LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended ~~June 30, 2019~~March 31, 2020

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	4

Condensed Consolidated Balance Sheets as of ~~June 30, 2019~~March 31, 2020 (unaudited) and December 31, ~~2018~~2019	4

Condensed Consolidated Statements of Operations and Comprehensive ~~Income~~Loss for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and March 31, 2019 ~~and June 30, 2018~~ (unaudited)	6

Condensed Consolidated Statement of Stockholder’s Equity for the period ~~Ended June 30,~~ended March 31, 2020 and March 31, 2019 ~~and June 30, 2018~~ (unaudited)	8

Condensed Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30, 201~~9March 31, 2020 and ~~June 3~~0~~, 201~~8March 31, 2019 (unaudited)	9

Notes to C~~ondensed Consolidated~~Condensed Consolidated Financial Statements (unaudited)	11

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	2223

Item 3. Quantitative and Qualitative Disclosures About Market Risk	28

Item 4. Controls and Procedures	28

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	29

~~PART II. OTHER INFORMATION~~Item 1A. Risk Factors	29

Item ~~1. Legal Proceedings~~2. Unregistered Sales of Equity Securities and Use of Proceeds	30 29

Item ~~1A. Risk Factors~~3. Defaults Upon Senior Securities	29

Item 4. Mine Safety Disclosures	29

Item 5. Other Information	29

Item 6. Exhibits	30

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~	30

~~Item 3. Defaults Upon Senior Securities~~		30

~~Item 4. Mine Safety Disclosures~~		30

~~Item 5. Other Information~~		30

~~Item 6. Exhibits~~SIGNATURES		31

~~SIGNATURES~~		32

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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, ~~2018.~~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. 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.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

C~~ONDENSED C~~~~ONSOLIDATED~~CONDENSED CONSOLIDATED BALANCE SHEETS

As of

As of

June 30,

December 31,

2019

2018

(Unaudited)

Current Assets:

Cash
$ 12,572,856 $ 3,776,111
Cash, restricted
783,499 -
Accounts receivable, net
8,460,159 1,308,122
Other receivables
3,303,504 1,098,796
Deposits
1,203,216 -
Contract assets
506,329 624,275
Inventories, net
4,713,656 4,432,055
Prepaid expenses
201,880 133,847

Total Current Assets
31,745,099 11,373,206

Property and Equipment, net accumulated depreciation
1,451,422 1,431,649
Operating lease right-of-use asset
1,925,645 -
Total Property and Equipment and right of use assets 3,377,067 1,431,649

Other Assets:

Investments at cost
5,680 5,714
Other intangible assets
- 748
Deposits
445,656 347,932

Total Other Assets
451,336 354,394

Total Assets
$ 35,573,502 $ 13,159,249

Assets	As of		As of
	March 31,		December 31,
	2020		2019
	(Unaudited)
Current Assets:
Cash, cash equivalents and restricted cash	$	6,299,042	$	9,783,932
Accounts receivable, net of allowance for doubtful accounts of $599,863 and $612,434 at March 31, 2020 and December 31, 2019, respectively		8,042,101		6,272,760
Inventories, net of allowance for excess and obsolete inventory of $654,895 and $665,308 at March 31, 2020 and December 31, 2019, respectively		5,324,499		5,199,238
Contract assets		5,137,111		5,664,929
Prepaid expenses and other current assets		822,306		566,398

Total Current Assets		25,625,059		27,487,257

Long-Term Assets:
Property and Equipment, net		5,529,919		4,825,952
Operating lease right-of-use assets		4,876,698		5,053,614
Deposits and other		488,656		498,053
Intangible assets, net		456,517		488,716
Goodwill		231,285		236,131

Total Long-Term Assets		11,583,075		11,102,466

Total Assets	$	37,208,134	$	38,589,723

~~(Continued)~~

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

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LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

C~~ONDENSED C~~~~ONSOLIDATED~~CONDENSED CONSOLIDATED BALANCE SHEETS

Liabilities and Stockholders’ Equity	As of			As of			As of			As of
	June 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019
	(Unaudited)						(Unaudited)
Current Liabilities:
Current maturities of finance lease obligations	$	5,201		$	13,789
Current maturities of operating lease liabilities		603,152			-
Accounts payable		4,717,535			2,122,479		$	3,226,114		$	4,339,070
Accrued expenses		3,008,933			1,868,229			3,290,386			3,222,951
Current portion of finance lease obligations								34,403			34,772
Current maturities of operating lease liabilities								985,360			999,685
Current portion of contingent earn-out								293,436			299,585
Contract liabilities		1,466,645			516,335			1,351,666			1,421,376
Deferred revenue / customers deposits		571,777			98,781
Income taxes payable								14,402			14,692

Total Current Liabilities		10,373,243			4,619,613			9,195,767			10,332,131

Deferred tax liability								316,587			338,763
Finance lease obligations, net of current portion								160,006			172,273
Operating lease liabilities, net of current maturities		1,352,749			-			3,994,609			4,141,855
Contingent earn-out, net of current portion								586,872			599,170

Total Long-term Liabilities		1,352,749			-			5,058,074			5,252,061

Total Liabilities		11,725,992			4,619,613			14,253,841			15,584,192

Commitment and Contingencies		-			-

Stockholders' Equity:
Preferred stock; par value $0.001, 2,500,000 shares authorized; no shares issued or outstanding at June 30, 2019 and December 31, 2018 respectively		-			-
Common stock; par value $0,001, 25,000,000 shares authorized, 20,547,668 and 18,228,887 (each after the 4-to-1 reverse stock split) shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		20,548			18,229
Series A Mandatory Convertible Preferred stock; par value $0.001, 2,500,000 shares authorized, 0 and 0 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively								-			-
Common stock; par value $0.001, 25,000,000 shares authorized, 20,555,880 and 20,547,668 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively								20,556			20,548
Additional paid-in capital		61,538,883			46,575,986			61,539,364			61,398,150
Accumulated deficit		(32,105,194	)		(32,286,224	)		(31,943,109	)		(32,246,608	)
Deferred compensation		(29,166	)		(23,499	)
Accumulated other comprehensive income, net		(5,577,561	)		(5,744,856	)
Accumulated other comprehensive loss								(6,662,518	)		(6,166,559	)

Total Stockholders' Equity		23,847,510			8,539,636			22,954,293			23,005,531

Total Liabilities and Stockholders' Equity	$	35,573,502		$	13,159,249		$	37,208,134		$	38,589,723

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

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

For the period ended ~~June 30, 2018~~March 31, 2019 and ~~June 30, 2019~~March 31, 2020

Inventory --– Inventory directly purchased is carried at the lower of cost or ~~market,~~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.

