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Table of Contents

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, 2020

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: +454 4986000

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 10, 2020, was 21,652,313 shares.

Table of Contents

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended June 30, 2020

TABLE OF CONTENTS

| Page
PART I. FINANCIAL INFORMATION |
Item 1. Financial Statements | 4
Condensed Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019 | 4
Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) for the Three and Six Months Ended June 30, 2020 and June 30, 2019 (unaudited) | 6
Condensed Consolidated Statement of Stockholder’s Equity for the period ended June 30, 2020 and June 30, 2019 (unaudited) | 8
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and June 30, 2019 (unaudited) | 9
Notes to Condensed Consolidated Financial Statements (unaudited) | 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation | 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 32
Item 4. Controls and Procedures | 32
PART II. OTHER INFORMATION |
Item 1. Legal Proceedings | 33
Item 1A. Risk Factors | 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 33
Item 3. Defaults Upon Senior Securities | 33
Item 4. Mine Safety Disclosures | 33
Item 5. Other Information | 33
Item 6. Exhibits | 34
SIGNATURES | 35

2

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FORWARD-LOOKING STATEMENTS

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties, 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, 2019. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. This is especially underlined by the anticipated impacts from the COVID-19 pandemic on the Company, including the related effects to our business operations, results of operations, cash flows, and financial position, and our future responses to the COVID-19 pandemic. 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

Table of Contents

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, |
|  | 2020 |  |  | 2019 |
|  | (Unaudited) |  |  |  |  |
Assets |  |  |  |  |  |  |  |
Current Assets: |  |  |  |  |  |  |  |
Cash, cash equivalents and restricted cash |  | $ | 16,230,269 |  |  | $ | 9,783,932 |
Accounts receivable, net of allowance for doubtful accounts of $147,250 and $612,434 at June 30, 2020 and December 31, 2019, respectively |  |  | 4,452,526 |  |  |  | 6,272,760 |
Inventories, net of allowance for excess and obsolete inventory of $666,878 and $665,308 at June 30, 2020 and December 31, 2019, respectively |  |  | 5,356,614 |  |  |  | 5,199,238 |
Contract assets |  |  | 4,523,130 |  |  |  | 5,664,929 |
Prepaid expenses and other current assets |  |  | 753,229 |  |  |  | 566,398 |
Total Current Assets |  |  | 31,315,768 |  |  |  | 27,487,257 |
Long-Term Assets: |  |  |  |  |  |  |  |
Property and Equipment, net |  |  | 6,407,932 |  |  |  | 4,825,952 |
Operating lease right-of-use assets |  |  | 4,776,456 |  |  |  | 5,053,614 |
Deposits and other assets |  |  | 499,470 |  |  |  | 498,053 |
Intangible assets, net |  |  | 462,716 |  |  |  | 488,716 |
Goodwill |  |  | 236,862 |  |  |  | 236,131 |
Total Long-Term Assets |  |  | 12,383,436 |  |  |  | 11,102,466 |
Total Assets |  | $ | 43,699,204 |  |  | $ | 38,589,723 |

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

4

Table of Contents

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

|  | As of |  |  | As of |
|  | June 30, |  |  | December 31, |
|  | 2020 |  |  | 2019 |
|  | (Unaudited) |  |  |  |  |
Liabilities and Stockholders’ Equity |  |  |  |  |  |  |  |
Current Liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 2,073,842 |  |  | $ | 4,339,070 |
Accrued expenses |  |  | 5,209,103 |  |  |  | 3,222,951 |
Current portion of finance lease obligations |  |  | 35,589 |  |  |  | 34,772 |
Current portion of operating lease liabilities |  |  | 957,971 |  |  |  | 999,685 |
Current portion of contingent earn-out |  |  | 300,512 |  |  |  | 299,585 |
Contract liabilities |  |  | 1,323,245 |  |  |  | 1,421,376 |
Income taxes payable |  |  | 14,736 |  |  |  | 14,692 |
Total Current Liabilities |  |  | 9,914,998 |  |  |  | 10,332,131 |
Deferred tax liability |  |  | 308,714 |  |  |  | 338,763 |
Warrant liability |  |  | 2,811,900 |  |  |  | - |
Finance lease obligations, net of current portion |  |  | 154,832 |  |  |  | 172,273 |
Operating lease liabilities, net of current portion |  |  | 3,951,093 |  |  |  | 4,141,855 |
Contingent earn-out, net of current portion |  |  | 601,025 |  |  |  | 599,170 |
Total Long-term Liabilities |  |  | 7,827,564 |  |  |  | 5,252,061 |
Total Liabilities |  |  | 17,742,562 |  |  |  | 15,584,192 |
Stockholders' Equity: |  |  |  |  |  |  |  |
Series A Mandatory Convertible Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 shares issued and outstanding at June 30, 2020 and December 31, 2019 |  |  | - |  |  |  | - |
Common stock; par value $0.001, 25,000,000 shares authorized, 21,649,213 and 20,547,668 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively |  |  | 21,649 |  |  |  | 20,548 |
Additional paid-in capital |  |  | 66,364,654 |  |  |  | 61,398,150 |
Accumulated deficit |  |  | (34,506,920 | ) |  |  | (32,246,608 | )
Accumulated other comprehensive loss |  |  | (5,922,741 | ) |  |  | (6,166,559 | )
Total Stockholders' Equity |  |  | 25,956,642 |  |  |  | 23,005,531 |
Total Liabilities and Stockholders' Equity |  | $ | 43,699,204 |  |  | $ | 38,589,723 |

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

5

Table of Contents

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, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Revenue |  | $ | 4,641,483 |  |  | $ | 9,297,186 |  |  | $ | 14,923,327 |  |  | $ | 16,718,384 |
Cost of Goods Sold |  |  | 4,147,020 |  |  |  | 7,222,076 |  |  |  | 11,789,788 |  |  |  | 13,168,194 |
Gross Profit |  |  | 494,463 |  |  |  | 2,075,110 |  |  |  | 3,133,539 |  |  |  | 3,550,190 |
Operating Expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling expenses |  |  | 605,947 |  |  |  | 514,037 |  |  |  | 1,282,747 |  |  |  | 997,623 |
General and administrative expenses |  |  | 1,509,772 |  |  |  | 1,001,179 |  |  |  | 3,059,530 |  |  |  | 1,808,427 |
Research and development expenses |  |  | 316,559 |  |  |  | 199,184 |  |  |  | 627,513 |  |  |  | 402,356 |
Total Operating Expense |  |  | 2,432,278 |  |  |  | 1,714,400 |  |  |  | 4,969,790 |  |  |  | 3,208,406 |
Income (Loss) from Operations |  |  | (1,937,815 | ) |  |  | 360,710 |  |  |  | (1,836,251 | ) |  |  | 341,784 |
Other Income (Expense) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest and other income |  |  | 247 |  |  |  | 18,173 |  |  |  | 4,737 |  |  |  | 25,450 |
Interest expense |  |  | (36,047 | ) |  |  | (3,760 | ) |  |  | (61,538 | ) |  |  | (6,025 | )
Fair value adjustment of warrants |  |  | (236,900 | ) |  |  | - |  |  |  | (236,900 | ) |  |  | - |
Gain (Loss) on currency transactions |  |  | (368,561 | ) |  |  | (206,718 | ) |  |  | (160,934 | ) |  |  | (158,560 | )
Gain (Loss) on sale of fixed assets |  |  | - |  |  |  | (21,619 | ) |  |  | - |  |  |  | (21,619 | )
Total Other Income (Expense) |  |  | (641,261 | ) |  |  | (213,924 | ) |  |  | (454,635 | ) |  |  | (160,754 | )
Income (Loss) Before Income Taxes |  |  | (2,579,076 | ) |  |  | 146,786 |  |  |  | (2,290,886 | ) |  |  | 181,030 |
Income Tax Provision (Benefit) |  |  | (15,265 | ) |  |  | - |  |  |  | (30,574 | ) |  |  | - |
Net Income (Loss) |  | $ | (2,563,811 | ) |  | $ | 146,786 |  |  | $ | (2,260,312 | ) |  | $ | 181,030 |
Basic Income (Loss) Per Share |  | $ | (0.12 | ) |  | $ | 0.01 |  |  | $ | (0.11 | ) |  | $ | 0.01 |
Diluted Income (Loss) Per Share |  | $ | (0.12 | ) |  | $ | 0.01 |  |  | $ | (0.11 | ) |  | $ | 0.01 |
Basic Weighted Average Common Shares Outstanding |  |  | 20,963,186 |  |  |  | 19,211,771 |  |  |  | 20,758,855 |  |  |  | 18,742,029 |
Diluted Weighted Average Common Shares Outstanding |  |  | 20,963,186 |  |  |  | 19,228,160 |  |  |  | 20,758,855 |  |  |  | 18,758,108 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

|  | For the Three Months Ended |  |  | For the Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Net Income (Loss) |  |  | (2,563,811 | ) |  |  | 146,786 |  |  |  | (2,260,312 | ) |  |  | 181,030 |
Other Comprehensive Income - Currency Translation, Net |  |  | 739,777 |  |  |  | 381,217 |  |  |  | 243,818 |  |  |  | 167,295 |
Total Comprehensive Income (Loss) |  | $ | (1,824,034 | ) |  | $ | 528,003 |  |  | $ | (2,016,494 | ) |  | $ | 348,325 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

