NOTE

- 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,

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

balances held in a financial institution in the United States in excess of federally insured amounts at

June 30, 2019

and

December 31, 2018.

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, 201 9			December 31, 201 8
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.

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.

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

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

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.

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

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.

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

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

). 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

Observable inputs such as quoted prices in active markets for identical assets or liabilities;

●

Level

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

●

Level

Unobservable inputs in which there is little or

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.

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.

August 2018,

the Financial Accounting Standards board (“FASB”) issued Accounting Standards Update (“ASU”)

2018

(“ASU

2018

15”

Intangibles - Goodwill and Other - Internal-Use Software (Topic

350

): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.

ASU

2018

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.

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.

August 2018,

the SEC adopted amendments to simplify certain disclosure requirements, as set forth in Securities Act Release

No.

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

-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

-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.

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

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

for the required disclosures relating to our lease agreements.

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

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.