Unbilled receivables – Unbilled receivables 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. Also included in unbilled receivables are short-term receivables such as Contract Assets, VAT etc.

Leases -- The Company leases certain vehicles, real property and office equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating lease or finance lease for financial reporting purposes. The assets and liabilities under finance leases are recorded at the lower of the present value of future minimum lease payments or the fair market value of the related assets. Assets under finance leases are amortized using the straight-line method over the initial lease term. Amortization of assets under finance leases is included in depreciation expense.

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

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

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

~~Long-Term Investments~~Goodwill and Intangible Assets -- ~~Investments in non-consolidated companies~~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 ~~included in long-term investments~~not limited to, the cash flows that an asset is expected to generate in the ~~consolidated balance sheet~~future and the appropriate weighted average cost of capital.

Acquired intangible assets with determinable useful lives are ~~accounted for under~~amortized on a straight-line or accelerated basis over the ~~cost method~~estimated periods benefited, ranging from one to 10 years. Customer relationships and ~~equity method. For these non-quoted investments, we regularly review~~other non-contractual intangible assets with determinable lives are amortized over periods of five years.

The Company evaluates the ~~assumptions underlying~~recoverability of long-lived assets by comparing the ~~operating performance and~~carrying amount of an asset to estimated future net undiscounted cash ~~flow forecasts based on information requested from these privately held companies. Generally, this information may~~flows generated by the asset. If such assets are considered to be ~~more limited, may not be~~impaired, the impairment recognized is measured as ~~timely as and may be less accurate than information available from publicly traded companies. Assessing each investment's~~the amount by which the carrying ~~value requires significant judgment by management. If it is determined that there is an-other-than-temporary decline in~~amount of the assets exceeds the fair value of ~~a non-public equity security, we write down~~ the ~~investment~~assets. The evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not limited to, ~~its fair value~~revenue growth rates, gross profit margins, and ~~record the related write down as an investment loss in the consolidated statement of operations.~~

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

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

The Company sells products throughout the world; sales by geographical region are as follows for the three months ended March 31, 2020 and 2019:

The Company’s sales by product line are as follows for the three months ended March 31, 2020 and 2019:

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 ~~transferred to~~rendered by the ~~customer.~~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 ~~for~~to the right tofor payment from the customer. The Company's standard payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Pre-payments received prior to satisfaction of performance obligations are recorded as a ~~customer deposit~~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 cost-plus margin.

System sales are recognized when the Company transfers control based upon signed acceptance of the system by the customer upon shipment of the system based on the terms of the contract. For the majority of ~~Systems,~~systems, the Company transfers control and recognizes revenue when products are shipped to the customer according to the terms of the contract or purchase order. In connection with the system, it is normal procedure to issue a FAT (Factory Acceptance Test) stating that the customer has accepted the performance of the system as it is being shipped from the production facility in Hobro. As part of the performance obligation, the customer is normally offered commissioning services (final assembly and configuration at a place designated by the customer) and this commissioning is therefore considered a second ~~delivery~~ performance obligation and is valued at cost, ~~based on~~with the ~~contractual performance given~~addition of a standard gross ~~margin rate.~~margin. This second performance ~~delivery~~obligation is recognized as revenue at the time of ~~delivery~~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 ~~Other~~Unbilled Receivables, while the revenue related to the commissioning is recognized as ~~Deferred Income.~~Contract liability.

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

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

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

The ~~Company’s disaggregated revenue~~roll-forward of Contract Assets / Liabilities for the three months ended March 31, 2020 and December 31, 2019 is ~~reported in Note 8.~~as follows:

Advertising Cost-- Costs incurred in connection with advertising of the Company’s products isare expensed as incurred. ~~Such~~Advertising costs are included in sales expenses and total advertising costs amounted to ~~$72,349~~$25,237 and ~~$3,326~~$22,592 for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Research and Development Cost-- The Company expenses research and development costs for the development of new products as incurred. Included in operating expense for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019 were $310,954 and ~~2018 were $402,356 and $345,677,~~$203,172, respectively, of research and development costs.

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

~~Income~~ Income/(Loss) Per Share-- The Company calculates earnings (loss) per share in accordance with FASB ASC 260, Earnings Per Share. Basic earnings per common share (EPS) ~~are~~is based on the weighted average number of common shares outstanding during each period. Diluted earnings per common share ~~are~~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, RSU´s, and warrants that have been granted but have not been exercised.

Stock Options and Awards-- ~~The Company has granted stock options to certain key employees during~~During the years presented in the accompanying consolidated financial statements, ~~(see note 7).~~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. ~~Non-cash~~Stock-based compensation costs of ~~$151,611~~$141,222 and ~~$87,434~~$128,444 have been recognized for the vesting of options and stock awards granted to Directors, management and certain key employees for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Fair Value of Financial Instruments-- The Company accounts for fair value measurements for financial assets and liabilities in accordance with FASB ASC Topic 820. The authoritative guidance, ~~that,~~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 be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

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

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~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ matching contributions were expensed and totaled ~~$5,677~~$3,949 and ~~$5,706,~~$2,621, respectively.

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

On November 20, 2018 a former supplier to Liqtech International ~~A/S~~AS contacted the Company with a claim of ~~DKK448,500~~DKK 448,500 ($68,800) alleging that ~~a former~~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 ~~at June 30, 2019~~as of March 31, 2020 as the Company has meritorious defenses and does not expect the claim to materialize in any payments to the former supplier.

On February 27, 2019, LiqTech Systems ~~A/S~~AS was contacted by a former supplier alleging that the Company owed ~~DKK543,905~~DKK 543,905 ($83,400) for services rendered in ~~2017, the~~2017. The claimant has previously filed a lawsuit to claim payment for the services, which was denied by the Company due to severe errors in the services supplied, and the claim was rejected by a court of law in 2018. Due to the nature of the new claim and the previous ruling from the court of law, no provision has been made ~~at June 30, 2019.~~as of March 31, 2020.

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

Product Warranties - The Company provides a standard warranty on its systems, generally for a period of one to three years after customer acceptance. The Company estimates the costs ~~which~~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 ~~provide~~provides a warranty for up to four years from the date of commissioning. The specific terms and conditions of ~~those~~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 and going forward.

Changes in the Company's current and long-term warranty obligations ~~including deferred revenue on extended warranty contracts~~ included in accrued expenses on the balance sheet, ~~are~~as of March 31, 2020 and December 31, 2019 were as follows:

2019

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

	March 31, 2020			December 31, 2019
Balance at December 31	$	813,288		$	432,225
Warranty costs charged to cost of goods sold		226,079			707,079
Utilization charges against reserve		(51,643	)		(315,556	)
Release of accrual related to expired warranties		-			-
Foreign currency effect		(17,679	)		(10,460	)
Balance at March 31	$	970,045		$	813,288

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 not received the related goods. The total obligation amounts to $3.8 million and the Company has entered into a leasing agreement with the bank to 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.