For the period ended June 30, 2020 and June 30, 2019

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated Other |  |  |  |  |
|  |  |  |  |  |  |  |  |  | Additional |  |  |  |  |  |  | Compre- |  |  |  |  |
|  | Common Stock |  |  | Paid-in |  |  | Accumulated |  |  | hensive |  |  |  |  |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Income/(Loss) |  |  | TOTAL |
BALANCE, December 31, 2019 |  |  | 20,547,668 |  |  |  | 20,548 |  |  |  | 61,398,150 |  |  |  | (32,246,608 | ) |  |  | (6,166,559 | ) |  |  | 23,005,531 |
Common shares issued in settlement of RSUs for services by the board of directors |  |  | 8,212 |  |  |  | 8 |  |  |  | 44,992 |  |  |  |  |  |  |  |  |  |  |  | 45,000 |
Stock based compensation |  |  |  |  |  |  |  |  |  |  | 96,222 |  |  |  |  |  |  |  |  |  |  |  | 96,222 |
Currency translation, net |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (495,959 | ) |  |  | (495,959 | )
Net Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 303,499 |  |  |  |  |  |  |  | 303,499 |
BALANCE, March 31, 2020 |  |  | 20,555,880 |  |  |  | 20,556 |  |  |  | 61,539,364 |  |  |  | (31,943,109 | ) |  |  | (6,662,518 | ) |  |  | 22,954,293 |
Common shares issued in settlement of RSUs for services by the board of directors |  |  | 8,333 |  |  |  | 8 |  |  |  | (8 | ) |  |  |  |  |  |  |  |  |  |  | - |
Common shares issued for cash at $5.00 per share, net of offering cost of $680,952, May 2020 |  |  | 1,085,000 |  |  |  | 1,085 |  |  |  | 4,742,963 |  |  |  |  |  |  |  |  |  |  |  | 4,744,048 |
Stock based compensation |  |  |  |  |  |  |  |  |  |  | 82,335 |  |  |  |  |  |  |  |  |  |  |  | 82,335 |
Currency translation, net |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 739,777 |  |  |  | 739,777 |
Net Loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (2,563,811 | ) |  |  |  |  |  |  | (2,563,811 | )
BALANCE, June 30, 2020 |  |  | 21,649,213 |  |  |  | 21,649 |  |  |  | 66,364,654 |  |  |  | (34,506,920 | ) |  |  | (5,922,741 | ) |  |  | 25,956,642 |
BALANCE, December 31, 2018 |  |  | 18,228,887 |  |  |  | 18,229 |  |  |  | 46,552,487 |  |  |  | (32,286,224 | ) |  |  | (5,744,856 | ) |  |  | 8,539,636 |
Common shares issued in settlement of RSUs for services by the board of directors |  |  | 28,993 |  |  |  | 29 |  |  |  | 112,471 |  |  |  |  |  |  |  |  |  |  |  | 112,500 |
Stock based compensation |  |  |  |  |  |  |  |  |  |  | 15,944 |  |  |  |  |  |  |  |  |  |  |  | 15,944 |
Exercising of stock options |  |  | 45,000 |  |  |  | 45 |  |  |  | 133,155 |  |  |  |  |  |  |  |  |  |  |  | 133,200 |
Currency translation, net |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (213,922 | ) |  |  | (213,922 | )
Net Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 34,244 |  |  |  |  |  |  |  | 34,244 |
BALANCE, March 31, 2019 |  |  | 18,302,880 |  |  |  | 18,303 |  |  |  | 46,814,057 |  |  |  | (32,251,980 | ) |  |  | (5,958,778 | ) |  |  | 8,621,602 |
Stock based compensation |  |  |  |  |  |  |  |  |  |  | 23,167 |  |  |  |  |  |  |  |  |  |  |  | 23,167 |
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 |  |  |  |  |  |  |  |  |  |  |  | 14,674,738 |
Currency translation, net |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 381,217 |  |  |  | 381,217 |
Net Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 146,786 |  |  |  |  |  |  |  | 146,786 |
BALANCE, June 30, 2019 |  |  | 20,547,668 |  |  |  | 20,548 |  |  |  | 61,509,717 |  |  |  | (32,105,194 | ) |  |  | (5,577,561 | ) |  |  | 23,847,510 |

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

|  | For the Six Months Ended |
|  | June 30, |
|  | 2020 |  |  | 2019 |
Cash Flows from Operating Activities: |  |  |  |  |  |  |  |
Net Income (Loss) |  | $ | (2,260,312 | ) |  | $ | 181,030 |
Adjustments to reconcile net income to net cash provided by (used in) operations: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 1,183,441 |  |  |  | 554,130 |
Stock-based compensation |  |  | 223,557 |  |  |  | 151,611 |
Change in fair value of warrant liability |  |  | 236,900 |  |  |  | - |
Change in deferred tax asset / liability |  |  | (30,574 | ) |  |  | - |
Changes in assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable |  |  | 1,820,234 |  |  |  | (7,152,037 | )
Inventory |  |  | (157,376 | ) |  |  | (281,601 | )
Contract assets |  |  | 1,141,799 |  |  |  | (2,086,762 | )
Deposits |  |  | - |  |  |  | (1,203,216 | )
Prepaid expenses and other current assets |  |  | (184,328 | ) |  |  | (157,913 | )
Accounts payable |  |  | (2,265,228 | ) |  |  | 2,595,054 |
Accrued expenses |  |  | 1,986,152 |  |  |  | 1,613,701 |
Operating lease liabilities |  |  | (366,198 | ) |  |  | (234,934 | )
Contract liabilities |  |  | (98,131 | ) |  |  | 950,310 |
Total Adjustments |  |  | 3,490,248 |  |  |  | (5,251,657 | )
Net Cash provided by (used in) Operating Activities |  |  | 1,229,936 |  |  |  | (5,070,627 | )
Cash Flows from Investing Activities: |  |  |  |  |  |  |  |
Purchase of property and equipment |  |  | (2,171,172 | ) |  |  | (327,559 | )
Purchase of other intangible assets |  |  | (23,446 | ) |  |  | - |
Net Cash used in Investing Activities |  |  | (2,194,618 | ) |  |  | (327,559 | )
Cash Flows from Financing Activities: |  |  |  |  |  |  |  |
Payments on finance lease obligation |  |  | (16,973 | ) |  |  | (8,588 | )
Proceeds from exercise of stock options |  |  | - |  |  |  | 133,200 |
Proceeds from issuance of prefunded warrants |  |  | 2,575,000 |  |  |  | - |
Proceeds from issuance of common stock, net |  |  | 4,744,048 |  |  |  | 14,674,738 |
Net Cash provided by Financing Activities |  |  | 7,302,075 |  |  |  | 14,799,350 |
Gain on Currency Translation |  |  | 108,944 |  |  |  | 179,080 |
Net change in Cash, Cash Equivalents and Restricted Cash |  |  | 6,446,337 |  |  |  | 9,580,244 |
Cash, Cash Equivalents and Restricted Cash at Beginning of Period |  |  | 9,783,932 |  |  |  | 3,776,111 |
Cash, Cash Equivalents and Restricted Cash at End of Period |  | $ | 16,230,269 |  |  | $ | 13,356,355 |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

|  | For the Six Months Ended June 30, |
|  | 2020 |  |  | 2019 |
Supplemental Disclosures of Cash Flow Information: |  |  |  |  |  |  |  |
Cash paid during the period for: |  |  |  |  |  |  |  |
Interest |  | $ | 45,471 |  |  | $ | 50,372 |
Income Taxes |  | $ | - |  |  | $ | - |

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation

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

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

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

LiqTech Holding A/S (formerly known as LiqTech International A/S), a Danish corporation, incorporated on January 15, 2000 (“LiqTech Holding”), a 100% owned subsidiary of LiqTech USA, engaged in the development, design, application, marketing and sales of membranes, ceramic diesel particulate and liquid filters, and catalytic converters in Europe, Asia and South America.

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

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

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

LiqTech Ceramics A/S, a Danish corporation (“LiqTech Ceramics”), incorporated on December 20, 2019 that is a dormant company without activity.

LiqTech Germany (“LiqTech Germany”), a 100% owned subsidiary of LiqTech Holding, incorporated in Germany on December 9, 2011. The Company is in the process of closing operations as all activity in the company has ceased.

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

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

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

Functional Currency / Foreign currency translation -- The functional currency of LiqTech International, Inc., LiqTech USA, Inc. and LiqTech NA is the U.S. Dollar. The Functional Currency of LiqTech Holding, LiqTech Water, LiqTech Plastics and LiqTech Ceramics is the Danish Krone (“DKK”); the functional currency of LiqTech Germany is the Euro; and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is the U.S. Dollar for the purpose of these consolidated financial statements. The balance sheet accounts of the foreign subsidiaries are translated into U.S. Dollars at the period-end exchange rates, and all revenue and expenses are translated into U.S. Dollars at the average exchange rates prevailing during the six months ended June 30, 2020 and 2019. 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.

