2.5 years, stock price of $0.43, exercise price of $0.65, volatility of 80.8%, risk-free rate of 3.13%, and no forfeiture rate. The debt discount will be accreted according to the effective interest method over the contractual term of the note. The warrants qualified for equity classification and were reported within Additional Paid-In Capital.

Six months ended June 30, ~~2022~~2023 compared to six months ended June 30, ~~2021~~2022

Cash ~~provided by (used in)~~flows from operating activities for the period ending June 30, 2023 consist of the net loss for the period, adjusted for non-cash items and changes in assets and liabilities. Cash flows from operating activities for the six months ended June 30, ~~2022~~2023 were $(3,756,688), representing an improvement of ~~$(11,032,241) represents a decrease of $10,121,981~~$7,275,553 or 66% compared to ~~$(910,259)~~$(11,032,241) for the six months ended June 30, ~~2021. For~~2022. The favorable change reflects the ~~six months ended June 30, 2022, the result is mainly attributable to the~~reported improvement in net loss ~~for the period of $(10,253,483)~~benefiting from an improved gross profit and a general reduction in both operating and other expenses adjusted for depreciation and other non-cash-related items, ~~of $4,274,243.~~and further underpinned by a reduction in Changes in assets and liabilities ~~include increased Accounts receivable~~ of ~~$660,578 and net Contract assets/liabilities of $1,358,363, with~~$3,063,451 for the ~~latter~~six month ended June 30, 2023 compared to the same period in 2022, mainly caused by ~~delivery of~~ a ~~water treatment system~~reduction in ~~Q2 2022 includes an extended payment schedule that runs until August 2025. Furthermore, Accounts payable increased by $432,337~~prepaid expenses and ~~Accrued expenses decreased by $178,716.~~contract assets.

~~Net cash used in~~Cash flows from investing activities ~~of $229,204~~were $(290,468) for the six months ended June 30, 2023 as compared to $(229,204) for the six months ended June 30, 2022, ~~compared~~representing an decrease of $61,264. The investing activities were mainly confined to ~~$717,232~~general maintenance investments in manufacturing facilities and associated production equipment.

Cash flows from financing activities were $(200,095) for the six months ended June 30, ~~2021, representing a decrease of $488,028 due~~2023 compared to limited delivery of production equipment during the quarter, with investments confined to the purchase of production equipment in Ballerup to relieve manufacturing bottlenecks and the continued investment in the new ERP platform, for which full implementation is anticipated in Q3 2022.

~~Cash provided from financing activities was~~ $13,473,839 for the six months ended June 30, 2022, ~~compared to $14,090,829 for the six months ended June 30, 2021,~~ representing a decrease of ~~$616,990. For~~$13,673,934. The decrease was mainly driven by the ~~six-month period~~equity raise recorded in the quarter ended June 30, 2022, ~~the result is mainly affected by the equity raise,~~ generating net proceeds of $24,453,527 from the issuance of ~~common stock~~Common Stock and prefunded warrants, ~~and~~coupled with proceeds of $6,000,000 from the issuance of the new Senior Promissory Notes, partly offset by the full repayment of the Convertible Note issued in April 2021 of $16,800,000.

As of June 30, 2023, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in our consolidated financial statements.

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:

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.

~~For a description of subsequent events, see “Note 13 – Subsequent Events”.~~

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

Management, with the participation of our ~~Interim~~ 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 material 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 ~~Interim~~ Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of June 30, ~~2022~~2023 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, ~~2022~~2023 for the year ended December 31, ~~2021.~~2022.

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.

In response to the identified material weaknesses, Company 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 ~~2022~~2023 by improving competencies and work processes. Further, an investment in a new ERP system has been made along with other supporting IT systems to ~~reinforce~~support the controls and processes of the Company. These investments are an important part of our remediation plan. Lastly, the Company has started the process of redesigning and ensuring documentation of all processes and procedures related to financial reporting to ensure the effective design and operation of process-level controls.

While management believes that the steps that have been taken and plan to take will improve the overall system of internal control over financial reporting and will remediate the identified material weaknesses, these material weaknesses cannot be considered fully remediated until the applicable relevant controls operate for a sufficient period of time.

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.~~period of time.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. For a description of contingencies, see “Note 87 – Agreements ~~and~~And Commitments”.