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NOTE 6 - EARNINGS PER SHARE

The following data shows the amounts used in computing earnings per share and the ~~effect on income and the~~ weighted average number of shares of potential dilutive common stock for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018:~~2019:

	For the Six Months Ended June 30,					For the Three Months Ended March 31,
	2019		2018			2020		2019
Net Gain (Loss) attributable to LiqTech International, Inc.	$	181,030	$	(1,796,815	)
Net Income attributable to LiqTech International Inc.						$	303,499	$	34,244
Weighted average number of common shares used in basic earnings per share		18,742,029		13,682,405			20,554,524		18,267,068
Effect of dilutive securities, stock options and warrants		16,079		-
Effect of dilutive securities, stock options, RSU’s, and warrants							156,511		878,807
Weighted average number of common shares and potential dilutive common shares outstanding used in dilutive earnings per share		18,758,108		13,682,405			20,711,035		19,145,875

For the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Company had 25,000 options outstanding to purchase common stock at $2.96 per share.

For the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, the Company had ~~113,750~~25,000 options outstanding to purchase common stock at $2.96 per share and 100,000 warrants outstanding to purchase common stock at $6.60 per ~~share, which were not included in the loss per share computation because their effect would be anti-dilutive.~~share.

A summary of the status of the options ~~at June 30, 2019,~~on March 31, 2020 and changes during the period is presented below:

NOTE 9 - SUBSEQUENT EVENTS

The Company’s management reviewed material events through ~~August 14, 2019~~May 11, 2020.

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 ~~there were no~~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 have been working remotely since that time.

While 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, our compliance with these measures did not have a material ~~subsequent events~~adverse impact on our financial results for the first quarter of fiscal year 2020. We have, however, begun to take 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 our 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

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

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report. In addition, the following discussion should be read in conjunction with our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on ~~April 1, 2019,~~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

~~We are~~LiqTech International, Inc. is a clean technology company that provides state-of-the-art ~~technologies~~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 ~~(“DPF “ )~~(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 ~~which~~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.~~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 International A/S, a Danish limited company organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“LiqTech Int. DK”), together with its direct wholly owned ~~subsidiary~~subsidiaries LiqTech Systems A/S a(“LiqTech Systems”), LiqTech Ceramics A/S (“LiqTech Ceramics”) and BS Plastic A/S (“BS Plastic”), three Danish limited ~~company,~~companies organized under the Danish Act on Limited Companies of the Kingdom of Denmark ~~(formerly known as Provital, “LiqTech Systems”)~~ and LiqTech NA, Inc., a Delaware corporation (“LiqTech Delaware”). Collectively, LiqTech USA, LiqTech Int. DK, LiqTech Systems, BS Plastic and LiqTech Delaware are referred to herein as our “Subsidiaries”.

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

Our Strategy

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

	●	~~Continue to maintain~~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 and the United States.~~Denmark. We work with distributors, agents and partners to access other important geographic markets.

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

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

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

22
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Table of Contents

Developments

Results of Operations

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

The following ~~tables set~~table sets forth our revenues, expenses and net income for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018:~~2019:

	Three Months Ended June 30,																		Three Months Ended March 31,
													Period to Period Change																		Period to Period Change
	2019			As a % of Sales			2018			As a % of Sales			US$			Percent %			2020			As a % of Sales			2019			As a % of Sales				$		Percent %
Net Sales		9,297,186			100.0	%		3,598,028			100.0	%		5,699,158			158.4	%
Revenue																				10,281,844			100.0	%		7,421,198			100.0	%		2,860,646			38.5	%
Cost of Goods Sold		7,222,076			77.7			2,938,206			81.7			4,283,870			145.8			7,642,768			74.3			5,946,118			80.1			1,696,650			28.5
Gross Profit		2,075,110			22.3			659,822			18.3			1,415,288			214.5			2,639,076			25.7			1,475,080			19.9			1,163,996			78.9

Operating Expenses
Selling expenses		514,037			5.5			463,998			12.9			50,039			10.8			676,800			6.6			483,587			6.5			193,213			40.0
General and administrative expenses		968,437			10.4			582,208			16.2			386,229			66.3			1,470,393			14.3			770,864			10.4			699,529			90.7
Research and development expenses		199,184			2.1			176,281			4.9			22,903			13.0			310,954			3.0			203,172			2.7			107,782			53.0
Total Operating Expenses		1,681,658			18.1			1,222,487			34.0			459,171			37.6			2,458,147			23.9			1,457,623			19.6			1,000,524			68.6

Profit (Loss) from Operation		393,452			4.2			(562,665	)		(15.6	)		956,117			169.9
Income from Operations																				180,929			1.8			17,457			0.3			163,473			936.5

Other Income (Expense)
Interest and other income		18,173			0.2			7,173			0.2			11,000			153.4			4,490			0.0			7,277			0.1			(2,787	)		(38.3	)
Interest (expense)		(36,502	)		(0.4	)		(4,174	)		(0.1	)		(32,328	)		(774.5	)		(104,856	)		(1.0	)		(38,648	)		(0.5	)		(66,208	)		171.3
Gain (loss) on currency transactions		(206,718	)		(2.2	)		296,140			8.2			(502,858	)		(169.8	)
Gain (loss) on sale of fixed assets		(21,619	)		(0.2	)		-			-			(21,619	)		-
Total Other Income (Expense)		(246,666	)		(2.7	)		299,139			8.3			(545,805	)		(182.5	)
Income on currency transactions																				207,627			2.0			48,158			0.6			159,469			331.1
Total Other Income																				107,261			1.0			16,787			0.2			90,474			539.0

Profit (loss) Before Income Taxes		146,786			1.6			(263,526	)		(7.3	)		410,312			155.7
Income Before Income Taxes																				288,190			2.8			34,244			0.5			253,946			741.6
Income Taxes Expense (Income)		-			-			-			-			-			-			(15,309	)		(0.1	)		-			-			(15,309	)		-

Net Profit (loss)		146,786			1.6			(263,526	)		(7.3	)		410,312			155.7
Net Income																				303,499			3.0			34,244			0.5			269,255			786.3