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Cash, Cash Equivalents and Restricted Cash -- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. As of June 30, 2020, and December 31, 2019, the Company held $2,711,608 and $2,714,173, respectively, of restricted cash. The restricted cash is held as security by a local financial institution for ensuring a leasing facility and for payment guarantees issued for the benefit of customers in connection with prepayments of sales orders and for warranties after the delivery of sales orders. The Company had no balances held in a financial institution in the United States in excess of federally insured amounts on June 30, 2020 and December 31, 2019.

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

The roll-forward of the allowance for doubtful accounts for the period ended June 30, 2020 and December 31, 2019 is as follows:

|  | June 30, 2020 |  |  | December 31, 2019 |
Allowance for doubtful accounts at the beginning of the period |  | $ | 612,434 |  |  | $ | 971,772 |
Bad debt expense |  |  | 327 |  |  |  | 25,044 |
Receivables written off during the periods |  |  | (459,207 | ) |  |  | (362,244 | )
Effect of currency translation |  |  | (6,305 | ) |  |  | (22,138 | )
Allowance for doubtful accounts at the end of the period |  | $ | 147,250 |  |  | $ | 612,434 |

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

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

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

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

Contracts Assets – Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract assets also includes unbilled receivables, which usually comprises the last invoice remaining after the delivery of the systems, where revenue is recognized at the transfer of control based upon signed acceptance of the system by the customer. Most commonly this invoice is sent to the customer at commissioning of the product or no later than 12 months after the delivery. Further included in Contract Assets are short-term receivables such as VAT and other receivables.

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

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

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

Acquired intangible assets with determinable useful lives are amortized on a straight-line or accelerated basis over the estimated periods benefited, ranging from one to 10 years. Customer relationships and other non-contractual intangible assets with determinable lives are amortized over periods of five years.

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

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

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

The Company sells products throughout the world; sales by geographical region are as follows for the three and six months ended June 30, 2020 and 2019:

|  | For the Three Months |  |  | For the Six Months |
|  | Ended June 30, |  |  | Ended June 30, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
United States and Canada |  | $ | 307,480 |  |  | $ | 255,642 |  |  | $ | 433,962 |  |  | $ | 688,229 |
Australia |  |  | 61,706 |  |  |  | 153,401 |  |  |  | 103,961 |  |  |  | 215,514 |
South America |  |  | 12,043 |  |  |  | - |  |  |  | 22,939 |  |  |  | - |
Asia |  |  | 292,756 |  |  |  | 933,693 |  |  |  | 2,326,044 |  |  |  | 2,172,807 |
Europe |  |  | 3,967,498 |  |  |  | 7,954,450 |  |  |  | 12,036,421 |  |  |  | 13,641,834 |
|  | $ | 4,641,483 |  |  | $ | 9,297,186 |  |  | $ | 14,923,327 |  |  | $ | 16,718,384 |

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The Company’s sales by product line are as follows for the three and six months ended June 30, 2020 and 2019:

|  | For the Three Months |  |  | For the Six Months |
|  | Ended June 30, |  |  | Ended June 30, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Liquid filters and systems |  | $ | 2,551,710 |  |  | $ | 8,453,136 |  |  | $ | 10,531,998 |  |  | $ | 13,493,469 |
Diesel particulate filters |  |  | 1,160,695 |  |  |  | 747,234 |  |  |  | 2,720,757 |  |  |  | 2,990,502 |
Plastic components |  |  | 762,384 |  |  |  | - |  |  |  | 1,343,794 |  |  |  | - |
Development projects |  |  | 166,694 |  |  |  | 96,815 |  |  |  | 326,778 |  |  |  | 234,413 |
|  | $ | 4,641,483 |  |  | $ | 9,297,186 |  |  | $ | 14,923,327 |  |  | $ | 16,718,384 |

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 or DPF transfers to the customer or when services are rendered by the Company. The majority of the Company's sales contracts contain performance obligations satisfied at a point in time when title and risks and rewards of ownership have transferred to the customer. This generally occurs when the product is shipped or accepted by the customer. Revenue for service contracts 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 to the right for payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Pre-payments received prior to satisfaction of performance obligations are recorded as a Contract liability. Given the insignificant days between revenue recognition and receipt of payment, financing components do not exist between the Company and its customers.

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

System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer, which typically occurs upon shipment of the system in accordance with the terms of the contract. In connection with the system sale, 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 performance obligation and is valued at cost, with the addition of a standard gross margin. This second performance obligation is recognized as revenue at the time of provision of the commissioning services together with the cost incurred. Part of the invoicing to the customer is also attributed to the commissioning, and at transfer of the control of the system (i.e. the first performance obligation), some of the invoicing will still be awaiting commissioning and is therefore recognized as Unbilled receivables, while the revenue related to the commissioning is recognized as Contract liability.

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

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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 sheet as Contract assets. Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported on our balance sheet as Contract liabilities.

Contract assets are the Company’s rights to consideration in exchange for goods or services and is recognized when a performance obligation has been satisfied but has not yet been billed. Contract assets are transferred to receivables when the right to consideration is unconditional and billed per the terms of the contractual agreement. Contract liabilities are payments received from customers prior to satisfaction of performance obligations and these balances are typically related to prepayments for third-party expenses that are incurred shortly after billing. Contract liabilities also include deferred revenue related to the second performance obligation stated under Revenue Recognition, where the obligation is attributed to the commissioning of the water treatment system.

The roll-forward of Contract assets / liabilities for the period ended June 30, 2020 and December 31, 2019 is as follows:

|  | June 30, 2020 |  |  | December 31, 2019 |
Cost incurred |  | $ | 4,305,503 |  |  | $ | 3,960,199 |
Unbilled project deliveries |  |  | 1,805,884 |  |  |  | 1,971,106 |
VAT |  |  | 397,949 |  |  |  | 862,368 |
Other receivables |  |  | 114,036 |  |  |  | 58,397 |
Prepayments |  |  | (2,330,373 | ) |  |  | (1,732,231 | )
Deferred Revenue |  |  | (1,093,114 | ) |  |  | (876,286 | )
|  | $ | 3,199,885 |  |  | $ | 4,243,553 |
Distributed as follows: |  |  |  |  |  |  |  |
Contract assets |  | $ | 4,523,130 |  |  | $ | 5,664,929 |
Contract liabilities |  |  | (1,323,245 | ) |  |  | (1,421,376 | )
|  | $ | 3,199,885 |  |  | $ | 4,243,553 |

Advertising Cost -- Costs incurred in connection with advertising of the Company’s products are expensed as incurred. Advertising costs are included in sales expenses, and total advertising costs amounted to $62,023 and $72,349 for the six months ended June 30, 2020 and 2019, respectively. Total advertising costs for the three months period ended June 30, 2020 and 2019 respectively, was $36,786 and $49,757.

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, 2020 and 2019 were $627,513 and $402,356, respectively, of research and development costs. For the three months period ended June 30, 2020 and 2019, research and development costs were $316,559 and $199,184.

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) is based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share is 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, RSUs, and warrants that have been granted but have not yet been exercised.

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Stock Options and Awards -- During the years presented in the accompanying consolidated financial statements, the Company has granted stock options and awards. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Stock-based compensation costs of $223,557 and $151,611 have been recognized for the vesting of options and stock awards granted to Directors, management and certain key employees for the six months ended June 30, 2020 and 2019, respectively. For the three months period ended June 30, 2020 and 2019, stock-based compensation was $82,335 and $23,167 respectively.

Warrant Liability -- The Company issued common stock warrants in May 2020 in conjunction with an equity financing. In accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), the fair value of these warrants is classified as a liability on the Company’s Consolidated Balance Sheet because, according to the warrants' terms, a fundamental transaction could give rise to an obligation of the Company to pay cash to its warrant holders, which is out of the control of the Company. Corresponding changes in the fair value of the warrants are recognized in earnings on the Company’s Consolidated Statement of Operations in each subsequent period.

Fair Value of Financial Instruments -- The Company accounts for fair value measurements for financial assets and liabilities in accordance with FASB ASC Topic 820. The authoritative guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

| ● | Level 1. Observable inputs such as quoted prices in active markets for identical assets or liabilities;
| ● | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
| ● | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, other receivables, prepaid expenses, accounts payable and accrued expenses approximate their recorded values due to their short-term maturities.

