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 period ended June 30, 2019

or

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

For the transition period from _______________________ to _______________________

Commission File Number:001-36210

LiqTech International, Inc.

(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number, including area code:  +4544986000

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 ☒

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, at August 14, 2019, was 20,547,668 shares. 

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended June 30, 2019

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		4
Condensed Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018		4
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2019 and June 30, 2018 (unaudited)		6
Condensed Consolidated Statement of Stockholder’s Equity for the period Ended June 30, 2019 and June 30, 2018 (unaudited)	8
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and June 30, 2018 (unaudited)		9
Notes to Condensed Consolidated Financial Statements (unaudited)		11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		28
Item 4. Controls and Procedures		29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		30
Item 1A. Risk Factors		30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3. Defaults Upon Senior Securities		30
Item 4. Mine Safety Disclosures		30
Item 5. Other Information		30
Item 6. Exhibits		31
SIGNATURES		32

2

FORWARD-LOOKING STATEMENTS

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations.  Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties, including but not limited to the risks described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. 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.  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 report will prove to be accurate.  In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

3

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	As of		As of
	June 30,		December 31,
	2019		2018
	(Unaudited)
Current Assets:
Cash	$	12,572,856	$	3,776,111
Cash, restricted		783,499		-
Accounts receivable, net		8,460,159		1,308,122
Other receivables		3,303,504		1,098,796
Deposits		1,203,216		-
Contract assets		506,329		624,275
Inventories, net		4,713,656		4,432,055
Prepaid expenses		201,880		133,847
Total Current Assets		31,745,099		11,373,206
Property and Equipment, net accumulated depreciation		1,451,422		1,431,649
Operating lease right-of-use asset		1,925,645		-
Total Property and Equipment and right of use assets		3,377,067		1,431,649
Other Assets:
Investments at cost		5,680		5,714
Other intangible assets		-		748
Deposits		445,656		347,932
Total Other Assets		451,336		354,394
Total Assets	$	35,573,502	$	13,159,249

(Continued)

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

4

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Liabilities and Stockholders’ Equity	As of			As of
	June 30,			December 31,
	2019			2018
	(Unaudited)
Current Liabilities:
Current maturities of finance lease obligations	$	5,201		$	13,789
Current maturities of operating lease liabilities		603,152			-
Accounts payable		4,717,535			2,122,479
Accrued expenses		3,008,933			1,868,229
Contract liabilities		1,466,645			516,335
Deferred revenue / customers deposits		571,777			98,781
Total Current Liabilities		10,373,243			4,619,613
Operating lease liabilities, net of current maturities		1,352,749			-
Total Long-term Liabilities		1,352,749			-
Total Liabilities		11,725,992			4,619,613
Commitment and Contingencies		-			-
Stockholders' Equity:
Preferred stock; par value $0.001, 2,500,000 shares authorized; no shares issued or outstanding at June 30, 2019 and December 31, 2018 respectively		-			-
Common stock; par value $0,001, 25,000,000 shares authorized, 20,547,668 and 18,228,887 (each after the 4-to-1 reverse stock split) shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		20,548			18,229
Additional paid-in capital		61,538,883			46,575,986
Accumulated deficit		(32,105,194	)		(32,286,224	)
Deferred compensation		(29,166	)		(23,499	)
Accumulated other comprehensive income, net		(5,577,561	)		(5,744,856	)
Total Stockholders' Equity		23,847,510			8,539,636
Total Liabilities and Stockholders' Equity	$	35,573,502		$	13,159,249

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

5

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Net Sales	$	9,297,186		$	3,598,028		$	16,718,384		$	5,989,410
Cost of Goods Sold		7,222,076			2,938,206			13,168,194			5,389,180
Gross Profit		2,075,110			659,822			3,550,190			600,230
Operating Expenses:
Selling expenses		514,037			463,998			997,623			873,790
General and administrative expenses		968,437			582,208			1,739,302			1,344,647
Research and development expenses		199,184			176,281			402,356			345,677
Total Operating Expense		1,681,658			1,222,487			3,139,281			2,564,114
Income (Loss) from Operations		393,452			(562,665	)		410,909			(1,963,884	)
Other Income (Expense)
Interest and other income		18,173			7,173			25,450			10,457
Interest expense		(36,502	)		(4,174	)		(75,150	)		(60,474	)
Gain (Loss) on currency transactions		(206,718	)		296,140			(158,560	)		217,086
Gain (Loss) on sale of fixed assets		(21,619	)		-			(21,619	)		-
Total Other Income (Expense)		(246,666	)		299,139			(229,879	)		167,069
Income (Loss) Before Income Taxes		146,786			(263,526	)		181,030			(1,796,815	)
Income Tax Expense (Income)		-			-			-			-
Net Income (Loss)	$	146,786		$	(263,526	)	$	181,030		$	(1,796,815	)
Basic and Diluted Income (Loss) Per Share	$	0.01		$	(0.004	)	$	0.01		$	(0.03	)
Basic Weighted Average Common Shares Outstanding		19,211,771			16,214,833			18,742,029			13,682,405
Diluted Weighted Average Common Shares Outstanding		19,228,160			16,214,833			18,758,108			13,682,405

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

6

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2019		2018			2019		2018
Net Income (Loss)		146,786		(263,526	)		181,030		(1,796,815	)
Other Comprehensive Income (Loss), Net of Taxes:
Currency Translation		381,217		(633,427	)		167,295		(458,560	)
Total Comprehensive Income (Loss)	$	528,003	$	(896,953	)	$	348,325	$	(2,255,375	)