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24

Table of Contents

Six Months Ended June 30,

Period to Period Change

2019

As a %
of Sales

2018

As a %
of Sales
$
Percent
%

Net Sales
16,718,384 100.0
%
5,989,410 100.0
%
10,728,974 179.1
Cost of Goods Sold
13,168,194 78.8 5,389,180 90.0 7,779,014 144.3
Gross Profit
3,550,190 21.2 600,230 10.0 2,949,960 491.5

Operating Expenses

Selling expenses
997,623 6.0 873,790 14.6 123,833 14.2
General and administrative expenses
1,739,302 10.4 1,344,647 22.5 394,655 29.4
Research and development expenses
402,356 2.4 345,677 5.8 56,679 16.4
Total Operating Expenses
3,139,281 18.8 2,564,114 42.8 575,167 22.4

Profit (loss) from Operation
410,909 2.5 (1,963,884
)
(32.8
)
2,374,793 120.9

Other Income (Expense)

Interest and other income
25,450 0.2 10,457 0.2 14,993 143.4
Interest (expense)
(75,150
)
(0.4
)
(60,474
)
(1.0
)
(14,676
)
(24.3
)
Gain (Loss) on currency transactions
(158,560
)
(0.9
)
217,086 3.6 (375,646
)
(173.0
)
Gain (Loss) on sale of fixed assets
(21,619
)
(0.1
)
- - (21,619
)
-
Total Other Income (Expense)
(229,879
)
(1.4
)
167,069 2.8 (396,948
)
(237.6
)

Profit (loss) Before Income Taxes
181,030 1.1 (1,796,815
)
(30.0
)
1,977,845 110.1
Income Taxes Expense (Income)
- - - - - -

Net Profit (loss)
181,030 1.1 (1,796,815
)
(30.0
)
1,977,845 110.1
24
~~Table of Contents~~

Comparison of the Three Months Ended ~~June 30,~~March 31, 2020 and March 31, 2019 ~~and June 30, 201~~8

Revenues

~~Net sales~~Revenue for the three months ended ~~June 30, 2019 were $9,297,186~~March 31, 2020 was $10,281,844 compared to ~~$3,598,028~~$7,421,198 for the same period in ~~2018,~~2019, representing an increase of ~~$5,699,158~~$2,860,646 or ~~158.4%~~38.5%. The ~~increase~~change in sales ~~consisted~~consists of an increase in ~~sales of~~ liquid filters ~~and systems~~ of ~~$6,464,165,~~$2,939,954, an increase in plastics of $581,411, an increase in development projects of $22,487, offset by a decrease in ~~sales~~DPFs of ~~DPF of $726,340 and a decrease in revenue related to development projects of $38,667.~~$683,205. The increase in ~~revenue~~demand for our liquid filters and ~~water treatment~~ systems is due to ~~completion~~the ramp-up in delivery of ~~projects related to~~water treatment systems for the marine scrubber industry. ~~The realized revenue is a record for the Company.~~ The decrease in demand for our ~~DPF~~DPFs is mainly due to ~~a decrease in~~the diminished market activity globally compared to the same period of last year. 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, 2019~~March 31, 2020 was ~~$2,075,110~~$2,639,076 compared to a gross profit of ~~$659,822~~$1,475,080 for the same period in ~~2018,~~2019, representing an increase of ~~$1,415,288~~$1,163,996 or ~~214.5%~~78.9%. The increase in gross profit ~~was~~is due to ~~high sales activity and~~ a ~~better product~~favorable mix ~~with increased sales of~~shift toward liquid filters and ~~water treatment~~ systems, ~~which have~~where sales command a higher gross margin. Included in the gross profit is depreciation of ~~$246,846~~$416,265 and ~~$212,573~~$307,283 for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Expenses

Total operating expenses for the three months ended ~~June 30, 2019~~March 31, 2020 were ~~$1,681,658~~$2,458,147, representing an increase of ~~$459,171~~$1,000,524, or ~~37.6%~~68.6%, compared to ~~$1,222,487~~$1,457,623 for the same period in ~~2018. This increase in operating~~2019.
Selling expenses ~~is attributable~~for the three months ended March 31, 2020 were $676,800 compared to an increase in general and administrative expenses of $386,229, or 66.3%, and increase in selling expenses of $50,039 or 10.8% and an increase in research and development expenses of $22,903, or 13.0%, compared to$483,587 for the same period in ~~2018.~~2019, representing an increase of $193,213 or 40.0%. This change is attributable to the addition of new sales employees from an average of 8 in 2019 to an average of 11 in 2020.

The main reason for the increase in operating expenses is the large number of new additional employees and related expenses (purchase of IT equipment, office furniture, HR consultants etc.). It is especially new project managers, who have been hired to assist with the large increase in sales and new orders.
~~Non-cash compensation, included in general~~General and administrative expenses for the three months ended ~~June 30, 2019~~March 31, 2020 were ~~$23,167,~~$1,470,393 compared to ~~$9,161~~$770,864 for the same period in ~~2018,~~2019, representing an increase of ~~$14,006,~~$699,529, or ~~152.9%~~90.7%. This ~~increase~~change is attributable to the addition of administrative employees, where the number of employees increased ~~non-cash~~from 11 in 2019 to 27 in 2020. The increase in the number of employees also created additional IT-expenses and office costs. Included in general and administrative expenses is Non-cash compensation ~~expense~~expenses, that were $141,222 and $128,444 for ~~restricted share units granted~~the three months ended March 31, 2020 and March 31, 2019, representing an increase of $12,778 or 9.9%, attributable to ~~directors.~~stock grants to members of the Board and the management.

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

For the Three Months
Ended June 30,

2019

2018

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

For the Three Months Ended

March 31,

March 31,

2020

2019

Compensation for vesting of restricted stock awards issued to the Board of Directors
$ 23,167 $ 15,944
Compensation for vesting of restricted stock awards issued to management
55,555 -
Compensation for common shares issued to the Board of Directors and management for services
62,500 112,500
Total Non-Cash Compensation
$ 141,222 $ 128,444