The following table sets forth the liabilities at June 30, 2020, which is recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required, these are classified based on the lowest level of input that is significant to the fair value measurement:

|  | Fair value at reporting date using: |
|  | June 30, 2020 |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Contingent Earn-out Liability |  | $ | 901,537 |  |  | $ | - |  |  | $ | - |  |  | $ | 901,537 |
Prefunded warrants |  |  | 2,811,900 |  |  |  | 2,811,900 |  |  |  | - |  |  |  | - |

The roll-forward of the Contingent Earn-out liability is as follows:

Balance at December 31, 2019 |  | $ | 898,755 |
Foreign currency effect |  |  | 2,782 |
Balance at June 30, 2020 |  | $ | 901,537 |

In connection with the equity financing in May 2020, the Company recorded a warrant liability on its Consolidated Balance Sheet based on the estimated fair value of the common stock warrants at the issuance date. The warrants are valued at the end of each reporting period with changes recorded as a mark-to-market adjustment on warrant liability on the Company's Consolidated Statement of Operations. The fair value of these warrants was $2,811,900 at June 30, 2020.

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The mark-to-market expense on these warrants was $236,900 for the six months ended June 30, 2020 and was not presented within loss from operations. The Company’s warrant liability is carried at fair value and was classified as Level 1 in the fair value hierarchy due to the use of observable inputs such as quoted prices in active markets for identical assets or liabilities.

The following table summarizes the fair value measurement of the warrant liability.

Base value of warrants, 515,000 warrants at $5 |  | $ | 2,575,000 |
Fair value adjustment |  |  | 236,900 |
Balance at June 30, 2020 |  | $ | 2,811,900 |

Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets including accounts receivable; allowance for doubtful accounts; contract assets; reserve for excess and obsolete inventory; depreciation and impairment of property, plant and equipment; goodwill; liabilities including contract liabilities and contingencies; the disclosures of contingent assets and liabilities at the date of the financial statements; and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.

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

On March 9, 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments.” This ASU was issued to clarify and improve various financial instruments topics. The guidance has various effective dates but is basically effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We will adopt the new standard effective March 1, 2021 and do not expect the adoption of this guidance to have a material impact on our 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 annual periods beginning after December 15, 2019, including interim periods within those annual periods. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash that requires companies, in the Statement of Cash Flows, to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Consequently, 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, 2020 the Company has recorded $2,711,608 as Restricted cash, $13,518,661 as Unrestricted cash, and a total of $16,230,269 as Cash, Cash equivalents and Restricted cash. For the period ended December 31, 2019 the amounts were $2,714,173 in Restricted cash and $7,069,759 in Unrestricted cash.

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, including subsequently issued ASUs to clarify the implementation guidance in ASU 2016-13. The amendment introduces new guidance for credit losses on financial assets measured at amortized cost, including finance receivables and trade receivables. Under this new model, expected credit losses are based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability, replacing the previous incurred loss model. The ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The company adopted ASU 2016-13 effective January 1, 2020 and concluded there was no material impact to the condensed consolidated financial statements.

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

NOTE 2 - INVENTORY

Inventory consisted of the following at June 30, 2020 and December 31, 2019:

|  | June 30, 2020 |  |  | December 31, 2019 |
Furnace parts and supplies |  | $ | 834,710 |  |  | $ | 621,991 |
Raw materials |  |  | 1,980,305 |  |  |  | 2,125,921 |
Work in process |  |  | 2,124,366 |  |  |  | 1,624,499 |
Finished goods and filtration systems |  |  | 1,084,111 |  |  |  | 1,492,135 |
Reserve for obsolescence |  |  | (666,878 | ) |  |  | (665,308 | )
Net Inventory |  | $ | 5,356,614 |  |  | $ | 5,199,238 |

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

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NOTE 3 - 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 Hobro, Aarhus and Copenhagen, Denmark as well as in White Bear Lake, Minnesota.

During the six months ended June 30, 2020, cash paid for amounts included for the measurement of lease liabilities was $521,716 and the company recorded operating lease expense of $577,765.

Supplemental balance sheet information related to leases as of June 30, 2020 and December 31, 2019 was as follows

|  | June 30, 2020 |  |  | December 31, 2019 |
Operating leases: |  |  |  |  |  |  |  |
Operating lease right-of-use |  | $ | 4,776,456 |  |  | $ | 5,053,614 |
Operating lease liabilities - current |  | $ | 957,971 |  |  | $ | 999,685 |
Operating lease liabilities – long-term |  |  | 3,951,093 |  |  |  | 4,141,855 |
Total operating lease liabilities |  | $ | 4,909,064 |  |  | $ | 5,141,540 |
Finance leases: |  |  |  |  |  |  |  |
Property and equipment, at cost |  | $ | 1,366,488 |  |  | $ | 1,362,272 |
Accumulated depreciation |  |  | (1,178,583 | ) |  |  | (1,156,145 | )
Property and equipment, net |  | $ | 187,905 |  |  | $ | 206,127 |
Finance lease liabilities - current |  | $ | 35,589 |  |  | $ | 34,772 |
Finance lease liabilities – long-term |  |  | 154,832 |  |  |  | 172,273 |
Total finance lease liabilities |  | $ | 190,421 |  |  | $ | 207,045 |
Weighted average remaining lease term: |  |  |  |  |  |  |  |
Operating leases |  |  | 10.2 |  |  |  | 10.2 |
Finance leases |  |  | 5.0 |  |  |  | 5.5 |
Weighted average discount rate: |  |  |  |  |  |  |  |
Operating leases |  |  | 6.3 | % |  |  | 6.4 | %
Finance leases |  |  | 3.9 | % |  |  | 3.9 | %

Maturities of lease liabilities at June 30, 2020 were as follows:

|  | Operating lease |  |  | Finance lease |
2020 (remaining 6 months) |  | $ | 529,443 |  |  | $ | 21,210 |
2021 |  |  | 885,165 |  |  |  | 42,421 |
2022 |  |  | 805,270 |  |  |  | 40,848 |
2023 |  |  | 761,361 |  |  |  | 36,211 |
2024 |  |  | 610,822 |  |  |  | 37,156 |
Thereafter |  |  | 3,041,218 |  |  |  | 32,650 |
Total payment under lease agreements |  |  | 6,633,279 |  |  |  | 210,496 |
Less imputed interest |  |  | (1,724,215 | ) |  |  | (20,075 | )
Total lease liability |  | $ | 4,909,064 |  |  | $ | 190,421 |

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NOTE 4 - LINES OF CREDIT

In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or security bond. For that purpose, we have a guarantee credit line of DKK10,000,000 (approximately $1,500,000). The credit line is secured by a cash deposit of $2,700,000. Further, we have a guarantee for a specific project delivered in 2016 of DKK 94,620 (approximately $14,217 at June 30, 2020) with a bank, subject to certain base limitations. 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 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, 2020 and 2019, matching contributions were expensed and totaled $6,984 and $5,677, respectively. For the three months period ended June 30, 2020 and 2019, matchng contributions expensed totaled $3,949 and $2,621 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 Holding contacted the Company with a claim of DKK 448,500 ($68,800) alleging that an 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 as of June 30, 2020 as the Company believes that it has valid supporting defenses and does not expect the claim to materialize in any payments to the former supplier.

On February 27, 2019, LiqTech Water was contacted by a former supplier alleging that the Company owed DKK 543,905 ($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 rendered, 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 as of June 30, 2020.

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 that may be incurred under its standard warranty programs and records a liability for such costs at the time product revenue is recognized.

In addition, the Company sells an extended warranty for certain systems, which generally provides a warranty for up to four years from the date of commissioning. The specific terms and conditions of the warranties vary depending upon the product sold and the country in which the Company does business. Revenue received for the sale of extended warranty contracts is deferred and recognized in the same manner as the costs incurred to perform under the warranty contracts.

The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the cost per claim. The Company has assessed the adequacy of the recorded warranty liability at the end of the third quarter of 2019 based on realized warranty expenses for the four years passed since the start-up of producing water treatment systems. Based on the assessment, the Company has reduced the warranty accrual from 7% to 3% of the sales value for delivered products since January 1, 2019.

Changes in the Company's current and long-term warranty obligations included in accrued expenses on the balance sheet, as of June 30, 2020 and December 31, 2019 were as follows:

|  | June 30, 2020 |  |  | December 31, 2019 |
Balance at December 31 |  | $ | 813,288 |  |  | $ | 432,225 |
Warranty costs charged to cost of goods sold |  |  | 287,847 |  |  |  | 707,079 |
Utilization charges against reserve |  |  | (76,225 | ) |  |  | (315,556 | )
Release of accrual related to expired warranties |  |  | - |  |  |  | - |
Foreign currency effect |  |  | 6,145 |  |  |  | (10,460 | )
Balance at June 30 |  | $ | 1,031,055 |  |  | $ | 813,288 |

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Purchase Obligation - The Company has a purchase obligation to the supplier of the new furnaces to the production facility in Ballerup for which the Company has received two units while the remaining two units will be delivered in the second half of 2020. The total obligation amounts to $3.8 million and the Company has entered into a leasing agreement with the bank to partly finance the purchase. The lease agreement will commence upon the receipt of all furnaces covered by the purchase contract. The Company has no right to cancel the order.