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

7

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

For the period ended June 30, 2018 and June 30, 2019 

																	Accumulated
											Additional						Compre-			Deferred
	Preferred Stock						Common Stock				Paid-in			Accumulated			hensive			Compen-
	Shares			Amount			Shares		Amount		Capital			Deficit			Income/(Loss)			sation
BALANCE, December 31, 2017		2,200,837			2,201			11,107,316		11,108		40,491,229			(28,471,696	)		(5,040,792	)		(79,933	)
Common shares issued at $4.04 per share for services provided and to be provided by the board of directors								14,852		14		59,986
Stock based compensation expenses recognized for the period ended March 31, 2018																					18,273
Currency translation, net																		174,867
Net Income for the period ended March 31, 2018															(1,533,287	)
BALANCE, March 31, 2018		2,200,837			2,201			11,122,168		11,123		40,551,214			(30,004,983	)		(4,865,925	)		(61,660	)
Common shares issued for cash at $1.36 per share, net of offering cost of $747,423, April 2018								4,862,132		4,862		5,860,215
Conversion of mandatory preferred stock issued in 2017 into 4 common shares per preferred stock		(2,200,837	)		(2,201	)		2,200,837		2,201
Stock based compensation expenses recognized for the period ended June 30, 2018																					9,161
Currency translation, net																		(633,427	)
Net Income for the period ended June 30, 2018															(263,526	)
BALANCE, June 30, 2018		-			-			18,185,137		18,185		46,411,430			(30,268,509	)		(5,499,352	)		(52,499	)
BALANCE, December 31, 2018		-			-			18,228,887		18,229		46,575,986			(32,286,224	)		(5,744,856	)		(23,499	)
Common shares issued at $4.63 per share for services provided and to be provided by the board of directors								28,993		29		134,138									(21,667	)
Stock based compensation expenses recognized for the period ended March 31, 2019												5,778									10,166
Exercise of stock options								45,000		45		133,155
Currency translation, net																		(213,922	)
Net Income for the period ended March 31, 2019															34,244
BALANCE, March 31, 2019		-			-			18,302,880		18,303		46,849,057			(32,251,980	)		(5,958,778	)		(35,000	)
Stock based compensation expenses recognized for the period ended June 30, 2019												17,333									5,834
Exercise of warrants								28,887		29		(29	)
Common shares issued for cash at $7.25 per share, net of offering cost of $1,390,262, May 2019								2,215,862		2,216		14,672,522
Currency translation, net																		381,217
Net Income for the period ended June 30, 2019															146,786
BALANCE, June 30, 2019		-			-			20,547,668		20,548		61,538,883			(32,105,194	)		(5,577,561	)		(29,166	)

8

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Increase (Decrease) in Cash and Cash Equivalents

	For the six months ended
	June 30,
	2019			2018
Cash Flows from Operating Activities:
Net Income (Loss)	$	181,030		$	(1,796,815	)
Adjustments to reconcile net profit (loss) to net cash provided (used) by operations:
Depreciation and amortization		554,130			430,081
Stock-based compensation		151,611			87,434
Changes in assets and liabilities:
Accounts receivable		(7,152,037	)		(319,952	)
Other receivables		(2,204,708	)		322,514
Deposits		(1,203,216	)		-
Inventory		(281,601	)		89,754
Prepaid expenses/deposits		(157,913	)		(78,882	)
Accounts payable		2,595,054			(250,828	)
Accrued expenses		1,613,701			(1,131,833	)
Operating lease liability		(234,934	)		-
Long-term contracts		1,068,256			(682,820	)
Total Adjustments		(5,251,657	)		(1,534,532	)
Net Cash Used in Operating Activities		(5,070,627	)		(3,331,347	)
Cash Flows from Investing Activities:
Purchase of property and equipment		(327,559	)		(82,992	)
Net Cash Used in Investing Activities		(327,559	)		(82,992	)
Cash Flows from Financing Activities:
Net payments on financing lease obligation		(8,588	)		(14,710	)
Proceeds from exercise of stock options		133,200			-
Proceeds from issuance of common stock, net		14,674,738			5,865,077
Net Cash Provided by Financing Activities		14,799,350			5,850,367
Gain (Loss) on Currency Translation		179,080			(430,727	)
Net Change in Cash, Cash Equivalents and Restricted Cash		9,580,244			2,005,301
Cash, Cash Equivalents and Restricted Cash at Beginning of Period		3,776,111			2,486,199
Cash, Cash Equivalents and Restricted Cash at End of Period	$	13,356,355		$	4,491,500

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

9

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months Ended June 30,
	2019		2018
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest Paid	$	50,372	$	60,474
Income Taxes	$	-	$	-
Supplemental Disclosures of Non-Cash Investing and Financing:
Common stocks issued for conversion of mandatory preferred stock		-		8,803
Offering costs for common stocks issuance		1,390,262		747,423

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

10

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation

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

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

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

LiqTech International AS, a Danish corporation, incorporated on January 15, 2000 (“LiqTech Int. DK”), a 100% owned subsidiary of LiqTech USA, engages in development, design, application, marketing and sales of membranes, ceramic diesel particulate and liquid filters and catalytic converters in Europe, Asia and South America.

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

LiqTech Systems AS, a Danish Corporation ("LiqTech Systems") (Formerly Provital Solutions A/S) was incorporated on September 1, 2009 and engages in the manufacture of fully automated filtering systems for application within marine applications municipal pool and spa applications, and other industrial applications within Denmark and international markets.

LiqTech Germany (“LiqTech Germany”), a 100% owned subsidiary of LiqTech Int. DK, incorporated in Germany on December 9, 2011, engaged in marketing and sale of liquid filters in Germany. The Company is in the process of closing operations, which is expected to be completed during 2019.

LiqTech PTE Ltd (“LiqTech Sing”), a 95% owned subsidiary of LiqTech Int. DK, incorporated in Singapore on January 19, 2012, engaged in marketing and sale of liquid filters in Singapore and other countries in the area. The Company is in the process of closing operations, which is expected to be completed during 2019.

Consolidation -- The consolidated financial statements include the accounts and operations of the Company. All material intercompany transactions and accounts have been eliminated in the consolidation.

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 Int. DK and LiqTech Systems AS is the Danish Krone (“DKK”), the functional currency of LiqTech Germany is the Euro and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is U.S. Dollar for the purpose of these consolidated financial statements. The foreign subsidiaries balance sheet accounts 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 three and six months ended June 30, 2019 and 2018. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.

Cash, Cash Equivalents and Restricted Cash -- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. For the six months ended June 30, 2019 and 2018, the Company has $783,499 and $0, respectively, as restricted cash. The restricted cash is payment guarantees issued to the benefit of customers in connection with prepayments of sales orders. The restricted cash is held in a local financial institution and will be released as order deliveries are made and accepted by the customer. The Company had no balances held in a financial institution in the United States in excess of federally insured amounts at June 30, 2019 and December 31, 2018.

11

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

The roll forward of the allowance for doubtful accounts for the six months ended June 30, 2019 and the year ended December 31, 2018 is as follows:

	June 30, 2019			December 31, 2018
Allowance for doubtful accounts at the beginning of the period	$	971,772		$	660,581
Bad debt expense		-			353,562
Receivables written off during the periods		(3,494	)		-
Effect of currency translation		(5,773	)		(42,371	)
Allowance for doubtful accounts at the end of the period	$	962,505		$	971,772

Inventory -- Inventory is carried at the lower of cost or market, as determined on the first-in, first-out method.