~~Net Income~~
~~Net profit~~Research and development expenses for the three months ended ~~June 30, 2019 was $146,786~~March 31, 2020 were $310,954 compared to a loss of $263,526 for the comparable period in 2018, representing a change of $410,312, or 155.7%. This improvement was attributable to the substantial increase in revenue and gross profit for the three months ending June 30, 2019, compared to the same period in 2018. Offset in Net Profit is Other Income/Expenses which amounts to ($246,666) for the three months ended June 30, 2019 compared to an income of $299,139$203,172 for the same period in ~~2018. The decrease in Net Other Income/Expense of $545,805 is principally related to losses on currency exchanges.~~
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~~Table of Contents~~
~~Comparison of the Six Months Ended June 30, 201~~9 ~~and June 30, 201~~8
~~Revenues~~
~~Net sales for the six months ended June 30,~~ 2019, ~~were $16,718,384 compared to $5,989,410 for the same period in 2018,~~ representing an increase of ~~10,728,974~~$107,782, or ~~179.1%~~53.0%. The increase in sales consisted of an increase in sales of liquid filters and water treatment systems of $11,041,221, a decrease in sales of DPF of $253,565 and a decrease in sales of development projects of $58,683. The increase in revenue for our liquid filters and water treatment systems is due to completion of projects related to the marine scrubber industry. The realized revenue for the first six months of 2019 is a record for the Company. The decrease in demand for our DPF is mainly due to a decrease in market activity compared to the same period last year.
~~Gross Profit~~
Gross profit for the six months ended June 30, 2019 was $3,550,190 compared to a gross profit of $600,230 for same period in 2018, representing an increase of $2,949,960 or 491.5%. The increase in gross profit was due to the high sales activity for our liquid filters and water treatment systems, which have a higher gross margin. Included in gross profit is depreciation of $554,129 and $430,081 for the six months ended June 30, 2019 and 2018, respectively.
~~Expenses~~
~~Total operating expenses for the six months ended June 30, 2019 were $3,139,281 representing an increase of $575,167 or 22.4%, compared to $2,564,114 for the same period in 2018.~~ This ~~increase in operating expenses~~change is attributable to an increase in ~~general and administrative expenses~~the number of ~~$394,655, or 29.4% an increase~~employees engaged in research and development ~~expenses~~activities as the Company focuses on the further development of ~~$56,679, or 16.4%,~~existing and ~~an increase in selling expenses of $123,833, or 14.2%, which include expenses related to marketing.~~new products for the marine industry.

~~The main reason for the increase in operating expenses is the large number~~
25
Table of new additional employees and related expenses (purchase of IT equipment, office furniture, HR consultants etc.). It is especially new project managers, who have been hired to assist with the large increase in sales and new orders.
Non-cash compensation, included in general and administrative expenses, for the six months ended June 30, 2019 were $151,611, compared to $87,434 for the same period in 2018, representing an increase of $64,177, or 73.4%. This increase is attributable to increased non-cash compensation expense for restricted share units granted to directors.
~~The following is a summary of our non-cash compensation:~~

For the Six Months
Ended June 30

2019

2018

Compensation upon vesting of stock options granted to employees
$ - $ 15,767
Compensation for vesting of restricted stock awards issued to the board of directors
151,611 71,667
Value of Warrants granted for services
- -
Total Non-Cash Compensation
$ 151,611 $ 87,434
Contents

Net Income

Net ~~profit~~income for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 was ~~$181,030,~~$303,499 compared to ~~a loss of $1,796,815~~$34,244 for the ~~same~~comparable period in ~~2018,~~2019, representing an ~~improvement in Net Income~~increase of ~~$1,977,845, or 110.1%.~~ $269,256.
This ~~improvement~~change was primarily attributable to ~~the substantial~~increased Revenue that drove a similar increase in ~~sales activities~~Gross Profit and a higher gross profit ~~for~~margin caused by a favorable mix shift toward marine scrubber systems, offset by higher operating expenses caused primarily by the ~~six months ending June 30, 2019, compared~~growth in headcount to ~~the same period in 2018.~~support additional sales and production.
26
~~Table of Contents~~

Liquidity and Capital Resources

We have historically satisfied our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. At ~~June 30,~~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. On March 31, 2020, we had cash of $6,299,042 and net working capital of $16,429,292, and at December 31, 2019, we had cash ~~(including restricted cash)~~ of ~~$13,356,355~~$9,783,932 and net working capital of ~~$21,371,856 and at December~~$17,155,126. On March 31, ~~2018, we had cash of $3,776,111 and~~2020, our net working capital ~~of $6,753,593. At June 30, 2019, our working capital increased~~had decreased by ~~$14,618,263~~$725,834 compared to December 31, ~~2018 due to a registered public offering of common stock in the second quarter of~~ 2019. Total current assets (excluding cash) were $18,388,744 and $7,597,095 at June 30, 2019 and at December 31, 2018, respectively, and total current liabilities (excluding finance debt and tax) were $9,764,890 and $4,605,254 at June 30, 2019 and at December 31, 2018, respectively.

In connection with certain orders, we ~~have to convey~~provide the customer a working guarantee, or a prepayment guarantee or a security bond. For that purpose, we ~~have~~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 ~~$14,427~~$13,882 at March 31, ~~2019)~~2020) with a bank, subject to certain base limitations. ~~As of June 30, 2018, we had DKK 94,620 (approximately $14,801) in working guarantee against the line.~~ This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Systems such as receivables, inventory and equipment.

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

~~Six~~Three months ended ~~June 30, 201~~March 31, 20920 Compared to ~~six~~three months ended ~~June 30,~~March 31, 20189

Cash provided (used) by operating activities is net income ~~(losses)~~ adjusted for certain non-cash items and changes in assets and liabilities. Cash used by operating activities for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 was ~~$5,070,627,~~$1,957,670, representing an increase of ~~$1,739,280~~$1,069,569 compared to cash used by operating activities of ~~$3,331,347~~$888,099 for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. The ~~increase~~change in cash used by operating activities for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 was mainly due to an increase in ~~account receivables~~Contract assets of ~~$7,152,037 related to the larger number~~$4,816,038, off-set by a decrease in cash from accounts payables of shipped orders in the second quarter of 2019. Further other receivables have increased by $2,204,708. The increase in Other Receivables is due to the larger number of shipped orders, as this increase relates to the last payment of most orders, which is normally invoiced when the commissioning has taken place. Deposits have increased by $1,203,216 due to prepayments made for the new furnaces in the production facility in Ballerup. Account payables have increased by $2,595,056; contract assets and liabilities have increased by $1,068,256 and accrued expenses have increased by $1,613,701 due to the large increase in sales activities.$4,531,656.

~~Cash~~Net cash used in investing activities was ~~$327,559~~$1,067,699 for the ~~six~~three months ended ~~June 30, 2019, representing an increase of $244,567,~~March 31, 2020 as compared to net cash used in investing activities of ~~$82,992~~$169,546 for the ~~six~~three months ended ~~June 30, 2018. The~~March 31, 2019, representing an increase ~~in cash used in investing activities~~of $898,153. This increase was ~~mainly~~ due to ~~$81,421 in~~a period-over-period increase of $919,635 for the purchase of property and equipment related to the installation of new ~~IT equipment.~~furnaces in Ballerup to increase production capacity in the context of growing demand.