NOTE 6 - EARNINGS PER SHARE

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

The following data show the amounts used in computing earnings per share and the weighted average number of shares of potential dilutive common stock for the three months ended June 30, 2020 and 2019:

|  | For the Six Months Ended June 30, |
|  | 2020 |  |  | 2019 |
Net Income (Loss) attributable to LiqTech International Inc. |  | $ | (2,260,312 | ) |  | $ | 181,030 |
Weighted average number of common shares used in basic earnings per share |  |  | 20,758,855 |  |  |  | 18,742,029 |
Effect of dilutive securities, stock options, RSUs, and warrants |  |  | - |  |  |  | 16,079 |
Weighted average number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share |  |  | 20,758,855 |  |  |  | 18,758,108 |

For the six months ended June 30, 2020, the Company had 136,632 stock grants outstanding to issue common stock (RSUs). Further the company had 25,000 options outstanding to purchase common stock at $2.96 per share and 515,000 prefunded warrants at $5.00 per share outstanding to issue common stock.

For the six months ended June 30, 2019, the Company had 58,334 stock grants outstanding to issue common stock (RSUs). Further the company had 25,000 options outstanding to purchase common stock at $2.96 per share.

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, 2020 and 2019, respectively, there were 21,649,213 and 20,547,668 common shares issued and outstanding.

Voting -- Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of directors, and do not have any right to cumulate votes in the election of directors.

Dividends -- Subject to the rights and preferences of the holders of any series of preferred stock, if any, which may at the time be outstanding, holders of common stock are entitled to receive ratably such dividends as our Board of Directors from time to time may declare out of funds legally available.

Liquidation Rights -- In the event of any liquidation, dissolution or winding-up of affairs, after payment of all of our debts and liabilities and subject to the rights and preferences of the holders of any outstanding shares of any series of our preferred stock, the holders of common stock will be entitled to share ratably in the distribution of any of our remaining assets.

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

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

The Company has 2,500,000 authorized Preferred stock, $0.001 par value. As of June 30, 2020, and 2019 there were 0 mandatory convertible preferred shares issued and outstanding.

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Stock Issuance

Since January 1, 2020, the Company has made the following issuances of common stock:

On January 15, 2020, the Company issued an additional 8,212 shares of restricted stock valued at $45,000 for services provided by the Board of Directors. The Company will recognize the stock-based compensation of the award over the requisite service period. The shares vested immediately.

On May 21, 2020, the Company completed a Securities Purchase Agreement with certain accredited investors in a private placement pursuant to which the Company issued and sold an aggregate of 1,085,000 shares of common stock, par value $0.001 per share, at a purchase price of $5.00 per share for gross proceeds of $4,744,048 including costs of $680,952 for placement fees, lawyer fees, auditor fees and other costs related to the capital raise, and a prefunded warrant to purchase an aggregate of 515,000 shares of Common Stock, at a purchase price of $5.00 per share for gross proceeds of $2,575,000.

On June 6, 2020, the Company issued an additional 8,333 shares of restricted stock valued at $69,333 for services provided by the Board of Directors. The Company will recognize the stock-based compensation of the award over the requisite service period. The shares vested immediately.

For the six months ended June 30, 2020 and 2019, the Company has recorded stock-based compensation expense of $223,557 and $151,611, respectively.

Warrants

In connection with the Securities Purchase Agreement entered in May 2020, a prefunded warrant (“the Warrant”) to purchase an aggregate of 515,000 shares of Common Stock at a purchase price of $5.00 per share was issued. Subject to certain beneficial ownership limitations, the Warrant is immediately exercisable and may be exercised for no additional consideration. The Warrant does not expire. A holder of the Warrant will not have the right to exercise any portion of the Warrant if the holder together with Affiliates and Attribution Parties (as such terms are defined in the Warrant) would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrant. However, upon notice from the holder to the Company, the holder may decrease or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrant, provided that any increase in the beneficial ownership limitation will not take effect until 61 days following notice to the Company.

In accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), the fair value of these warrants is classified as a liability on the Company’s Consolidated Balance Sheet because, according to the warrant’s terms, a fundamental transaction could give rise to an obligation of the Company to pay cash to its warrant holders. Corresponding changes in the fair value of the warrants are recognized in earnings on the Company’s Consolidated Statement of Operations in each subsequent period.

For warrants classified as a liability, the following is a summary of the periodic changes in their fair value during the six months ended June 30, 2020:

|  | June 30, 2020 |
Warrants outstanding January 1, 2020 |  |  | - |
Prefunded warrants issued May 2020 |  |  | 515,000 |
Exercises and conversions |  |  | - |
Warrants outstanding June 30, 2020 |  |  | 515,000 |

The following table summarizes the fair value measurement of the warrant liability.

Base value of warrants, 515,000 warrants at $5 |  | $ | 2,575,000 |
Fair value adjustment |  |  | 236,900 |
Balance at June 30, 2020 |  | $ | 2,811,900 |

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Stock-based Compensation

In 2013, the Company’s Board of Directors adopted a Share Incentive Plan (the “Incentive Plan”). Under the terms and conditions of the Incentive Plan, the Board of Directors is empowered to grant shares (Restricted Stock Units “RSUs”) to officers and directors of the Company. At June 30, 2020, 136,632 shares were granted and outstanding under the Incentive Plan. Directors of the company receives share compensation as follows: (i) an initial grant of 25,000 shares of common stock grant that vest over a three-year period at the appointment to the Board, followed by an annual grant of $30,000 in shares of common stock per annum after full vesting of the initial 25,000 share grant. Further the company have granted shares to management for 2020 as part of the Incentive Plan. Total grant is 92,081 shares that vest over a three-year period.

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

The Company recognized stock-based compensation expense related to share grants of $223,557 and $151,611 for the six months ended June 30, 2020 and 2019, respectively. For the three months period ended June 30, 2020 and 2019 respectively, the stock-based compensation related to share grants was $82,335 and $23,167. On June 30, 2020, the Company had $559,167 of unrecognized compensation cost related to non-vested stock grants.

A summary of the status of the RSU's June 30, 2020 and changes during the period is presented below:

|  | June 30, 2020 |
|  | Number of units |  |  | Weighted Average Grant-Date Fair value |  |  | Aggregated Intrinsic Value |
Outstanding, December 31, 2019 |  |  | 133,747 |  |  | $ | 5.47 |  |  | $ | 50,824 |
Granted |  |  | 19,430 |  |  |  | 5.92 |  |  |  | - |
Vested and settled with share issuance |  |  | (16,545 | ) |  |  | 6.91 |  |  |  | - |
Forfeited |  |  | - |  |  |  | - |  |  |  | - |
Outstanding, June 30, 2020 |  |  | 136,632 |  |  | $ | 5.36 |  |  | $ | 13,663 |

Stock Options

In August 2015, the Company’s Board of Directors adopted a Stock Option Plan (the “Plan”). Under the terms and conditions of the Plan, the Board of Directors is empowered to grant stock options to employees, officers, and directors of the Company. At June 30, 2020, 25,000 options were granted and outstanding under the Plan.

The Company recognizes compensation costs for stock option awards to employees based on the 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 options of $0 for the six months ended June 30, 2020 and 2019. On June 30, 2020, the Company had $0 of unrecognized compensation cost related to non-vested options.

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A summary of the status of the options outstanding under the Company’s stock option plans on June 30, 2020 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 |  |  |  | 0.12 |  |  | $ | 2.96 |  |  |  | 25,000 |  |  | $ | 2.96 |
Total |  |  |  | 25,000 |  |  |  | 0.12 |  |  | $ | 2.96 |  |  |  | 25,000 |  |  | $ | 2.96 |

A summary of the status of the options on June 30, 2020 and changes during the period is presented below:

|  | June 30, 2020 |
|  | Shares |  |  | Weighted Average Exercise Price |  |  | Average Remaining Life |  |  | Weighted Average Intrinsic Value |
Outstanding at beginning of period |  |  | 25,000 |  |  | $ | 2.96 |  |  |  | 0.62 |  |  | $ | 72,250 |
Granted |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Exercised |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Forfeited |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Expired |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Outstanding at end of period |  |  | 25,000 |  |  | $ | 2.96 |  |  |  | 0.12 |  |  | $ | 62,500 |
Vested and expected to vest |  |  | 25,000 |  |  | $ | 2.96 |  |  |  | 0.12 |  |  | $ | 62,500 |
Exercisable end of period |  |  | 25,000 |  |  | $ | 2.96 |  |  |  | 0.12 |  |  | $ | 62,500 |

NOTE 8 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE

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

|  | For the Three Months |  |  | For the Six Months |
|  | Ended June 30, |  |  | Ended June 30, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Customer A |  |  | 18 | % |  |  | 33 | % |  |  | 30 | % |  |  | 30 | %
Customer B |  |  | 15 | % |  |  | * |  |  |  | 13 | % |  |  | * |
Customer D |  |  | * |  |  |  | 10 | % |  |  | * |  |  |  | 12 | %
Customer E |  |  | * |  |  |  | 43 | % |  |  | * |  |  |  | 33 | %

* Zero or less than 10%

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

|  | June 30, 2020 |  |  | December 31, 2019 |
Customer A |  |  | 26 | % |  |  | 39 | %
Customer B |  |  | 25 | % |  |  | 15 | %
Customer C |  |  | * |  |  |  | 17 | %
Customer D |  |  | 11 | % |  |  | * |

* Zero or less than 10%

As of June 30, 2020, approximately 97% and 3% of the Company’s assets were located in Denmark and the United States, respectively. As of December 31, 2019, approximately 91% and 9% of the Company’s assets were located in Denmark and the United States, respectively.