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.

	Page
PART I. FINANCIAL INFORMATION	5

Item 1. Financial Statements	5

Condensed Consolidated Balance Sheets as of June 30, ~~2022~~2023 (unaudited) and December 31, ~~2021~~2022	5

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, ~~2022~~2023 and June 30, ~~2021~~2022 (unaudited)	7

Condensed Consolidated ~~Statement~~Statements of Stockholder’s Equity for the Three and Six Months ended June 30, ~~2022~~2023 and June 30, ~~2021~~2022 (unaudited)	9

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2022~~2023 and June 30, ~~2021~~2022 (unaudited)	1011

Notes to Condensed Consolidated Financial Statements (unaudited)	1213

Item 2. Management's Discussion and Analysis of Financial Condition and Results of ~~Operation~~Operations	28

Item 3. Quantitative and Qualitative Disclosures About Market Risk	3736

Item 4. Controls and Procedures	3736

PART II. OTHER INFORMATION	38

Item 1. Legal Proceedings	38

Item 1A. Risk Factors	38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3. Defaults Upon Senior Securities	38

Item 4. Mine Safety Disclosures	38

Item 5. Other Information	38

Item 6. Exhibits	39

SIGNATURES	40

	As of		As of		As of		As of
	June 30,		December 31,		June 30,		December 31,
	2022		2021		2023		2022
	(Unaudited)				(Unaudited)
Assets

Current Assets:
Cash and restricted cash	$	19,695,722	$	17,489,380	$	12,594,689	$	16,597,371
Accounts receivable, net of allowance for doubtful accounts of $152,311 and $409,076 at June 30, 2022 and December 31, 2021, respectively		2,420,968		1,957,579
Inventories, net of allowance for excess and obsolete inventory of $419,985 and $268,470 at June 30, 2022 and December 31, 2021, respectively		5,445,413		5,421,027
Accounts receivable, net of allowance for doubtful accounts of $50,230 and $59,559 at June 30, 2023 and December 31, 2022, respectively						2,960,421		2,310,344
Inventories, net of allowance for excess and obsolete inventory of $732,638 and $663,227 at June 30, 2023 and December 31, 2022, respectively						4,423,280		4,062,001
Contract assets		2,786,063		1,906,510		2,406,402		2,253,295
Prepaid expenses and other current assets		3,434,607		1,292,285		2,816,823		1,720,902
Assets held for sale						694,601		723,872

Total Current Assets		33,782,773		28,066,781		25,896,216		27,667,785

Long-Term Assets:
Property and equipment, net of accumulated depreciation of $7,950,015 and $7,554,803 at June 30, 2022 and December 31, 2021, respectively		7,209,565		8,858,993
Property and equipment, net of accumulated depreciation of $10,374,274 and $9,046,499 at June 30, 2023 and December 31, 2022, respectively						7,526,475		8,296,807
Operating lease right-of-use assets		3,468,258		6,925,807		3,046,933		3,271,997
Deposits and other assets		582,963		628,109		457,111		450,038
Intangible assets, net of accumulated amortization of $376,674 and $357,231 at June 30, 2022 and December 31, 2021, respectively		257,252		334,743
Intangible assets, net of accumulated amortization of $497,445 and $438,250 at June 30, 2023 and December 31, 2022, respectively						164,978		212,933
Goodwill		220,105		240,259		229,999		226,095

Total Long-Term Assets		11,738,143		16,987,911		11,425,496		12,457,870

Total Assets	$	45,520,916	$	45,054,692	$	37,321,712	$	40,125,655

	June 30, 2022			December 31, 2021			June 30, 2023			December 31, 2022
Allowance for doubtful accounts at the beginning of the period	$	409,076		$	498,044		$	59,559		$	409,076
Bad debt expense		73,749			(28,499	)		-			(24,534	)
Receivables written off during the periods		(307,885	)		(24,415	)		(10,299	)		(295,778	)
Effect of currency translation		(22,629	)		(36,054	)		970			(29,205	)
Allowance for doubtful accounts at the end of the period	$	152,311		$	409,076		$	50,230		$	59,559