Cash ~~provided by~~used in financing activities was ~~$14,799,350~~$8,434 for the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020 as compared to net cash provided by financing activities of ~~$5,850,367~~$126,062 for the ~~six~~three months ended ~~June 30, 2018. The~~March 31, 2019. This change of $134,496 was mainly due to cash ~~provided by financing activities is mainly related to a public offering that raised $16,065,000 less offering costs~~proceeds of ~~$1,390,262 during~~$133,200, for the ~~six months ended June 30,~~employee exercise of stock options in 2019.

Off Balance Sheet Arrangements

As of ~~June 30, 2019,~~March 31, 2020, we had no off-balance sheet arrangements. We are not aware of any material transactions ~~which~~that are not disclosed in our consolidated financial statements.

27
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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~~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 ~~margin~~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 ~~margin;~~profit; and
●
the recognition and measurement of loss contingencies, which impact gross ~~margin~~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

The Company’s management reviewed material events through ~~August 14, 2019~~May 11, 2020.
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 ~~there were no~~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 have been working remotely since that time.
While 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, our compliance with these measures did not have a material ~~subsequent events~~adverse impact on our financial results for the first quarter of fiscal year 2020. We have, however, begun to take 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 our 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.
27
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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
28
~~Table of Contents~~

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the design and effectiveness of our internal controls over financial reporting and disclosure controls and procedures (pursuant to Rule 13a-15(b) and (c) under the Exchange Act) as of the end of the period covered by this ~~Annual~~Quarterly Report. We have excluded the acquired Company BS Plastic from the assessment of internal controls over financial reporting as of March 31, 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 overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives
Based ~~on this~~upon that evaluation, ~~Management~~our Chief Executive Officer and our Chief Financial Officer concluded that ~~due to the limited number of employees in the finance department,~~ our disclosure controls and procedures as of March 31, 2020 were not effective as of ~~such date~~the period covered by this Quarterly Report due to material weaknesses ~~that were identified.~~
In 2019 we plan on hiring additional employees to the finance department, and we plan to continue remedy this lack of effectiveness during 2019 in connection with hiring additional employees in the finance department and implementing procedures to minimize the identified weaknesses. Further a planned investment in a new ERP-system to support the controls and processes of the Company should ensure that identified weaknesses will be detected on a timely basis to ensure proper and reliable financial reporting.
.
~~A material weakness is a control deficiency, or combination of control deficiencies,~~ in internal ~~control~~controls over financial reporting, ~~such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis.~~described below. For more information on material weaknesses identified by ~~Management,~~management, please ~~see~~reference our ~~annual report~~Form 10-K filed on ~~Form 10-K~~March 30, 2020 for the year ended December 31, ~~2018.~~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

~~Management~~In response to the identified material weaknesses, our management, with oversight from the Company’s Audit Committee, has been ~~actively developing~~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, a ~~remediation plan~~planned investment in a new ERP system and ~~been implementing new~~other supporting IT programs to support the controls and processes ~~to address~~of the ~~aforementioned deficiencies. Upon identifying~~Company will be a part of our remediation of the material ~~weakness in~~weaknesses. Lastly, the Company has started the process of ~~our internal controls,~~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 ~~actions~~and plans to ~~strengthen our~~take will improve the overall system of internal control ~~structure.~~
~~Management continues to meet with key managers~~over financial reporting and ~~control owners to evaluate~~will remediate identified material weaknesses, the ~~effectiveness~~material weaknesses cannot be considered remediated until the applicable relevant controls operate for a sufficient period of ~~internal controls and to ensure implementation of remediation initiatives.~~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~~management override of the ~~internal~~ control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

29
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Table of Contents

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not required for a “smaller reporting company.”

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

None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.   MINE SAFETY DISCLOSURES

None.

ITEM 5.   OTHER INFORMATION

None.

30
29
Table of Contents
ITEM 6.    EXHIBITS

~~10.1~~ ~~Form of Purchase Agreement with Stephens Inc. as representative of the several underwriters, dated May 22, 2019~~
31.1
Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2
Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
~~Incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K as filed with the SEC on May 24, 2019~~
~~31.1~~
~~Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
~~Filed herewith~~
~~31.2~~
~~Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
~~Filed herewith~~
~~32.1~~
~~Certification Pursuant To 18 U,S,C, Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002~~
~~Furnished herewith~~
~~32.2~~
~~Certification Pursuant To 18 U,S,C, Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002~~
~~Furnished herewith~~
~~101. INS~~
~~XBRL Instance Document~~
~~Filed herewith~~
~~101. CAL~~
~~XBRL Taxonomy Extension Calculation Link base Document~~
~~Filed herewith~~
~~101. DEF~~
~~XBRL Taxonomy Extension Definition Link base Document~~
~~Filed herewith~~
~~101. LAB~~
~~XBRL Taxonomy Label Link base Document~~
~~Filed herewith~~
~~101. PRE~~
~~XBRL Extension Presentation Link base Document~~
~~Filed herewith~~
~~101. SCH~~
~~XBRL Taxonomy Extension Scheme Document~~
Filed herewith

32.1
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
Furnished herewith

32.2
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
Furnished herewith
101. INS
XBRL Instance Document
Filed herewith
101. CAL
XBRL Taxonomy Extension Calculation Link base Document
Filed herewith
101. DEF
XBRL Taxonomy Extension Definition Link base Document
Filed herewith
101. LAB
XBRL Taxonomy Label Link base Document
Filed herewith
101. PRE
XBRL Extension Presentation Link base Document
Filed herewith
101. SCH
XBRL Taxonomy Extension Scheme Document
Filed herewith
30
31
Table of Contents

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.

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

~~LiqTech International, Inc.~~
~~Dated: August 14, 2019~~
LiqTech International, Inc.
Dated: May 11, 2020

/s/ Sune Mathiesen



Sune Mathiesen, Chief Executive Officer



(Principal Executive Officer)
Dated: May 11, 2020
/s/ Claus Toftegaard
Claus Toftegaard, Chief Financial Officer
(Principal Financial and Accounting Officer)

~~Dated: August 14, 2019~~
~~/s/~~ ~~Claus Toftegaard~~
~~Claus Toftegaard, Chief Financial Officer~~
~~(Principal Financial and Accounting Officer)~~
32

31

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)

Large accelerated filer	☐	Accelerated filer	☐☒
Non-accelerated filer	☒☐	Smaller reporting company	☒
Emerging growth company	☐

	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2019		2018			2019		2018

Net Income (Loss)		146,786		(263,526	)		181,030		(1,796,815	)

Other Comprehensive Income (Loss), Net of Taxes:
Currency Translation		381,217		(633,427	)		167,295		(458,560	)