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NOTE 9 - SUBSEQUENT EVENTS

On July 8, 2020 the Company issued a total of 3,100 shares in connection with employees exercising options 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 $9,176.

In March 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid- March, we elected to temporarily introduce two shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, most of our employees were working remotely during the shutdown. However since the beginning of May, the businesses in Denmark have been opening up as the effect of COVID-19 has largely been constrained and the number of infections and fatalities decreased significantly.

We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, result of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures implemented to avoid the spread of the virus did have a material adverse impact on our financial results for the second quarter of 2020. We have taken precautionary measures to reduce and/or defer operating expenses and preserve liquidity. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for the next 12 months from the issuance of this quarterly report. In addition, as a result of reduced order intake and decreased manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in 2020.

While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products and transportation restrictions, especially if it results in a prolonged global recession

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

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report. In addition, the following discussion should be read in conjunction with our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 30, 2020 and the financial statements and notes thereto. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Overview

LiqTech International, Inc. is a clean technology company that provides state-of-the-art products 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 (DPFs) 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 that facilitate new applications and improve existing technologies. We market our products from our offices in the United States and Denmark and through local representatives and distributors. 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 Holding A/S (formerly known as LiqTech International A/S), a Danish limited company organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“LiqTech Holding”), together with its direct wholly owned subsidiaries LiqTech Water A/S (formerly known as LiqTech Systems A/S) (“LiqTech Water”), LiqTech Ceramics A/S (“LiqTech Ceramics”) and LiqTech Plastics A/S (formerly known as BS Plastic A/S) (“LiqTech Plastics”), three Danish limited companies organized under the Danish Act on Limited Companies of the Kingdom of Denmark and LiqTech NA, Inc., a Delaware corporation (“LiqTech Delaware”). Collectively, LiqTech USA, LiqTech Holding, LiqTech Water, LiqTech Ceramics, LiqTech Plastics and LiqTech Delaware are referred to herein as our “Subsidiaries”.

We conduct operations in the Kingdom of Denmark and the United States. Our Danish operations are located in the Copenhagen area, Hobro and Aarhus, and our U.S. operations are conducted 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:

| ● | Maintain and gain new marine industry customers. We currently provide water filtration systems for scrubber technology providers, ship owners and ship operators. We are expanding our range of marine products to better leverage existing customer relationships.
| ● | Enter new geographic markets and expand existing markets. We plan to continue to manufacture and sell our products from our core operations in Denmark. We work with distributors, agents and partners to access other important geographic markets.
| ● | Strengthen our position in the DPF market. We believe that we have a strong position in the retrofit market for diesel particulate filter (DPF) systems. 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.
| ● | Develop and improve technologies and enter new end markets. We intend to continue to develop our ceramic membranes and improve the 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.
| ● | Focus on the development and sales of standardized water filtration and treatment systems. We will continue our focus on selling systems based on our unique SiC Filters. We will also combine the ceramic membranes with other technologies 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.

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Developments

Results of Operations

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

Comparison of the Three Months Ended June 30, 2020 and June 30, 2019

The following table sets forth our revenues, expenses and net income for the three months ended June 30, 2020 and 2019:

|  | Three Months Ended June 30, |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Period to Period Change |
|  | 2020 |  |  | As a % of Sales |  |  | 2019 |  |  | As a % of Sales |  |  | US$ |  |  | Percent % |
Revenue |  |  | 4,641,483 |  |  |  | 100.0 | % |  |  | 9,297,186 |  |  |  | 100.0 | % |  |  | (4,655,703 | ) |  |  | (50.1 | )%
Cost of Goods Sold |  |  | 4,147,020 |  |  |  | 89.3 |  |  |  | 7,222,076 |  |  |  | 77.7 |  |  |  | (3,075,056 | ) |  |  | (42.6 | )
Gross Profit |  |  | 494,463 |  |  |  | 10.7 |  |  |  | 2,075,110 |  |  |  | 22.3 |  |  |  | (1,580,647 | ) |  |  | (76.2 | )
Operating Expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling expenses |  |  | 605,947 |  |  |  | 13.1 |  |  |  | 514,037 |  |  |  | 5.5 |  |  |  | 91,900 |  |  |  | 17.9 |
General and administrative expenses |  |  | 1,509,772 |  |  |  | 32.5 |  |  |  | 1,001,179 |  |  |  | 10.8 |  |  |  | 508,593 |  |  |  | 50.8 |
Research and development expenses |  |  | 316,559 |  |  |  | 6.8 |  |  |  | 199,184 |  |  |  | 2.1 |  |  |  | 117,375 |  |  |  | 58.9 |
Total Operating Expenses |  |  | 2,432,278 |  |  |  | 52.4 |  |  |  | 1,714,400 |  |  |  | 18.4 |  |  |  | 717,878 |  |  |  | 41.9 |
Profit (Loss) from Operation |  |  | (1,937,815 | ) |  |  | (41.7 | ) |  |  | 360,710 |  |  |  | 3.9 |  |  |  | (2,298,525 | ) |  |  | (637.2 | )
Other Income (Expense) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest and other income |  |  | 247 |  |  |  | 0.0 |  |  |  | 18,173 |  |  |  | 0.2 |  |  |  | (17,926 | ) |  |  | (98.6 | )
Interest (expense) |  |  | (36,047 | ) |  |  | (0.8 | ) |  |  | (3,760 | ) |  |  | (0.0 | ) |  |  | (32,287 | ) |  |  | 858.7 |
Fair value adjustment of warrants |  |  | (236,900 | ) |  |  | (5.1 | ) |  |  | - |  |  |  | - |  |  |  | (236,900 | ) |  |  | - |
Gain (loss) on currency transactions |  |  | (368,561 | ) |  |  | (7.9 | ) |  |  | (206,718 | ) |  |  | (2.2 | ) |  |  | (161,843 | ) |  |  | 78.3 |
Gain (loss) on sale of fixed assets |  |  | - |  |  |  | - |  |  |  | (21,619 | ) |  |  | (0.2 | ) |  |  | 21,619 |  |  |  | 100.0 |
Total Other Income (Expense) |  |  | (641,261 | ) |  |  | (13.8 | ) |  |  | (213,924 | ) |  |  | (2.3 | ) |  |  | (427,337 | ) |  |  | 199.8 |
Profit (loss) Before Income Taxes |  |  | (2,579,076 | ) |  |  | (55.6 | ) |  |  | 146,786 |  |  |  | 1.6 |  |  |  | (2,725,863 | ) |  |  | (1,857.0 | )
Income Taxes Expense (Income) |  |  | (15,265 | ) |  |  | (0.3 | ) |  |  | - |  |  |  | - |  |  |  | (15,265 | ) |  |  | - |
Net Profit (loss) |  |  | (2,563,811 | ) |  |  | (55.2 | ) |  |  | 146,786 |  |  |  | 1.6 |  |  |  | (2,710,598 | ) |  |  | (1,846.6 | )

Revenues

Revenue for the three months ended June 30, 2020 was $4,641,483 compared to $9,297,186 for the same period in 2019, representing a decrease of $4,655,703 or 50%. The change in sales consists of a decrease in sales of liquid filters of $5,901,426, offset by an increase in sales DPFs of $413,460, an increase in sales of plastics of $762,384, and an increase in sales of development projects of $69,878.. The decrease in sales of liquid filters and water treatment systems is a result of the negative impact of the COVID-19 virus that has caused a significant decrease in new orders since the start of 2020. The increase in demand for our DPFs is due to an increased interest in environmental solutions to reduce the CO2-emmissions globally. The increase in sales of plastic components is related to the newly acquired business in 2019.

Gross Profit

Gross profit for the three months ended June 30, 2020 was $494,463 compared to gross profit of $2,075,110 for the same period in 2019, representing a decrease of $1,580,647 or 76%. The decrease in gross profit is due to the decrease in sales of liquid filters and water treatment systems where sales command a higher gross margin. This resulted in the Gross profit being negatively impacted by costs related to the investments in additional employees, improvement of the business facilities and other fixed costs included in Cost of good sold, and therefore had the consequence of a decrease in gross profit due to the decline in Revenue. Included in the gross profit is depreciation of $491,374 and $246,846 for the three months ended June 30, 2020 and 2019, respectively.

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Expenses

Total operating expenses for the three months ended June 30, 2020 were $2,432,278, representing an increase of $717,878, or 42%, compared to $1,714,400 for the same period in 2019.

Selling expenses for the three months ended June 30, 2020 were $605,947 compared to $514,037 for the same period in 2019, representing an increase of $91,910 or 18%. This change is attributable to the addition of new sales employees from an average of 9 in 2019 to an average of 12 in 2020. Other expenses related to the update of the company’s website and other marketing materials have also resulted in increased selling expenses.