Leases -- The Company leases certain vehicles, real property 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 assets and liabilities under finance leases are recorded at the lower of the present value of future minimum lease payments or the fair market value of the related assets. Assets under finance leases are amortized using the straight-line method over the initial lease term. Amortization of assets under finance leases is included in depreciation expense.

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

On January 1, 2019, the Company adopted Topic 842 using the optional transition method of adoption, under which the new standards were applied prospectively rather than restating the prior periods presented. The Company elected the package of practical expedients permitted, which, among other things, allowed the Company to carry forward the historical lease classification. The Company made the accounting policy elections to not recognize lease assets and lease liabilities with an initial term of 12 months or less and to not separate lease and non-lease components. The Company’s accounting for finance leases (formerly called capital lease obligations) remains substantially unchanged. Operating lease right-of-use (“ROU”) assets and liabilities were recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, an incremental borrowing rate based on the information available at the commencement date was used in determining the present value. The Company will use the implicit rate when readily determinable. The operating lease ROU asset also included prepaid lease payments and was reduced by accrued lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Operating lease cost for lease payments will be recognized on a straight-line basis over the lease term. The impact of adoption on the Company’s consolidated balance sheet was the recognition of a ROU asset of $2.1 million and an operating lease liability of $2.1 million primarily for office space leases. The Company’s adoption of Topic 842 did not materially impact its results of operation.

Property and Equipment -- Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized, upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years.

Long-Term Investments -- Investments in non-consolidated companies are included in long-term investments in the consolidated balance sheet and are accounted for under the cost method and equity method. For these non-quoted investments, we regularly review the assumptions underlying the operating performance and cash flow forecasts based on information requested from these privately held companies. Generally, this information may be more limited, may not be as timely as and may be less accurate than information available from publicly traded companies. Assessing each investment's carrying value requires significant judgment by management. If it is determined that there is an-other-than-temporary decline in the fair value of a non-public equity security, we write down the investment to its fair value and record the related write down as an investment loss in the consolidated statement of operations.

12

Intangible Assets -- Definite life intangible assets include patents. The Company accounts for definite life intangible assets in accordance with Financial Accounting Standards Board, (“FASB”) Accounting Standards Codification, (“ASC”) Topic 350, “Goodwill and Other Intangible Assets” and amortized the patents on a straight-line basis over the estimated useful life of two to ten years. 

Revenue Recognition and Sales Incentives 

Accounting policy: On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” which includes clarifying ASUs issued in 2015, 2016 and 2017 (“new revenue standard”). The new revenue standard was applied to all open revenue contracts using the modified retrospective method as of January 1, 2018. The new revenue standard did not have a material impact on revenue recognition.

For membrane and DPF product sales, revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied, which occurs when control of the membrane, DPF or services are transferred to the customer. The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and risks and rewards of ownership have transferred to the customer. This generally occurs when the product is shipped or accepted by the customer.  Revenue for service contracts are 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 for the right to 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 customer deposit liability. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers.

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

System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer upon shipment of the system based on the terms of the contract. For the majority of Systems, the Company transfers control and recognizes revenue when products are shipped to the customer according to the terms of the contract or purchase order. In connection with the system it is normal procedure to issue a FAT (Factory Acceptance Test) stating that the customer has accepted the performance of the system as it is being shipped from the 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 delivery performance and is valued at cost, based on the contractual performance given a standard gross margin rate. This second performance delivery is recognized as revenue at the time of delivery of the commissioning together with the cost incurred. Part of the invoicing to the customer is also attributed to the commissioning and at transfer of the control of the system (i.e. the first performance obligation), some of the invoicing will still be awaiting commissioning and is therefore recognized as Other Receivables, while the revenue related to the commissioning is recognized as Deferred Income.

Aftermarket sales represent parts, extended warranty and maintenance services. For the sale of aftermarket parts, the Company transfers control and recognizes revenue when parts are shipped to the customer or services are provided. 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, which reflects the costs to perform under these contracts, which corresponds with, and thereby depicts the transfer of control to the customer. For invoicing to customers where the transfer of control has not occurred (prepayments), the invoiced amount is recognized as Contract Assets / Contract Liabilities.

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

In Denmark, Value Added Tax (“VAT”) of 25% of the invoice amount is collected with respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Company; instead, the amount is recorded as a liability on the balance sheet until such VAT is paid to the authorities. 

The Company’s disaggregated revenue is reported in Note 8.

Advertising Cost -- Costs incurred in connection with advertising of the Company’s products is expensed as incurred. Such costs amounted to $72,349 and $3,326 for the six months ended June 30, 2019 and 2018, respectively.

Research and Development Cost -- The Company expenses research and development costs for the development of new products as incurred. Included in operating expense for the six months ended June 30, 2019 and 2018 were $402,356 and $345,677, respectively, of research and development costs.

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

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

Stock Options and Awards -- The Company has granted stock options to certain key employees during the years presented in the accompanying consolidated financial statements (see note 7). The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Non-cash compensation costs of $151,611 and $87,434 have been recognized for the vesting of options and stock awards granted to employees for the six months ended June 30, 2019 and 2018, respectively.

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 that, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

● Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;

● Level 2. Inputs other than the quoted prices in active markets that are observable either directly or indirectly; and

● Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, prepaid expenses, investments, accounts payable, accrued expenses, capital lease obligations and notes payable approximates their recorded values due to their short-term maturities.

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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 obsolete inventory, depreciation and impairment of property plant and equipment, and 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 June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation – Stock Compensation (“Topic 718”): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees except for certain circumstances. Any transition impact will be a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company adopted this guidance in the first quarter of 2019, and it did not have a material impact on its consolidated financial statements.

In August 2018, the Financial Accounting Standards board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15 (“ASU 2018-15”), Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The updated guidance is effective for annual periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurement by removing, modifying and adding certain disclosures. This ASU is effective for the annual period beginning after December 15, 2019, including interim periods within that annual period. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.