	For the Three Months				For the Six Months				For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,				Ended June 30,				Ended June 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Americas	$	339,380	$	196,207	$	478,688	$	361,795	$	441,186	$	339,380	$	774,717	$	478,688
Asia-Pacific		1,213,389		1,459,032		2,048,753		2,589,068		650,095		1,213,389		1,101,989		2,048,753
Europe		2,084,570		2,361,324		4,747,134		5,063,577		3,119,496		2,084,570		6,219,282		4,747,134
Middle East & Africa		1,380,953		0		1,380,953		0		779,242		1,380,953		905,550		1,380,953
	$	5,018,292	$	4,016,563	$	8,655,528	$	8,014,440	$	4,990,019	$	5,018,292	$	9,001,538	$	8,655,528

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2022		2021		2022		2021
Liquid filters and systems	$	2,144,011	$	1,080,004	$	2,737,002	$	2,237,340
Diesel particulate filters		1,812,334		1,810,743		3,692,452		3,741,807
Plastic components		1,035,705		1,016,370		2,174,302		1,830,396
Development projects		26,242		109,446		51,772		204,897
	$	5,018,292	$	4,016,563	$	8,655,528	$	8,014,440

											Accumulated Other
					*Additional*						*Compre-*
	*Common Stock*				*Paid-in*			*Accumulated*			*hensive*
	*Shares*		*Amount*		*Capital*			*Deficit*			*Income/(Loss)*			*TOTAL*

BALANCE, December 31, 2021		21,285,706		21,285		70,910,092			(53,181,928	)		(4,975,399	)		12,774,860

Common stock issued in settlement of RSUs		66,982		67		(67	)								-

Stock-based compensation						178,778									178,778

Currency translation, net												(355,891	)		(355,891	)

Net Loss									(3,746,424	)					(3,746,424	)

BALANCE, March 31, 2022		21,352,688		21,352		71,089,613			(56,928,352	)		(5,331,290	)		8,851,323

Common shares issued for cash at $0.50 per share, net of offering cost of $1,996,469, in May 2022		22,535,850		22,536		24,430,992									24,453,528

Warrants issued in connection with Senior Promissory Notes						664,704									664,704

Stock-based compensation						221,472									221,472

Currency translation, net												(614,575	)		(614,575	)

Net Loss									(6,507,059	)					(6,507,059	)

BALANCE, June 30, 2022		43,888,538		43,888		96,406,781			(63,435,411	)		(5,945,865	)		27,069,393


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 Income									(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

●	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.

	June 30, 2022
CEO separation	$	235,139
Terminated employees		164,673
China close-down		286,807
Capex commitments		668,606
Write-downs		433,603
	$	1,788,827

	2022			2021
Restructuring accruals, January 1	$	0		$	0
Restructuring costs, net		1,788,827			0
Cash payments		(1,058,286	)		0
Asset impairments		(433,603	)		0
Restructuring accruals, June 30	$	296,938		$	0

	Operating Lease			Finance lease			Operating Lease			Finance lease
2022 (remaining 6 months)	$	386,343		$	205,150
2023		726,131			407,466
2023 (remaining 6 months)							$	378,615		$	274,966
2024		588,309			408,343			614,755			550,849
2025		306,659			405,016			320,444			547,372
2026		296,523			370,372			309,853			511,546
2027								309,853			511,546
Thereafter		2,298,056			894,329			2,091,506			747,493
Total payment under lease agreements		4,602,021			2,691,036			4,025,026			3,143,772
Less imputed interest		(1,133,764	)		(229,382	)		(978,093	)		(513,732	)
Total lease liability	$	3,468,257		$	2,461,654		$	3,046,933		$	2,630,040

	June 30, 2022		December 31, 2021
Convertible Note	$	0		16,800,000
Less: unamortized debt issuance costs		0		(2,213,064	)
Convertible Note payable	$	0	$	14,586,936

Current portion of Convertible Note payable		0		8,400,000
Convertible Note payable, less current portion		0		6,186,936
Convertible Note payable	$	0	$	14,586,936

	June 30, 2022
	Number of units			Weighted Average Grant-Date Fair value			Aggregated Intrinsic Value

Outstanding, December 31, 2021		149,636		$	6.59		$	0
Granted		2,649,207			0.76			-
Vested and settled with share issuance		(66,982	)		(6.56	)		-
Forfeited		(144,853	)		(6.22	)		-
Outstanding, June 30, 2022		2,587,009		$	0.64		$	0