General and administrative expenses for the three months ended June 30, 2020 were $1,509,772 compared to $1,001,179 for the same period in 2019, representing an increase of $508,593, or 51%. This change is attributable to the addition of administrative employees, where the number of employees increased from 12 in 2019 to 23 in 2020. The increase in the number of employees also created additional IT and office costs. Included in general and administrative expenses is non-cash compensation expenses, that were $82,335 and $23,167 for the three months ended June 30, 2020 and June 30, 2019, representing an increase of $59,168 or 255%, attributable to stock grants to members of the Board and management.

The following is a summary of non-cash compensation:

|  | For the Three Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2020 |  |  | 2019 |
Compensation for vesting of restricted stock awards issued to the Board of Directors |  | $ | 40,668 |  |  | $ | 23,167 |
Compensation for vesting of restricted stock awards issued to management |  |  | 41,667 |  |  |  | - |
Total Non-Cash Compensation |  | $ | 82,335 |  |  | $ | 23,167 |

Research and development expenses for the three months ended June 30, 2020 were $316,559 compared to $199,184 for the same period in 2019, representing an increase of $117,375, or 59%. This change is attributable to an increase in the number of employees engaged in research and development activities as the Company focuses on the further development of existing and new products for the marine industry.

Net Income (Loss)

Net income (loss) for the three months ended June 30, 2020 was $(2,563,811) compared to $146,786 for the comparable period in 2019, representing a decrease of $2,710,597.

This change was primarily attributable to the significant decrease in revenue and the increase in operating expenses caused primarily by the growth in headcount to support additional sales and production that unfortunately did not persist in the second quarter due to impacts associated with COVID-19. Further losses on currency translations due to the negative impact of the USD/DKK exchange rate and the negative fair value adjustment of $236,900 related to the prefunded warrant liability have influenced the Net Loss for the period.

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Comparison of the Six Months Ended June 30, 2020 and June 30, 2019

The following table sets forth our revenues, expenses and net income for the six months ended June 30, 2020 and 2019:

|  | Six Months Ended June 30, |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Period to Period Change |
|  | 2020 |  |  | As a % of Sales |  |  | 2019 |  |  | As a % of Sales |  |  | $ |  |  | Percent % |
Revenue |  |  | 14,923,327 |  |  |  | 100.0 | % |  |  | 16,718,384 |  |  |  | 100.0 | % |  |  | (1,795,057 | ) |  |  | (10.7 | )%
Cost of Goods Sold |  |  | 11,789,788 |  |  |  | 79.0 |  |  |  | 13,168,194 |  |  |  | 78.8 |  |  |  | (1,378,406 | ) |  |  | (10.5 | )
Gross Profit |  |  | 3,133,539 |  |  |  | 21.0 |  |  |  | 3,550,190 |  |  |  | 21.2 |  |  |  | (416,651 | ) |  |  | (11.7 | )
Operating Expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling expenses |  |  | 1,282,747 |  |  |  | 8.6 |  |  |  | 997,623 |  |  |  | 6.0 |  |  |  | 285,124 |  |  |  | 28.6 |
General and administrative expenses |  |  | 3,059,530 |  |  |  | 20.5 |  |  |  | 1,808,427 |  |  |  | 10.8 |  |  |  | 1,251,103 |  |  |  | 69.2 |
Research and development expenses |  |  | 627,513 |  |  |  | 4.2 |  |  |  | 402,356 |  |  |  | 2.4 |  |  |  | 225,157 |  |  |  | 56.0 |
Total Operating Expenses |  |  | 4,969,790 |  |  |  | 33.3 |  |  |  | 3,208,406 |  |  |  | 19.2 |  |  |  | 1,761,384 |  |  |  | 54.9 |
Profit (Loss) from Operations |  |  | (1,836,251 | ) |  |  | (12.3 | ) |  |  | 341,784 |  |  |  | 2.0 |  |  |  | (2,178,035 | ) |  |  | (637.3 | )
Other Income (Expense) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest and other income |  |  | 4,737 |  |  |  | 0.0 |  |  |  | 25,450 |  |  |  | 0.2 |  |  |  | (20,713 | ) |  |  | (81.4 | )
Interest (expense) |  |  | (61,538 | ) |  |  | (0.4 | ) |  |  | (6,025 | ) |  |  | (0.0 | ) |  |  | (55,513 | ) |  |  | 921.4 |
Fair value adjustment of warrants |  |  | (236,900 | ) |  |  | (1.6 | ) |  |  | - |  |  |  | - |  |  |  | (236,900 | ) |  |  | - |
Loss on currency transactions |  |  | (160,934 | ) |  |  | (1.1 | ) |  |  | (158,560 | ) |  |  | (0.9 | ) |  |  | (2,374 | ) |  |  | 1.5 |
Gain (loss) on sale of fixed assets |  |  | - |  |  |  | - |  |  |  | (21,619 | ) |  |  | (0.1 | ) |  |  | 21,619 |  |  |  | (100.0 | )
Total Other Income (Expense) |  |  | (454,635 | ) |  |  | (3.0 | ) |  |  | (160,754 | ) |  |  | (1.0 | ) |  |  | (293,881 | ) |  |  | 182.8 |
Profit (Loss) Before Income Taxes |  |  | (2,290,886 | ) |  |  | (15.4 | ) |  |  | 181,030 |  |  |  | 1.1 |  |  |  | (2,471,916 | ) |  |  | (1,365.5 | )
Income Taxes Expense (Income) |  |  | (30,574 | ) |  |  | (0.2 | ) |  |  | - |  |  |  | - |  |  |  | (30,574 | ) |  |  | - |
Net Profit (Loss) |  |  | (2,260,312 | ) |  |  | (15.1 | ) |  |  | 181,030 |  |  |  | 1.1 |  |  |  | (2,441,342 | ) |  |  | (1,348.6 | )

Revenues

Revenue for the six months ended June 30, 2020 was $14,923,327 compared to $16,718,384 for the same period in 2019, representing a decrease of $1,795,057 or 11%. The change in sales consists of a decrease in sales of liquid filters and water treatment systems of $2,961,472 and a decrease of sales in DPFs of $269,745 offset by an increase in sales of plastics of $1,343,794 and an increase in sales of development projects of $92,366. The increase in sales of plastic components is related to the newly acquired business in 2019. The decrease in demand for our liquid filters and water treatment systems is mainly due to impacts of the ongoing COVID-19 pandemic, which have resulted in significant restrictions and business limitations across the globe causing a significant decline in delivery of water treatment systems for the marine scrubber industry. The decrease in demand for our DPFs is mainly due to the relative decline in sales realized in the first quarter of 2020 compared to 2019 and even though sales in the second quarter of 2020 improved compared to 2019, accumulated sale of DPFs for the six months ended June 30, 2020 is 9% lower than the same period in 2019.

Gross Profit

Gross profit for the six months ended June 30, 2020 was $3,133,539 compared to gross profit of $3,550,190 for the same period in 2019, representing a decrease of $416,651 or 12%. The decrease in gross profit is due to the decline in sales of liquid filters and water treatment systems, where sales command a higher gross margin. Included in the gross profit is depreciation of $907,639 and $554,129 for the six months ended June 30, 2020 and 2019, respectively.

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Expenses

Total operating expenses for the six months ended June 30, 2020 were $4,969,790, representing an increase of $1,761,384, or 55%, compared to $3,208,406 for the same period in 2019.

Selling expenses for the six months ended June 30, 2020 were $1,282,747 compared to $997,623 for the same period in 2019, representing an increase of $285,124, or 29%. This change is attributable to the addition of new sales employees from an average of 8 in 2019 to an average of 12 in 2020.

General and administrative expenses for the six months ended June 30, 2020 were $3,059,530 compared to $1,808,427 for the same period in 2019, representing an increase of $1,251,103, or 69%. This change is attributable to the addition of administrative employees, where the number of employees increased from 12 in 2019 to 25 in 2020. The increase in the number of employees also created additional IT and office costs. Included in general and administrative expenses is Non-cash compensation expenses, that were $223,557 and $151,611 for the six months ended June 30, 2020 and June 30, 2019, representing an increase of $71,946 or 47%, attributable to stock grants to members of the Board and management.

The following is a summary of non-cash compensation:

|  | For the Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2020 |  |  | 2019 |
Compensation for vesting of restricted stock awards issued to the Board of Directors |  | $ | 126,334 |  |  | $ | 151,611 |
Compensation for vesting of restricted stock awards issued to management |  |  | 97,223 |  |  |  | - |
Total Non-Cash Compensation |  | $ | 223,557 |  |  | $ | 151,611 |

Research and development expenses for the six months ended June 30, 2020 were $627,513 compared to $402,356 for the same period in 2019, representing an increase of $225,157, or 56%. This change is attributable to an increase in the number of employees engaged in research and development activities as the Company focuses on the further development of existing and new products for the marine industry.

Net Income (Loss)

Net income (loss) for the six months ended June 30, 2020 was $(2,260,312) compared to $181,030 for the comparable period in 2019, representing a decrease of $2,441,342.