In August 2018, the SEC adopted amendments to simplify certain disclosure requirements, as set forth in Securities Act Release No. 33-10532, Disclosure Update and Simplification, which includes a requirement for entities to present the changes in shareholders’ equity in the interim financial statements in quarterly reports on Form 10-Q. This amendment is effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendment and proximity to the filing date for most filers’ quarterly reports, the SEC has allowed for a filer’s first presentation of the changes in shareholders’ equity to be included in its Form 10-Q for the quarter that begins after the effective date. The Company adopted the SEC’s amendment to interim disclosures in the first quarter of 2019 and has presented the changes in shareholders’ equity on an interim basis.

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"), which requires lessees to recognize right-of-use ("ROU") assets and related lease liabilities on the balance sheet for all leases greater than one year in duration. We adopted ASC 842 on January 1, 2019 using a modified retrospective transition approach for leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach did not require any transition accounting for leases that expired before the earliest comparative period presented. The adoption of this standard resulted in the recording of ROU assets of approximately $2.1 million and lease liabilities of approximately $2.1 million for all of our lease agreements with original terms of greater than one year. The adoption of ASC 842 did not have a significant impact on our consolidated statements of operations. See Note 4 for the required disclosures relating to our lease agreements.

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash which requires companies in the statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. For the period ended June 30, 2019 the Company has recorded $783,499 as Restricted cash and $12,572,856 as Unrestricted cash and a total of $13,356,355 as Cash, Cash equivalents and Restricted cash. For the period ended December 31, 2018 the amounts were $0 in Restricted cash and $3,776,111 in Unrestricted cash.

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

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NOTE 2 - INVENTORY

Inventory consisted of the following at June 30, 2019 and December 31, 2018:

	2019			2018
Furnace parts and supplies	$	730,370		$	596,806
Raw materials		1,756,414			1,659,826
Work in process		1,501,307			1,691,175
Finished goods and filtration systems		1,527,554			1,596,042
Reserve for obsolescence		(801,990	)		(1,111,794	)
Net Inventory	$	4,713,656		$	4,432,055

 NOTE 3 - LINES OF CREDIT

In connection with certain orders, we have to convey the customer a working guarantee or a prepayment guarantee or security bond. For that purpose, we have a guarantee credit line of DKK 94,620 (approximately $14,427 at June 30, 2019) with a bank, subject to certain base limitations. As of June 30, 2018, we had DKK 94,620 (approximately $14,801) in working guarantee against the line. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Systems such as receivables, inventory and equipment.

 NOTE 4 - LEASES

The Company leases certain vehicles, real property 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 Copenhagen and White Bear Lake, Minnesota.

On January 1, 2019, the Company adopted Topic 842 requiring organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The Company elected to use the transition method of adoption, under which the new standards were applied prospectively rather than restating the prior periods presented. As a result of the modified retrospective transition method of adoption, certain accounts lack a comparable value for the same period of 2018, specifically accounts and values associated with operating leases and ROU assets.

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Supplemental balance sheet information related to leases as of June 30, 2019 and 2018 was as follows:

	June 30, 2019			December 31, 2018
Operating leases:
Operating lease right-of-use	$	1,925,645		$	-
Operating lease liabilities - current	$	603,152		$	-
Operating lease liabilities – long-term		1,352,749			-
Total operating lease liabilities	$	1,955,901		$	-
Finance leases:
Property and equipment, at cost	$	1,171,295		$	1,171,295
Accumulated depreciation		(1,166,115	)		(1,162,256	)
Property and equipment, net	$	5,180		$	9,039
Finance lease liabilities - current	$	5,201		$	13,789
Finance lease liabilities – long-term		-			-
Total finance lease liabilities	$	5,201		$	13,789
Weighted average remaining lease term:
Operating leases		4.4			-
Finance lease		0.1			0.8
Weighted average discount rate:
Operating leases		7.0	%		-
Finance leases		9.0	%		7.3	%

Maturities of lease liabilities at June 30, 2019 were as follows:
	Operating lease			Finance lease
July 2019 – June 2020	$	624,358		$	5,240
July 2020 – June 2021		531,629			-
July 2021 – June 2022		370,864			-
July 2022 – June 2023		342,510			-
July 2023 – June 2024		335,706			-
Thereafter		27,801			-
Total payment under lease agreements		2,232,868			5,240
Less imputed interest		(276,967	)		(39	)
Total lease liability	$	1,955,901		$	5,201

As previously disclosed in our 2018 Form 10-K under the prior guidance of ASC 842, minimum payments under operating lease agreements as of December 31, 2018 were as follows:

Year ending December 31,	Operating lease
2019	$	712,250
2020		578,997
2021		402,584
2022		350,249
Thereafter		560,977
Total	$	2,605,057

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 NOTE 5 - AGREEMENTS AND COMMITMENTS

401(K) Profit Sharing Plan -- LiqTech NA has a 401(k)-profit sharing plan and trust covering certain eligible employees. The amount LiqTech NA contributes is discretionary. For the six months ended June 30, 2019 and 2018, matching contributions were expensed and totaled $5,677 and $5,706, respectively.

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

On November 20, 2018 a former supplier to Liqtech International A/S contacted the Company with a claim of DKK448,500 ($68,800) alleging that a former Agreement from 2016 had not been respected. The Company has contested the claim due to lack of evidence to support the claim. No provision has been made at June 30, 2019 as the Company does not expect the claim to materialize in any payments to the former supplier.

On February 27, 2019, LiqTech Systems A/S was contacted by a former supplier alleging that the Company owed DKK543,905 ($83,400) for services rendered in 2017, the claimant has previously filed a lawsuit to claim payment for the services, which was denied by the Company due to severe errors in the services supplied, and the claim was rejected by a court of law in 2018. Due to the nature of the new claim and the previous ruling from the court of law, no provision has been made at June 30, 2019.

In connection with certain orders, we have to convey the customer a working guarantee or a prepayment guarantee or security bond. For that purpose, we have a guarantee line of DKK 94,620 (approximately $14,427 at June 30, 2019) with a bank, subject to certain base limitations. As of June 30, 2018, we had DKK 94,620 (approximately $14,801) in working guarantee against the line. 

Product Warranties - The Company provides a standard warranty on its systems, generally for a period of one to three years after customer acceptance. The Company estimates the costs which 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 provide a warranty for up to four years from the date of commissioning. The specific terms and conditions of those warranties vary depending upon the product sold and the country in which the Company does business. Revenue received for the sale of extended warranty contracts is deferred and recognized in the same manner as the costs incurred to perform under the warranty contracts.

The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the cost per claim.