	June 30, 2023
	Number of units			Weighted Average Grant-Date Fair value			Aggregated Intrinsic Value

Outstanding, December 31, 2022		301,111		$	4.80		$	-
Granted		225,604			3.00			-
Vested and settled with share issuance		(185,170	)		(4.63	)		-
Outstanding, June 30, 2023		341,545		$	3.69		$	-

	~~June 30,~~ ~~2022~~			~~December 31,~~ ~~2021~~
~~Customer A~~		16	%		-
~~Customer B~~		12	%		-
~~Customer C~~		-			16	%
~~Customer D~~		-			11	%

	June 30, 2023			December 31, 2022
Customer B		20	%		17	%
Customer D		*	%		20	%
Customer E		*	%		10	%

	●	Develop and reinforce new products and applications to provide clean water and reduce ~~pollution.~~pollution We currently provide water filtration systems for scrubber technology providers, shipowners, and ship operators as well as tailored filtration systems for oil & gas ~~operators~~clients, chemical producers, industrial wastewater applications, and ~~services~~other manufacturing companies. We are expanding our range of products to better leverage existing customer relationships and develop new relationships within the oil & gas, marine, global manufacturing, and ~~global~~ chemical industries.

	●	Better penetrate existing end markets where our value proposition is ~~strong.~~strong We have successfully sold products and installed systems into several end ~~markets--including~~markets—including automotive/transportation, clean water and pool filtration, marine, industrial wastewater, and oil & gas. We are focused on targeting and activating new customers in these end markets while working with distributors, agents, and partners to access ~~other~~ important geographic markets.

	For the Three Months Ended
The following is a summary of non-cash compensation:					For the Three Months Ended
	June 30,		June 30,		June 30,		June 30,
	2022		2021		2023		2022
Compensation for vesting of restricted stock awards issued to the Board of Directors	$	51,125	$	49,375	$	87,875	$	51,125
Compensation for vesting of restricted stock awards issued to management		170,347		75,701		106,049		170,347
Total Non-Cash Compensation	$	221,472	$	125,076	$	193,924	$	221,472

●	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.

~~4.2~~3.1	~~Form~~Articles of ~~Warrant~~Incorporation, as amended as of May 24, 2023		Filed herewith

3.2	Amended and Restated Bylaws		Incorporated by reference to Exhibit ~~4.1~~3.4 to the Company’s ~~current report~~Quarterly Report on Form ~~8-K, filed with the SEC on June 27, 2022.~~

~~10.1~~	~~Separation Agreement and Release between LiqTech International A/S and Sune Mathiesen dated May 11, 2022~~	~~Incorporated by reference to Exhibit 10.1 to the Company’s quarterly report on Form~~ 10-Q as filed with the SEC on May ~~12, 2022.~~15, 2012

~~10.2~~	~~Underwriting agreement, dated May 12, 2022, by and between LiqTech International, Inc. and Lake Street Capital Markets LLC~~	~~Incorporated by reference to Exhibit 1.1 to the Company’s current report on Form 8-K, filed with the SEC on May 17, 2022.~~

~~10.3~~	~~Note and Warrant Purchase Agreement, by and among the Company and the Purchasers~~	~~Incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K, filed with the SEC on June 27, 2022.~~

~~10.4~~	~~Form of Note~~	~~Incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K, filed with the SEC on June 27, 2022.~~

~~10.5~~	~~Registration Rights Agreement, by and among the Company and the Purchasers~~	~~Incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K, filed with the SEC on June 27, 2022.~~

~~10.6~~	~~Engagement Letter with Lake Street Capital Markets, LLC~~	~~Incorporated by reference to Exhibit 10.4 to the Company’s current report on Form 8-K, filed with the SEC on June 27, 2022.~~

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

	LiqTech International, Inc.

Dated: August ~~11, 2022~~10, 2023	/s/ ~~Alexander J. Buehler~~Fei Chen
	~~Alexander J. Buehler, Interim~~Fei Chen, Chief Executive Officer
	(Principal Executive Officer)


Dated: August ~~11, 2022~~10, 2023	/s/ Simon S. Stadil
	Simon S. Stadil, Chief Financial Officer
	(Principal Financial and Accounting Officer)