Total Comprehensive Income (Loss)	$	528,003	$	(896,953	)	$	348,325	$	(2,255,375	)

																	Accumulated
											Additional						Compre-			Deferred
	Preferred Stock						Common Stock				Paid-in			Accumulated			hensive			Compen-
	Shares			Amount			Shares		Amount		Capital			Deficit			Income/(Loss)			sation
BALANCE, December 31, 2017		2,200,837			2,201			11,107,316		11,108		40,491,229			(28,471,696	)		(5,040,792	)		(79,933	)

Common shares issued at $4.04 per share for services provided and to be provided by the board of directors								14,852		14		59,986

Stock based compensation expenses recognized for the period ended March 31, 2018																					18,273

Currency translation, net																		174,867

Net Income for the period ended March 31, 2018															(1,533,287	)

BALANCE, March 31, 2018		2,200,837			2,201			11,122,168		11,123		40,551,214			(30,004,983	)		(4,865,925	)		(61,660	)

Common shares issued for cash at $1.36 per share, net of offering cost of $747,423, April 2018								4,862,132		4,862		5,860,215

Conversion of mandatory preferred stock issued in 2017 into 4 common shares per preferred stock		(2,200,837	)		(2,201	)		2,200,837		2,201

Stock based compensation expenses recognized for the period ended June 30, 2018																					9,161

Currency translation, net																		(633,427	)

Net Income for the period ended June 30, 2018															(263,526	)

BALANCE, June 30, 2018		-			-			18,185,137		18,185		46,411,430			(30,268,509	)		(5,499,352	)		(52,499	)

BALANCE, December 31, 2018		-			-			18,228,887		18,229		46,575,986			(32,286,224	)		(5,744,856	)		(23,499	)

Common shares issued at $4.63 per share for services provided and to be provided by the board of directors								28,993		29		134,138									(21,667	)

Stock based compensation expenses recognized for the period ended March 31, 2019												5,778									10,166

Exercise of stock options								45,000		45		133,155

Currency translation, net																		(213,922	)

Net Income for the period ended March 31, 2019															34,244

BALANCE, March 31, 2019		-			-			18,302,880		18,303		46,849,057			(32,251,980	)		(5,958,778	)		(35,000	)

Stock based compensation expenses recognized for the period ended June 30, 2019												17,333									5,834

Exercise of warrants								28,887		29		(29	)

Common shares issued for cash at $7.25 per share, net of offering cost of $1,390,262, May 2019								2,215,862		2,216		14,672,522

Currency translation, net																		381,217

Net Income for the period ended June 30, 2019															146,786

BALANCE, June 30, 2019		-			-			20,547,668		20,548		61,538,883			(32,105,194	)		(5,577,561	)		(29,166	)

										Accumulated Other
					Additional		Retained			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 at $5.48 per share 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


BALANCE, December 31, 2018		18,228,887		18,229		46,552,487		(32,286,224	)		(5,744,856	)		8,539,636

Common shares issued at $4.63 per share 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

	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended March 31,
	June 30,						June 30,						2020			2019
	2019			2018			2019			2018

Net Sales	$	9,297,186		$	3,598,028		$	16,718,384		$	5,989,410
Revenue													$	10,281,844		$	7,421,198
Cost of Goods Sold		7,222,076			2,938,206			13,168,194			5,389,180			7,642,768			5,946,118

Gross Profit		2,075,110			659,822			3,550,190			600,230			2,639,076			1,475,080

Operating Expenses:
Selling expenses		514,037			463,998			997,623			873,790			676,800			483,587
General and administrative expenses		968,437			582,208			1,739,302			1,344,647			1,470,393			770,864
Research and development expenses		199,184			176,281			402,356			345,677			310,954			203,172

Total Operating Expense		1,681,658			1,222,487			3,139,281			2,564,114			2,458,147			1,457,623

Income (Loss) from Operations		393,452			(562,665	)		410,909			(1,963,884	)
Income from Operations														180,929			17,457

Other Income (Expense)
Interest and other income		18,173			7,173			25,450			10,457			4,490			7,277
Interest expense		(36,502	)		(4,174	)		(75,150	)		(60,474	)		(104,856	)		(38,648	)
Gain (Loss) on currency transactions		(206,718	)		296,140			(158,560	)		217,086
Gain (Loss) on sale of fixed assets		(21,619	)		-			(21,619	)		-
Gain on currency transactions														207,627			48,158

Total Other Income (Expense)		(246,666	)		299,139			(229,879	)		167,069
Total Other Income														107,261			16,787

Income (Loss) Before Income Taxes		146,786			(263,526	)		181,030			(1,796,815	)
Income Before Income Taxes														288,190			34,244

Income Tax Expense (Income)		-			-			-			-
Income Tax Benefit														(15,309	)		-

Net Income (Loss)	$	146,786		$	(263,526	)	$	181,030		$	(1,796,815	)
Net Income													$	303,499		$	34,244


Basic and Diluted Income (Loss) Per Share	$	0.01		$	(0.004	)	$	0.01		$	(0.03	)
Basic Income Per Share													$	0.01		$	0.00

Diluted Income Per Share													$	0.01		$	0.00

Basic Weighted Average Common Shares Outstanding		19,211,771			16,214,833			18,742,029			13,682,405			20,554,524			18,267,068

Diluted Weighted Average Common Shares Outstanding		19,228,160			16,214,833			18,758,108			13,682,405			20,711,035			19,145,875

	For the Three Months Ended
	March 31,
	2020			2019

Net Income		303,499			34,244

Other Comprehensive Loss - Currency Translation, Net		(495,959	)		(213,922	)

Total Comprehensive Loss	$	(192,460	)	$	(179,678	)

	For the Six Months Ended June 30,				For the Three Months Ended March 31,
	2019		2018		2020		2019
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest Paid	$	50,372	$	60,474	$	16,514	$	23,541
Income Taxes	$	-	$	-	$	-	$	-

Supplemental Disclosures of Non-Cash Investing and Financing:
Common stocks issued for conversion of mandatory preferred stock		-		8,803
Offering costs for common stocks issuance		1,390,262		747,423

	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Allowance for doubtful accounts at the beginning of the period	$	971,772		$	660,581		$	612,434		$	971,772
Bad debt expense		-			353,562			327			25,044
Receivables written off during the periods		(3,494	)		-			(327	)		(362,244	)
Effect of currency translation		(5,773	)		(42,371	)		(12,571	)		(22,138	)
Allowance for doubtful accounts at the end of the period	$	962,505		$	971,772		$	599,863		$	612,434