Changes in the Company's current and long-term warranty obligations, including deferred revenue on extended warranty contracts included in accrued expenses on the balance sheet, are as follows:

	2019
Balance at December 31, 2018	$	432,225
Current year warranty expense		903,216
Change in estimate related to pre-existing warranties		-
Payments made		(275,736	)
Foreign currency effect		1,901
Balance at June 30, 2019	$	1,061,606

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 NOTE 6 - EARNINGS PER SHARE

The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of potential dilutive common stock for the six months ended June 30, 2019 and 2018:

	For the Six Months Ended June 30,
	2019		2018
Net Gain (Loss) attributable to LiqTech International, Inc.	$	181,030	$	(1,796,815	)
Weighted average number of common shares used in basic earnings per share		18,742,029		13,682,405
Effect of dilutive securities, stock options and warrants		16,079		-
Weighted average number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share		18,758,108		13,682,405

For the six months ended June 30, 2019, the Company had 25,000 options outstanding to purchase common stock at $2.96 per share.

For the six months ended June 30, 2018, the Company had 113,750 options outstanding to purchase common stock at $2.96 per share and 100,000 warrants outstanding to purchase common stock at $6.60 per share, which were not included in the loss per share computation because their effect would be anti-dilutive.

NOTE 7 - STOCKHOLDERS' EQUITY

Common Stock -- The Company has 25,000,000 authorized shares of common stock, $0.001 par value. As of June 30, 2019, and December 31, 2018, respectively, there were 20,547,668 (after the 4-to-1 reverse stock split effective on April 8, 2019) and 18,228,887 common shares issued and outstanding.      

Voting -- Holders of the 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 the 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 of the Company, 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 the common stock will be entitled to share ratably in the distribution of any of our remaining assets.  

Other Matters -- Holders of the common stock have no conversion, preemptive or other subscription rights, and there are no redemption rights or sinking fund provisions with respect to our common stock. All of the issued and outstanding shares of common stock on the date of this report are validly issued, fully paid and non-assessable.

Preferred Stock -- Our Board of Directors has the authority to issue preferred stock in one or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.

The Company has 2,500,000 authorized shares of preferred stock, $0.001 par value. As of June 30, 2019 and December 31, 2018, respectively, there were 0 mandatory convertible preferred shares issued and outstanding. 

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Stock Issuances 

Since January 1, 2019, the Company has made the following issuances of common stock (adjusted to account for the 4-to-1 reverse stock-split on April 8, 2019): 

On March 5, 2019, the Company issued an additional 24,827 shares of restricted stock valued at $112,500 for services provided by the Board of Directors. The shares vested immediately.

On January 24, January 28, February 6 and March 1, 2019, the Company issued a total of 45,000 shares in connection with employees exercising shares in relation to the stock option plan entered in 2015. The shares were issued at a share price of $2.96 and generated net proceeds of $133,200.

On May 22, 2019, the Company completed a registered public offering of its common stock. At closing, the Company issued 2,215,862 shares of common stock at a per share price of $7.25 and generated net proceeds of $14,674,738 including cost of $1,390,262 for underwrites fee, lawyer fee, auditor fee and other cost related to the capital raise.

On June 6, 2019 the Company issued an additional 28,887 shares in connection with a cashless exercise of warrant’s issued in 2014.

For the six months ended June 30, 2019 and 2018, the Company has recorded non-cash compensation expense of $39,111 and $27,434 relating to the awards, respectively.   

Common Stock Purchase Warrants 

On June 6, 2019 the remaining warrants issued in 2014 were exercised on a cashless basis.

At June 30, 2019 and 2018, the Company had no non-vested warrants. We have recorded non-cash compensation expense of $0 for the period’s ended June 30, 2019 and 2018 related to the warrants issued.

Stock Options 

In August 2011, the Company’s Board of Directors adopted a Stock Option Plan (the “Plan”). Under the terms and conditions of the Plan, the Board of Directors is empowered to grant stock options to employees, officers, and directors of the Company. At June 30, 2019, 25,000 options were granted and outstanding under the Plan. 

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

The Company recognized stock-based compensation expense related to the options of $0 and $27,434 for six months ended June 30, 2019 and 2018, respectively. At June 30, 2019, the Company had $0 of unrecognized compensation cost related to non-vested options.

A summary of the status of the options outstanding under the Company’s stock option plans at June 30, 2019 is presented below: 

		Options Outstanding						Options Exercisable
Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	2.96		25,000		1.12	$	2.96		25,000	$	2.96
Total			25,000		1.12	$	2.96		25,000	$	2.96

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A summary of the status of the options at June 30, 2019, and changes during the period is presented below:

	Shares			Weighted Average Exercise Price		Average Remaining Life		Weighted Average Intrinsic Value
Outstanding at beginning of period		70,000		$	2.96		1.62	$	-
Granted		-			-		-		-
Exercised		(45,000	)		-		-		-
Forfeited		-			-		-		-
Expired		-			-		-		-
Outstanding at end of period		25,000		$	2.96		1.12	$	-
Vested and expected to vest		25,000		$	2.96		1.12	$	-
Exercisable end of period		25,000		$	2.96		1.12	$	-

 NOTE 8 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE

For the six months ended June 30, 2019, our 4 largest customers accounted for approximately 74% of our net sales.

For the six months ended June 30, 2018, our largest customer accounted for approximately 12% of our net sales.

The Company sells products throughout the world; disaggregated revenue by geographical region is as follows for the three and six months ended June 30, 2019 and 2018: 

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2019		2018		2019		2018
United States and Canada	$	255,642	$	260,525	$	688,229	$	369,750
Australia		153,401		82,490		215,514		282,793
South America		-		24,248		-		27,676
Asia		933,693		111,015		2,172,807		928,616
Europe		7,954,450		3,119,750		13,641,834		4,380,575
	$	9,297,186	$	3,598,028	$	16,718,384	$	5,989,410

The Company’s disaggregated revenue by product line is as follows for the three and six months ended June 30, 2019 and 2018: 

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2019		2018		2019		2018
Ceramic diesel particulate	$	747,234	$	1,609,057	$	2,990,502	$	3,537,162
Liquid filters and systems		8,453,136		1,988,971		13,493,469		2,452,248
Development projects		96,815		-		234,413		-
	$	9,297,186	$	3,598,028	$	16,718,384	$	5,989,410

As of June 30, 2019, approximately 92% and 8% of the Company’s assets were located in Denmark and the United States, respectively. As of June 30, 2018, approximately 90% and 10% of the Company’s assets were located in Denmark and the United States, respectively.