This change was primarily attributable to the significant decrease in revenue and the increase in operating expenses caused primarily by the growth in headcount to support additional sales and production. Further losses on currency translations due to the negative impact of the USD/DKK exchange rate and the negative fair value adjustment of $236,900 related to the prefunded warrant liability have influenced the Net Loss for the period.

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Liquidity and Capital Resources

In March 2020, the World Health Organization declared the outbreak of novel corona virus ("COVID-19"), a pandemic which has resulted in authorities across the globe implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. In response to measures taken by state and local governments in mid-March, we elected to temporarily introduce 2-shifts at our production facilities to minimize the risk of infection and to implement health and safety actions recommended by government and health officials to better protect our employees who are required to be present at our production facilities. In addition, the majority of our employees were working remotely during the shutdown. However since the beginning of May, the majority of the businesses in Denmark have been opening up as the effect of the COVID-19 had been constrained and the number of diseases and fatalities were going down to a minimum, which resulted in an incremental opening of social and business environment.

We are unable to accurately predict the full impact that COVID-19 will have on our long-term financial condition, result of operations, liquidity and cash flows due to uncertainties, and our compliance with the measures taken to avoid the spreading of the virus did have a material adverse impact on our financial results for the second quarter of the fiscal year 2020. We have taken precautionary measures to manage our resources conservatively by reducing and/or deferring capital and operating expenses to mitigate any potential adverse impacts of the pandemic as well as to conserve cash. Based on current projections, which are subject to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the effect of these on the industries in which we compete, we believe our cash on hand, as well as our ongoing cash generated from operations, should be sufficient to cover our capital requirements for the next 12 months from the issuance of this quarterly report. In addition, as a result of reduced order intake and reduced manufacturing levels, our future gross profit will likely be impacted until such time that we are able to operate our manufacturing facilities as originally planned prior to the COVID-19 pandemic. Notwithstanding the reduction in our manufacturing levels, based on our current rate of production, we believe that we will be able to fulfill most, if not all, of our existing delivery obligations in fiscal year 2020.

While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and our business may be adversely impacted as a result of the pandemic’s global economic impact. In the future, the pandemic may cause reduced demand for our products if it results in a recessionary global economic environment. It could also lead to volatility in access to our products due to government actions impacting our ability to produce and ship products.

We have historically satisfied our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. At the filing date, the Company had an available line of credit from the bank amounting to DKK20,000,000 ($3,000,000), which is used for a leasing arrangement and guarantees issued to customers for prepayments and for warranties after delivery.

Additionally, on May 21, 2020, the Company completed a Securities Purchase Agreement with certain accredited investors in a private placement pursuant to which the Company issued and sold an aggregate of 1,085,000 shares of common stock, par value $0.001 per share, at a purchase price of $5.00 per share for gross proceeds of $4,744,048 including costs of $680,952 for placement fee, lawyer fee, auditor fee and other cost related to the capital raise, and a prefunded warrant to purchase an aggregate of 515,000 shares of Common Stock, at a purchase price of $5.00 per share for gross proceeds of $2,575,000.

On June 30, 2020, we had cash of $16,230,269 and net working capital of $21,400,770, and at December 31, 2019, we had cash of $9,783,932 and net working capital of $17,155,126. On June 30, 2020, our net working capital has increased by $4,245,644 compared to December 31, 2019 primarily related to the increase in cash as a result of the private placement in May 2020.

In connection with certain orders, we provide the customer a working guarantee, a prepayment guarantee or a security bond. For that purpose, we maintain a guarantee credit line of DKK10,000,000 (approximately $1,500,000). The credit line is secured by a cash deposit of $2,700,000. Further, we have a guarantee for a specific project delivered in 2016 of DKK 94,620 (approximately $14,217 at June 30, 2020) with a bank, subject to certain base limitations. 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.

Cash Flows

Six months ended June 30, 2020 compared to six months ended June 30, 2019

Cash provided (used) by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities for the six months ended June 30, 2020 was $1,229,936, representing an increase of $6,300,563 compared to cash used by operating activities of $5,070,627 for the six months ended June 30, 2019. The change in cash provided by operating activities for the six months ended June 30, 2020 was mainly due to reductions in Account receivable of $8,972,271 and Contract assets/liabilities (net) of $2,180,120, off-set by the decrease in Net Income (Loss) of $(2,353,792) and a decrease in Accounts payable of $4,860,284.

Net cash used in investing activities was $2,194,618 for the six months ended June 30, 2020 as compared to net cash used in investing activities of $327,559 for the six months ended June 30, 2019, representing an increase of $1,867,059. This increase was due primarily to the purchase of property and equipment related to the installation of new furnaces in Ballerup to increase production capacity.

Cash provided by financing activities was $7,302,077 for the six months ended June 30, 2020 as compared to net cash provided by financing activities of $14,799,350 for the six months ended June 30, 2019. This change of $7,497,273 was mainly due to net cash proceeds of $7,319,050 related to the capital raise in May 2020 compared to net proceeds of $14,807,938 from the capital raise in May 2019.

Off Balance Sheet Arrangements

As of June 30, 2020, we had no off-balance sheet arrangements. We are not aware of any material transactions that are not disclosed in our consolidated financial statements.

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Significant Accounting Policies and Critical Accounting Estimates

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

| ● | The assessment of revenue recognition, which impacts revenue and cost of sales;
| ● | the assessment of allowance for product warranties, which impacts gross profit;
| ● | the assessment of collectability of accounts receivable, which impacts operating expenses when and if we record bad debt or adjust the allowance for doubtful accounts;
| ● | the assessment of recoverability of long-lived assets, which impacts gross profit or operating expenses when and if we record asset impairments or accelerate their depreciation;
| ● | the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes;
| ● | the valuation of inventory, which impacts gross profit; and
| ● | the recognition and measurement of loss contingencies, which impact gross profit or operating expenses when we recognize a loss contingency, revise the estimate for a loss contingency, or record an asset impairment.

Recently Enacted Accounting Standards

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

Subsequent Events

On July 8, 2020 the Company issued a total of 3,100 shares in connection with employees exercising options 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 $9,176.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and effectiveness of our internal controls over financial reporting and disclosure controls and procedures (pursuant to Rule 13a-15(b) and (c) under the Exchange Act) as of the end of the period covered by this Quarterly Report. We have excluded the acquired company BS Plastic from the assessment of internal controls over financial reporting as of June 30, 2020 due to the limited time that the Company has been part of the LiqTech Group and an immaterial impact on the consolidated financial statements. A weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a misstatement of the registrant's financial statements will not be prevented or detected on a timely basis.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or override of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives

Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of June 30, 2020 were not effective as of the period covered by this Quarterly Report due to material weaknesses in internal controls over financial reporting. For more information on material weaknesses identified by management, please reference our Form 10-K filed on March 30, 2020 for the year ended December 31, 2019.

Changes in Internal Control over Financial Reporting

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

Management's Remediation Initiatives

In response to the identified material weaknesses, our management, with oversight from the Company’s Audit Committee, has been and will continue to dedicate necessary resources to enhance the Company’s internal control over financial reporting and remediate the identified material weaknesses. As an example of such remediation, the Company in 2019 hired additional employees into the finance department, and we plan to continue to work on remediating the material weaknesses during 2020 by improving competencies and processes. Further, an investment in a new ERP system has been made along with other supporting IT programs to support the controls and processes of the Company, are an important part of the remediation of the material weaknesses. Lastly, the Company has started the process of redesigning and ensuring documentation of all processes and procedures related to the financial reporting process to ensure the effective design and operation of process-level controls.

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

Limitations on the Effectiveness of Internal Controls

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

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not required for a “smaller reporting company.”

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

4.1 | Form of Pre-Funded Warrant | Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K as filed with the SEC on June 2, 2020
10.1 | Form of Securities Purchase Agreement, by and among the Company and the purchasers named therein | Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K as filed with the SEC on June 2, 2020
10.2 | Form of Registration Rights Agreement, by and among the Company and the investors named therein | Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K as filed with the SEC on June 2, 2020
31.1 | Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith
31.2 | Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith
32.1 | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002 | Furnished herewith
32.2 | Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002 | Furnished herewith
101. INS | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | Filed herewith
101. CAL | Inline XBRL Taxonomy Extension Calculation Link base Document | Filed herewith
101. DEF | Inline XBRL Taxonomy Extension Definition Link base Document | Filed herewith
101. LAB | Inline XBRL Taxonomy Label Link base Document | Filed herewith
101. PRE | Inline XBRL Extension Presentation Link base Document | Filed herewith
101. SCH | Inline XBRL Taxonomy Extension Scheme Document | Filed herewith
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |

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SIGNATURES

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

| LiqTech International, Inc. |
Dated: August 10, 2020 | /s/ Sune Mathiesen |
| Sune Mathiesen, Chief Executive Officer |
| (Principal Executive Officer) |
Dated: August 10, 2020 | /s/ Claus Toftegaard |
| Claus Toftegaard, Chief Financial Officer |
| (Principal Financial and Accounting Officer) |

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