LIQTECH INTERNATIONAL INC

LIQTECH INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE1 – BASIS OF PRESENTATION AND OTHER INFORMATION

The accompanying unaudited condensed consolidated financial statements of LiqTech International, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form10-Q of Regulation S-X. They donot include all the information and footnotes required by GAAP for complete financial statements. The* December 31, 2023* consolidated balance sheet data were derived from audited financial statements but doesnot include all disclosures required by GAAP. However, except as disclosed herein, there has beenno material change in the information disclosed in the notes to the consolidated financial statements for the year ended* December 31, 2023* included in the Company’s Annual Report on Form10-K, as filed with the Securities and Exchange Commission on* March 22, 2024.The interim unaudited condensed consolidated financial statements should be read in conjunction with those consolidated financial statements included in the Company’s Annual Report on Form10*-K. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, consisting solely of normal recurring adjustments, have been made. Operating results for thethree andnine months ended* September 30, 2024* arenot necessarily indicative of the results that* maybe expected for the year ending December 31,*2024.

Recently Issued Accounting Pronouncements

In* November 2023,the FASB issued ASU2023*-07, “Segment Reporting (Topic280*): Improvements to Reportable Segment Disclosures*,” which requires a public entity to disclose significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about reportable segment’s profit or loss and assets that are currently required annually. ASU2023-07 is effective for fiscal years beginning after* December 15, 2023,and interim periods within fiscal years beginning after December 15, 2024,*with early adoption permitted. These amendments are to be applied retrospectively. The Company is currently evaluating the impact this standard will have on its condensed consolidated financial statements.

In* December 2023,the FASB issued ASU2023*-09, “Income Taxes (Topic740*): Improvements to Income Tax Disclosures*,” which enhances the transparency and decision usefulness of income tax disclosures by requiring; (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. ASU2023-09 is effective for fiscal years beginning after* December 15, 2025,*with early adoption permitted. These amendments are to be applied prospectively, with retrospective application permitted. The Company is currently evaluating the impact this standard will have on its condensed consolidated financial statements.

The Company currently believes there areno other issued andnot yet effective accounting standards that are materially relevant to its condensed consolidated financial statements.

NOTE2 – LIQUIDITY AND GOING CONCERN ASSESSMENT

Management assesses liquidity and going concern uncertainty in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at leastone year from the date the financial statements are issued, which is referred to as the “look-forward period,” as defined by GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management considered various scenarios, forecasts, projections, estimates and made certain key assumptions, including the timing and nature of projected cash expenditures or programs, its ability to delay or curtail expenditures or programs, and its ability to raise additional capital, if necessary, among other factors. Based on this assessment, management made certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable those implementations can be achieved and management has the proper authority to execute them within the look-forward period.

As of* September 30, 2024*, the Company had cash and cash equivalents of $4,535,266, net working capital of $9,963,511, an accumulated deficit of $83,262,701, and total assets and liabilities of $28,725,344 and $17,303,859, respectively.

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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 ofone year from the issuance of these financial statements. Continued market uncertainty and reduced order intake caused by weakening global macroeconomic conditions or recession could unfavorably impact the Company’s ability to generate positive cash flow and thereby significantly reduce its profitability and liquidity position. There isno assurance that the Company will be successful in executing the planned revenue growth, cost reductions, strategy, and profitability improvement measures, thus achieving profitable operations.

We continue to analyze various alternatives, including potentially obtaining debt or equity financings or other arrangements. As further disclosed in Note10 below, on* September 27, 2024,the Company entered into an agreement with certain investors, pursuant to which the Company agreed to issue and sell common stock and warrants for gross proceeds of up to $10 million intwo* tranches. In connection with the closing of thefirst tranche on* September 27, 2024,the Company received gross proceeds of approximately $1.2 million. The Company obtained stockholder approval at our stockholders' meeting on November 8, 2024on the issuance of the securities in thesecond* tranche. On* November 12, 2024,thesecond* tranche closed, and the Company received gross proceeds of approximately $8.8 million. Our future success depends on our ability to accelerate growth, restore profitability, and raise capital as needed.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The accompanying consolidated financial statements donot include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amounts and classification of liabilities that* mayresult should the Company be unable to continue as a going concern. As we issue additional securities to raise funds, these securities mayhave rights, preferences, or privileges senior to those of our common stock, and our current shareholders mayexperience dilution. If we are unable to obtain funds when needed or on acceptable terms, we may*be required to curtail our current development programs, reduce operating costs, forego future development and other opportunities, or even terminate our operations.