NOTE 9 - SUBSEQUENT EVENTS

The Company’s management reviewed material events through August 14, 2019 and there were no material subsequent events to report.

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

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report. In addition, the following discussion should be read in conjunction with our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on April 1, 2019, and the financial statements and notes thereto. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Overview

We are a clean technology company that provides state-of-the-art technologies for gas and liquid purification by manufacturing ceramic silicon carbide filters. For more than a decade, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in two business areas: ceramic membranes for liquid filtration and diesel particulate filters (“DPF “ ) for the control of soot exhaust particles from diesel engines. Using nanotechnology, we develop proprietary products using patented silicon carbide technology. Our products are based on unique silicon carbide membranes which facilitate new applications and improve existing technologies. We market our products from our offices in the United States and Denmark, and through local representatives. The products are shipped directly to customers from our production facilities in the United States and 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 International A/S, a Danish limited company, organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“LiqTech Int. DK”), together with its direct wholly owned subsidiary LiqTech Systems A/S, a Danish limited company, organized under the Danish Act on Limited Companies of the Kingdom of Denmark (formerly known as Provital, “LiqTech Systems”) and LiqTech NA, Inc., a Delaware corporation (“LiqTech Delaware”). Collectively, LiqTech USA, LiqTech Int. DK, LiqTech Systems and LiqTech Delaware are referred to herein as our “Subsidiaries”.  

We conduct operations in the Kingdom of Denmark and the United States. Our Danish DPF and membrane manufacturing operations are located in the Copenhagen area; LiqTech Systems’ assembly and testing operations are located in Hobro in Jutland, Denmark. Our U.S. operations are conducted by LiqTech Delaware located in White Bear Lake, Minnesota.

Our Strategy

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

● Continue to maintain and gain new marine industry customers.  We currently provide water filtration systems for scrubber technology providers, ship owners and ship operators.

● Enter new geographic markets and expand existing markets. We plan to continue to manufacture and sell our products from our core operations in Denmark and the United States. We work with distributors, agents and partners to access other important geographic markets.

● Continue to strengthen our position in the DPF market. We believe that we have a strong position in the retrofit market for diesel particulate filter (DPF) systems. We intend to continue our efforts to maintain our market position in this area. Furthermore, we intend to leverage our experience in the OEM market by expanding our presence with new products relating to diesel particulate filter systems.

● Continue to develop and improve technologies and open new end markets. We intend to continue to develop our ceramic membranes and improve the filtration efficiency for our filtration products. Through continuous research and development, we intend to find new uses for our products and plan to expand into new markets that offer significant opportunity for the Company. One of our key strategies is to develop our membrane applications in partnership with our customers including, for example, the development of the next generation of diesel particulate filters with asymmetric design for the OEM market.

● Continue our focus on the development and sales of standardized systems. We will continue our focus on selling systems based on our unique SIC Filters. We will also combine the ceramic membranes with other technologies to be able to offer our customers complete filtration solutions. We will continue our focus on developing smaller standard systems, like our ground water treatment system and our residential swimming pool system.

22

Developments

Results of Operations

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

The following tables set forth our revenues, expenses and net income for the three and six months ended June 30, 2019 and 2018:

	Three Months Ended June 30,
													Period to Period Change
	2019			As a % of Sales			2018			As a % of Sales			US$			Percent %
Net Sales		9,297,186			100.0	%		3,598,028			100.0	%		5,699,158			158.4	%
Cost of Goods Sold		7,222,076			77.7			2,938,206			81.7			4,283,870			145.8
Gross Profit		2,075,110			22.3			659,822			18.3			1,415,288			214.5
Operating Expenses
Selling expenses		514,037			5.5			463,998			12.9			50,039			10.8
General and administrative expenses		968,437			10.4			582,208			16.2			386,229			66.3
Research and development expenses		199,184			2.1			176,281			4.9			22,903			13.0
Total Operating Expenses		1,681,658			18.1			1,222,487			34.0			459,171			37.6
Profit (Loss) from Operation		393,452			4.2			(562,665	)		(15.6	)		956,117			169.9
Other Income (Expense)
Interest and other income		18,173			0.2			7,173			0.2			11,000			153.4
Interest (expense)		(36,502	)		(0.4	)		(4,174	)		(0.1	)		(32,328	)		(774.5	)
Gain (loss) on currency transactions		(206,718	)		(2.2	)		296,140			8.2			(502,858	)		(169.8	)
Gain (loss) on sale of fixed assets		(21,619	)		(0.2	)		-			-			(21,619	)		-
Total Other Income (Expense)		(246,666	)		(2.7	)		299,139			8.3			(545,805	)		(182.5	)
Profit (loss) Before Income Taxes		146,786			1.6			(263,526	)		(7.3	)		410,312			155.7
Income Taxes Expense (Income)		-			-			-			-			-			-
Net Profit (loss)		146,786			1.6			(263,526	)		(7.3	)		410,312			155.7

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	Six Months Ended June 30,
													Period to Period Change
	2019			As a % of Sales			2018			As a % of Sales			$			Percent %
Net Sales		16,718,384			100.0	%		5,989,410			100.0	%		10,728,974			179.1
Cost of Goods Sold		13,168,194			78.8			5,389,180			90.0			7,779,014			144.3
Gross Profit		3,550,190			21.2			600,230			10.0			2,949,960			491.5
Operating Expenses
Selling expenses		997,623			6.0			873,790			14.6			123,833			14.2
General and administrative expenses		1,739,302			10.4			1,344,647			22.5			394,655			29.4
Research and development expenses		402,356			2.4			345,677			5.8			56,679			16.4
Total Operating Expenses		3,139,281			18.8			2,564,114			42.8			575,167			22.4
Profit (loss) from Operation		410,909			2.5			(1,963,884	)		(32.8	)		2,374,793			120.9
Other Income (Expense)
Interest and other income		25,450			0.2			10,457			0.2			14,993			143.4
Interest (expense)		(75,150	)		(0.4	)		(60,474	)		(1.0	)		(14,676	)		(24.3	)
Gain (Loss) on currency transactions		(158,560	)		(0.9	)		217,086			3.6			(375,646	)		(173.0	)
Gain (Loss) on sale of fixed assets		(21,619	)		(0.1	)		-			-			(21,619	)		-
Total Other Income (Expense)		(229,879	)		(1.4	)		167,069			2.8			(396,948	)		(237.6	)
Profit (loss) Before Income Taxes		181,030			1.1			(1,796,815	)		(30.0	)		1,977,845			110.1
Income Taxes Expense (Income)		-			-			-			-			-			-
Net Profit (loss)		181,030			1.1			(1,796,815	)		(30.0	)		1,977,845			110.1