	For the Three months ended March 31
	2020		2019
United States and Canada	$	126,482	$	113,059
Australia		42,255		62,113
South America		10,896		319,528
Asia		2,033,288		1,239,113
Europe		8,068,923		5,687,385
	$	10,281,844	$	7,421,198

	For the Three months ended March 31
	2020		2019
Ceramic diesel particulate	$	1,560,062	$	2,243,268
Liquid filters and systems		7,980,287		5,040,333
Plastics		581,411		-
Development projects		160,084		137,597
	$	10,281,844	$	7,421,198

	March 31, 2020			December 31, 2019
Cost incurred	$	3,795,520		$	3,960,199
Unbilled project deliveries		2,386,541			1,971,106
VAT		626,621			862,368
Other receivables		97,082			58,397
Prepayments		(1,964,914	)		(1,732,231	)
Deferred Revenue		(1,155,405	)		(876,286	)
	$	3,785,445		$	4,243,553

Distributed as follows:
Contract Assets	$	5,137,111		$	5,664,929
Contract Liabilities		(1,351,666	)		(1,421,376	)
	$	3,785,445		$	4,243,553

	Fair value at reporting date using:
	March 31, 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	$	880,308	$	-	$	-	$	880,308

Balance at December 31, 2019	$	898,755
Foreign currency effect		(18,447	)
Balance at March 31, 2020	$	880,308

	June 30, 2019			December 31, 2018
Operating leases:
Operating lease right-of-use	$	1,925,645		$	-

Operating lease liabilities - current	$	603,152		$	-
Operating lease liabilities – long-term		1,352,749			-
Total operating lease liabilities	$	1,955,901		$	-

Finance leases:
Property and equipment, at cost	$	1,171,295		$	1,171,295
Accumulated depreciation		(1,166,115	)		(1,162,256	)
Property and equipment, net	$	5,180		$	9,039

Finance lease liabilities - current	$	5,201		$	13,789
Finance lease liabilities – long-term		-			-
Total finance lease liabilities	$	5,201		$	13,789

Weighted average remaining lease term:
Operating leases		4.4			-
Finance lease		0.1			0.8

Weighted average discount rate:
Operating leases		7.0	%		-
Finance leases		9.0	%		7.3	%

	2019			2018			2020			2019
Furnace parts and supplies	$	730,370		$	596,806		$	925,300		$	621,991
Raw materials		1,756,414			1,659,826			1,967,234			2,125,921
Work in process		1,501,307			1,691,175			1,877,131			1,624,499
Finished goods and filtration systems		1,527,554			1,596,042			1,209,729			1,492,135
Reserve for obsolescence		(801,990	)		(1,111,794	)		(654,895	)		(665,308	)
Net Inventory	$	4,713,656		$	4,432,055		$	5,324,499		$	5,199,238

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

	Operating lease			Finance lease
April 2020 – March 2021	$	1,019,750		$	41,422
April 2021 – March 2022		819,998			41,422
April 2022 – March 2023		763,059			38,370
April 2023 – March 2024		733,877			35,358
April 2024 – March 2025		481,982			35,623
Thereafter		2,889,807			23,699
Total payment under lease agreements		6,708,473			215,894
Less imputed interest		(1,728,504	)		(21,485	)
Total lease liability	$	4,979,969		$	194,409

		Options Outstanding						Options Exercisable					Options Outstanding						Options Exercisable
Exercise Prices	Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price		Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price

$	2.96		25,000		1.12	$	2.96		25,000	$	2.96	2.96		25,000		0.37	$	2.96		25,000	$	2.96
Total	Total		25,000		1.12	$	2.96		25,000	$	2.96	Total		25,000		0.37	$	2.96		25,000	$	2.96

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

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

										March 31, 2020
	Shares			Weighted Average Exercise Price		Average Remaining Life		Weighted Average Intrinsic Value		Shares		Weighted Average Exercise Price		Average Remaining Life		Weighted Average Intrinsic Value

Outstanding at beginning of period		70,000		$	2.96		1.62	$	-		25,000	$	2.96		0.62	$	-
Granted		-			-		-		-		-		-		-		-
Exercised		(45,000	)		-		-		-		-		-		-		-
Forfeited		-			-		-		-		-		-		-		-
Expired		-			-		-		-		-		-		-		-
Outstanding at end of period		25,000		$	2.96		1.12	$	-		25,000	$	2.96		0.37	$	-
Vested and expected to vest		25,000		$	2.96		1.12	$	-		25,000	$	2.96		0.37	$	-
Exercisable end of period		25,000		$	2.96		1.12	$	-		25,000	$	2.96		0.37	$	-

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

	For the three months ended
	March 31, 2020			March 31, 2019
Customer A		35	%		13	%
Customer B		12	%		20	%
Customer C		12	%		*
Customer D		11	%		*
Customer E		*			19	%

	March 31, 2020			December 31, 2019
Customer A		40	%		39	%
Customer C		16	%		15	%
Customer B		11	%		*
Customer E		*			*

	Six Months Ended June 30,
													Period to Period Change
	2019			As a % of Sales			2018			As a % of Sales			$			Percent %
Net Sales		16,718,384			100.0	%		5,989,410			100.0	%		10,728,974			179.1
Cost of Goods Sold		13,168,194			78.8			5,389,180			90.0			7,779,014			144.3
Gross Profit		3,550,190			21.2			600,230			10.0			2,949,960			491.5

Operating Expenses
Selling expenses		997,623			6.0			873,790			14.6			123,833			14.2
General and administrative expenses		1,739,302			10.4			1,344,647			22.5			394,655			29.4
Research and development expenses		402,356			2.4			345,677			5.8			56,679			16.4
Total Operating Expenses		3,139,281			18.8			2,564,114			42.8			575,167			22.4

Profit (loss) from Operation		410,909			2.5			(1,963,884	)		(32.8	)		2,374,793			120.9

Other Income (Expense)
Interest and other income		25,450			0.2			10,457			0.2			14,993			143.4
Interest (expense)		(75,150	)		(0.4	)		(60,474	)		(1.0	)		(14,676	)		(24.3	)
Gain (Loss) on currency transactions		(158,560	)		(0.9	)		217,086			3.6			(375,646	)		(173.0	)
Gain (Loss) on sale of fixed assets		(21,619	)		(0.1	)		-			-			(21,619	)		-
Total Other Income (Expense)		(229,879	)		(1.4	)		167,069			2.8			(396,948	)		(237.6	)

Profit (loss) Before Income Taxes		181,030			1.1			(1,796,815	)		(30.0	)		1,977,845			110.1
Income Taxes Expense (Income)		-			-			-			-			-			-

Net Profit (loss)		181,030			1.1			(1,796,815	)		(30.0	)		1,977,845			110.1

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

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

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