NOTE3 – DISAGGREGATION OF REVENUES AND SEGMENT REPORTING

The Company operates inthree reportable segments: Water, Ceramics and Plastics.

The Company sells products throughout the world, and sales by geographical region are as follows for thethree andnine months ended* September 30, 2024and2023*:

The Company’s sales by segment are as follows for thethree andnine months ended* September 30, 2024and2023*:

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The Company’s income and total assets segment are as follows:

NOTE4 – ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following on* September 30, 2024*, and* December 31, 2023*:

The roll-forward of the allowance for doubtful accounts for the periods ended* September 30, 2024* and* December 31, 2023* is as follows:

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NOTE5 – INVENTORIES

Inventories consisted of the following on* September 30, 2024*, and* December 31, 2023*:

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.

NOTE6 – CONTRACT ASSETS AND CONTRACT LIABILITIES

The roll-forward of Contract assets and Contract liabilities for the periods ended* September 30, 2024* and* December 31, 2023* is as follows:

NOTE7 – LEASES

The Company leases certain vehicles, real property, production equipment and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The majority of our operating leases are non-cancelable leases for production and office space in Hobro and Copenhagen, Denmark.

The Company has entered into a new lease agreement to relocate its office and warehouse space from Aarhus to Hobro, Denmark. The lease commenced in the current quarter and shall expire on* April 30, 2034.Under the terms of the lease, the Company will lease the premises at the monthly rate of approximately $14,500 for thefirst* year, with scheduled annual increases. The lease agreement contains customary events of default, representations, warranties, and covenants. The measurement of the ROU asset and liability associated with this operating lease was $1,260,508.

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During thenine months ended* September 30, 2024*, cash paid for amounts included for the measurement of finance lease liabilities was $1,356,795, and the Company recorded finance lease expenses in other income (expenses) of $131,913.

During thenine months ended* September 30, 2024*, cash paid for amounts included for the measurement of operating lease liabilities was $691,687, and the Company recorded operating lease expense of $689,054.

Supplemental balance sheet information related to leases as of* September 30, 2024* and* December 31, 2023* was as follows:

Maturities of lease liabilities at* September 30, 2024* were as follows:

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NOTE8 –** LONG-TERM DEBT**

The components of notes payable are as follows:

For thethree months ended* September 30, 2024and2023*, the Company recognized interest expense of $0 and $0, respectively, and $156,988 and $86,447, respectively, on the Senior Promissory Notes related to the amortization of debt issuance costs.

For thenine months ended* September 30, 2024and2023*, the Company recognized interest expense of $0 and $0, respectively, and $453,619 and $257,765, respectively, on the Senior Promissory Notes related to the amortization of debt issuance costs.

NOTE9 –** AGREEMENTS AND COMMITMENTS**

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.

Product Warranties – The Company provides a standard warranty for its systems, generally for a period ofone tothree 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 tofour 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 current and long-term warranty obligations included in accrued expenses on the balance sheet, as of* September 30, 2024* and* December 31, 2023*, were as follows:

NOTE10 –** STOCKHOLDERS**’** EQUITY**

Common Stock** – The Company has 50,000,000 authorized shares of Common Stock, $0.001 par value. As of September 30, 2024 and* December 31, 2023*, there were 5,848,499 and 5,727,310 shares of Common Stock issued and outstanding, respectively.

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Stock Issuances

During thenine months ended* September 30, 2024*, the Company has made the following issuances of Common Stock:

On* January 3, 2024,the Company issued 24,500 shares of Common Stock to settle RSUs. The RSUs were valued at $73,500 for services provided by the Board of Directors in2023*. The Company recognized the stock-based compensation of the award over the requisite service period during the year ended* December 31, 2023*.

On* January 3, 2024,the Company issued 85,528 shares of Common Stock to settle RSUs. The RSUs were valued at $289,672 for services provided by management in2023*. The Company recognized the stock-based compensation of the award over the requisite service period during the year ended* December 31, 2023*. In connection with the issuance,29,998 shares of Common Stock, with a total value of $104,940, were retired to settle tax withholdings associated with stock-based compensation.

On* June 24, 2024,the Company issued 11,932 shares of Common Stock to settle RSUs. The RSUs were valued at $36,750 for services provided by the Board of Directors from2023* to2024. The Company recognized the stock-based compensation of the award over the requisite service period from2023 to2024.