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Comparison of the Three Months Ended June 30, 2019 and June 30, 2018
 

Revenues 

Net sales for the three months ended June 30, 2019 were $9,297,186 compared to $3,598,028 for the same period in 2018, representing an increase of $5,699,158 or 158.4%. The increase in sales consisted of an increase in sales of liquid filters and systems of $6,464,165, a decrease in sales of DPF of $726,340 and a decrease in revenue related to development projects of $38,667. The increase in revenue for our liquid filters and water treatment systems is due to completion of projects related to the marine scrubber industry. The realized revenue is a record for the Company. The decrease in demand for our DPF is mainly due to a decrease in market activity compared to the same period last year.

Gross Profit

Gross profit for the three months ended June 30, 2019 was $2,075,110 compared to a gross profit of $659,822 for same period in 2018, representing an increase of $1,415,288 or 214.5%. The increase in gross profit was due to high sales activity and a better product mix with increased sales of liquid filters and water treatment systems, which have a higher gross margin. Included in gross profit is depreciation of $246,846 and $212,573 for the three months ended June 30, 2019 and 2018, respectively.

Expenses

Total operating expenses for the three months ended June 30, 2019 were $1,681,658 representing an increase of $459,171 or 37.6%, compared to $1,222,487 for the same period in 2018. This increase in operating expenses is attributable to an increase in general and administrative expenses of $386,229, or 66.3%, and increase in selling expenses of $50,039 or 10.8% and an increase in research and development expenses of $22,903, or 13.0%, compared to the same period in 2018.

The main reason for the increase in operating expenses is the large number of new additional employees and related expenses (purchase of IT equipment, office furniture, HR consultants etc.). It is especially new project managers, who have been hired to assist with the large increase in sales and new orders.

Non-cash compensation, included in general and administrative expenses, for the three months ended June 30, 2019 were $23,167, compared to $9,161 for the same period in 2018, representing an increase of $14,006, or 152.9%. This increase is attributable to increased non-cash compensation expense for restricted share units granted to directors.

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

	For the Three Months Ended June 30,
	2019		2018
Compensation upon vesting of stock options granted to employees	$	-	$	3,328
Compensation for vesting of restricted stock awards issued to the board of directors		23,167		5,833
Value of Warrants granted for services		-		-
Total Non-Cash Compensation	$	23,167	$	9,161

 Net Income

Net profit for the three months ended June 30, 2019 was $146,786 compared to a loss of $263,526 for the comparable period in 2018, representing a change of $410,312, or 155.7%. This improvement was attributable to the substantial increase in revenue and gross profit for the three months ending June 30, 2019, compared to the same period in 2018. Offset in Net Profit is Other Income/Expenses which amounts to ($246,666) for the three months ended June 30, 2019 compared to an income of $299,139 for the same period in 2018. The decrease in Net Other Income/Expense of $545,805 is principally related to losses on currency exchanges.

25

Comparison of the Six Months Ended June 30, 2019 and June 30, 2018
 

Revenues 

Net sales for the six months ended June 30, 2019 were $16,718,384 compared to $5,989,410 for the same period in 2018, representing an increase of 10,728,974 or 179.1%. The increase in sales consisted of an increase in sales of liquid filters and water treatment systems of $11,041,221, a decrease in sales of DPF of $253,565 and a decrease in sales of development projects of $58,683. The increase in revenue for our liquid filters and water treatment systems is due to completion of projects related to the marine scrubber industry. The realized revenue for the first six months of 2019 is a record for the Company. The decrease in demand for our DPF is mainly due to a decrease in market activity compared to the same period last year.

Gross Profit

Gross profit for the six months ended June 30, 2019 was $3,550,190 compared to a gross profit of $600,230 for same period in 2018, representing an increase of $2,949,960 or 491.5%. The increase in gross profit was due to the high sales activity for our liquid filters and water treatment systems, which have a higher gross margin. Included in gross profit is depreciation of $554,129 and $430,081 for the six months ended June 30, 2019 and 2018, respectively.

Expenses

Total operating expenses for the six months ended June 30, 2019 were $3,139,281 representing an increase of $575,167 or 22.4%, compared to $2,564,114 for the same period in 2018. This increase in operating expenses is attributable to an increase in general and administrative expenses of $394,655, or 29.4% an increase in research and development expenses of $56,679, or 16.4%, and an increase in selling expenses of $123,833, or 14.2%, which include expenses related to marketing.

The main reason for the increase in operating expenses is the large number of new additional employees and related expenses (purchase of IT equipment, office furniture, HR consultants etc.). It is especially new project managers, who have been hired to assist with the large increase in sales and new orders.

Non-cash compensation, included in general and administrative expenses, for the six months ended June 30, 2019 were $151,611, compared to $87,434 for the same period in 2018, representing an increase of $64,177, or 73.4%. This increase is attributable to increased non-cash compensation expense for restricted share units granted to directors.

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

	For the Six Months Ended June 30
	2019		2018
Compensation upon vesting of stock options granted to employees	$	-	$	15,767
Compensation for vesting of restricted stock awards issued to the board of directors		151,611		71,667
Value of Warrants granted for services		-		-
Total Non-Cash Compensation	$	151,611	$	87,434

Net Income

Net profit for the six months ended June 30, 2019 was $181,030, compared to a loss of $1,796,815 for the same period in 2018, representing an improvement in Net Income of $1,977,845, or 110.1%. This improvement was attributable to the substantial increase in sales activities and a higher gross profit for the six months ending June 30, 2019, compared to the same period in 2018.

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Liquidity and Capital Resources 

We have historically satisfied our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. At June 30, 2019, we had cash (including restricted cash) of $13,356,355 and working capital of $21,371,856 and at December 31, 2018, we had cash of $3,776,111 and working capital of $6,753,593. At June 30, 2019, our working capital increased by $14,618,263 compared to December 31, 2018 due to a registered public offering of common stock in the second quarter of 2019. Total current assets (excluding cash) were $18,388,744 and $7,597,095 at June 30, 2019 and at December 31, 2018, respectively, and total current liabilities (excluding finance debt and tax) were $9,764,890 and $4,605,254 at June 30, 2019 and at December 31, 2018, respectively. 

In connection with certain orders, we have to convey the customer a working guarantee or a prepayment guarantee or security bond. For that purpose, we have a guarantee credit line of DKK 94,620 (approximately $14,427 at March 31, 2019) with a bank, subject to certain base limitations. As of June 30, 2018, we had DKK 94,620 (approximately $14,801) in working guarantee against the line. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Systems such as receivables, inventory and equipment.

On May 24, 2019, we issued 2,215,862 shares of common stock in a public offering for gross proceeds of approximately $16.2 million, which has improved our liquidity. We believe that our existing cash and cash equivalents at June 30, 2019, along with cash generated from operations, will be sufficient to allow us to fund our current operating plan over the next 12 months. However, we may need additional funds to sustain and grow our business, and we may raise such funds from time to time through public or private sales of equity or debt securities. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially and adversely impact our financial condition and results of operations. Additional equity financing may be dilutive to holders of our common stock, and debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate our business.

Cash Flows 

Six months ended June 30, 2019 Compared to six months ended June 30, 2018

Cash provided (used) by operating activities is net income (losses) adjusted for certain non-cash items and changes in assets and liabilities. Cash used by operating activities for the six months ended June 30, 2019 was $5,070,627, representing an increase of $1,739,280 compared to cash used by operating activities of $3,331,347 for the six months ended June 30, 2018. The increase in cash used by operating activities for the six months ended June 30, 2019 was mainly due to an increase in account receivables of $7,152,037 related to the larger number of shipped orders in the second quarter of 2019. Further other receivables have increased by $2,204,708. The increase in Other Receivables is due to the larger number of shipped orders, as this increase relates to the last payment of most orders, which is normally invoiced when the commissioning has taken place. Deposits have increased by $1,203,216 due to prepayments made for the new furnaces in the production facility in Ballerup. Account payables have increased by $2,595,056; contract assets and liabilities have increased by $1,068,256 and accrued expenses have increased by $1,613,701 due to the large increase in sales activities.

Cash used in investing activities was $327,559 for the six months ended June 30, 2019, representing an increase of $244,567, as compared to cash used in investing activities of $82,992 for the six months ended June 30, 2018. The increase in cash used in investing activities was mainly due to $81,421 in the purchase of new IT equipment.

Cash provided by financing activities was $14,799,350 for the six months ended June 30, 2019, as compared to cash provided by financing activities of $5,850,367 for the six months ended June 30, 2018. The cash provided by financing activities is mainly related to a public offering that raised $16,065,000 less offering costs of $1,390,262 during the six months ended June 30, 2019.

Off Balance Sheet Arrangements

As of June 30, 2019, we had no off-balance sheet arrangements. We are not aware of any material transactions, which are not disclosed in our consolidated financial statements. 

27

Significant Accounting Policies and Critical Accounting Estimates

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

● the assessment of revenue recognition, which impacts revenue and cost of sales;

● the assessment of collectability of accounts receivable, which impacts operating expenses when and if we record bad debt or adjust the allowance for doubtful accounts;

● the assessment of recoverability of long-lived assets, which impacts gross margin or operating expenses when and if we record asset impairments or accelerate their depreciation;

● the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes;

● the valuation of inventory, which impacts gross margin; and

● the recognition and measurement of loss contingencies, which impact gross margin or operating expenses when we recognize a loss contingency, revise the estimate for a loss contingency, or record an asset impairment.

Recently Enacted Accounting Standards

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

Subsequent Events

The Company’s management reviewed material events through August 14, 2019 and there were no material subsequent events to report.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable. 

28

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and effectiveness of our internal controls over financial reporting and disclosure controls and procedures (pursuant to Rule 13a-15(b) and (c) under the Exchange Act) as of the end of the period covered by this Annual Report. A weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a misstatement of the registrant's financial statements will not be prevented or detected on a timely basis. Based on this evaluation, Management concluded that due to the limited number of employees in the finance department, our disclosure controls and procedures were not effective as of such date due to material weaknesses that were identified.

In 2019 we plan on hiring additional employees to the finance department, and we plan to continue remedy this lack of effectiveness during 2019 in connection with hiring additional employees in the finance department and implementing procedures to minimize the identified weaknesses. Further a planned investment in a new ERP-system to support the controls and processes of the Company should ensure that identified weaknesses will be detected on a timely basis to ensure proper and reliable financial reporting.

.

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 material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis. For more information on material weaknesses identified by Management, please see our annual report on Form 10-K for the year ended December 31, 2018.

Changes in Internal Control over Financial Reporting

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

Management's Remediation Initiatives

Management has been actively developing a remediation plan and been implementing new controls and processes to address the aforementioned deficiencies. Upon identifying the material weakness in of our internal controls, we have taken actions to strengthen our internal control structure.

Management continues to meet with key managers and control owners to evaluate the effectiveness of internal controls and to ensure implementation of remediation initiatives.

Limitations on the Effectiveness of Internal Controls

An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by Management override of the internal 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.

29

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not required for a “smaller reporting company.”  

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

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    MINE SAFETY DISCLOSURES

None.  

ITEM 5.    OTHER INFORMATION

None.  

30

ITEM 6.    EXHIBITS

10.1	Form of Purchase Agreement with Stephens Inc. as representative of the several underwriters, dated May 22, 2019	Incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K as filed with the SEC on May 24, 2019
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	XBRL Instance Document	Filed herewith
101. CAL	XBRL Taxonomy Extension Calculation Link base Document	Filed herewith
101. DEF	XBRL Taxonomy Extension Definition Link base Document	Filed herewith
101. LAB	XBRL Taxonomy Label Link base Document	Filed herewith
101. PRE	XBRL Extension Presentation Link base Document	Filed herewith
101. SCH	XBRL Taxonomy Extension Scheme Document	Filed herewith

31

SIGNATURES

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

	LiqTech International, Inc.
Dated: August 14, 2019	/s/ Sune Mathiesen
	Sune Mathiesen, Chief Executive Officer
	(Principal Executive Officer)
Dated: August 14, 2019	/s/ Claus Toftegaard
	Claus Toftegaard, Chief Financial Officer
	(Principal Financial and Accounting Officer)

32