On* September 27, 2024,*the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to issue and sell an aggregate of 3,630,129 shares of Common Stock,1,369,871 pre-funded warrants to purchase shares of Common Stock, and warrants to purchase up to an aggregate of 5,000,000 shares of Common Stock, for gross proceeds of up to $10 million. The combined purchase price ofone share of Common Stock andone accompanying warrant to purchaseone share of Common Stock is $2.00. The combined purchase price ofone pre-funded warrant andone accompanying warrant to purchaseone share of Common Stock under the purchase agreement is $1.999.

The Company agreed to issue the Common Stock, warrants, and pre-funded warrants intwo tranches: (i) afirst tranche comprised of 29,227 shares of Common Stock,555,302 pre-funded warrants and warrants to purchase an aggregate of 584,529 shares of Common Stock (collectively, the “First Tranche Securities”); and (ii) asecond tranche comprised of 3,600,902 shares of Common Stock,814,569 pre-funded warrants, and warrants to purchase an aggregate of 4,415,471 shares of Common Stock (the “Second Tranche Securities”).

On* September 27, 2024,in connection with the closing of thefirst* tranche, the Company sold and issued the First Tranche Securities for gross proceeds of approximately $1.2 million. On* November 12, 2024,in connection with the closing of thesecond* tranche, the Company sold and issued the Second Tranche Securities for gross proceeds of approximately $8.8 million.

Warrants

On* September 27, 2024 (*as described above), the Company closed on a securities purchase agreement with certain purchasers, pursuant to which the Company agreed to issue and sell to such purchasers warrants for the purchase of 584,529 shares of Common Stock at an exercise price of $2.00 per common share and prefunded warrants for the purchase of 555,302 shares of Common Stock at an exercise price of $0.001 per common share.

The following is a summary of the periodic changes in warrants outstanding for thenine months ended* September 30, 2024and2023*:

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Stock-based Compensation

In2013, 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 stock awards, including RSUs to officers, directors, and consultants of the Company. At* September 30, 2024*,52,082 RSUs were granted and outstanding under the Incentive Plan. Directors of the Company receive share compensation consisting of annual grants of $36,750 ($73,500 for the Chairman of the Board) in RSUs per annum withone-year vesting.

In2022, the Company’s Board of Directors adopted an Equity Incentive Plan (the*“2022* Incentive Plan”). Under the terms and conditions of the2022 Incentive Plan, the Board of Directors is empowered to grant stock awards, including RSUs to officers and directors of the Company. At* September 30, 2024*,353,471 RSUs were granted and outstanding under the2022 Incentive Plan.

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

The Company recognized stock-based compensation expense related to RSU grants of $166,617 and $143,195 for thethree-month periods ended* September 30, 2024and2023*, respectively. For thenine months periods ended* September 30, 2024*, and2023, the stock-based compensation related to share grants was $521,791 and $494,292, respectively. On* September 30, 2024*, the Company had $816,505 of unrecognized compensation cost related to non-vested stock grants.

A summary of the status of the RSUs as of* September 30, 2024* and changes during the period are presented below:

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NOTE11 –LOSS PER SHARE

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 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 is the same for the reported periods.

As of* September 30, 2024*, the Company had 405,553 RSUs,4,485,310 prefunded warrants, and 1,675,875 warrants, all exercisable for shares of Common Stock.

As of* September 30, 2023*, the Company had 314,461 RSUs,3,930,008 prefunded warrants, and 1,091,346 warrants, all exercisable for shares of Common Stock.

NOTE12 –SIGNIFICANT CUSTOMERS AND CONCENTRATIONS

The following table presents customers accounting for10% or more of the Company’s revenue:

• Zero or less than10%

The following table presents customers accounting for10% or more of the Company’s Accounts receivable:

• Zero or less than10%

As of* September 30, 2024*, approximately 95% of the Company’s assets were located in Denmark and 5% were located in the U.S. As of* December 31, 2023*, approximately 98% of the Company’s assets were located in Denmark,0% were located in the U.S., and 2% were located in China.

NOTE13 –SUBSEQUENT EVENTS

On* November 8, 2024,the Company’s stockholders approved the issuance of thesecond* tranche of securities pursuant to the previously announced security purchase agreement entered into on* September 27, 2024with certain investors. On November 12, 2024,the Company completed the closing of thesecond* tranche, in which the Company issued 3,600,902 shares of Common Stock,814,569 pre-funded warrants, and warrants to purchase an aggregate of 4,415,471 shares of Common Stock, securing additional gross proceeds of approximately $8.8 million, bringing the total gross proceeds from the securities purchase agreement, to $10 million.

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