UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-Q

(Mark One)

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

For the ~~quarterly~~three months period ended ~~September 30, 2019~~March 31, 2020

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

For the transition period from _______________________ to _______________________

Commission File Number:001-36210

LiqTech International, Inc.

(Exact name of registrant as specified in its charter)

Nevada		20-1431677
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Industriparken 22C, DK 2750 Ballerup, Denmark
(Address of principal executive offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which

registered

Common Stock, $0.001 par value

LIQT

The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, at ~~November 14, 2019,~~May 11, 2020, was ~~20,547,668~~20,555,880 shares.

Table of Contents

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

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

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	4

Condensed Consolidated Balance Sheets as of ~~September 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 Nine~~ Months Ended ~~September 30,~~March 31, 2020 and March 31, 2019 ~~and September 30, 2018~~ (unaudited)	6

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

Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2020 and March 31, 2019 ~~and September 30, 2018~~ (unaudited)	9

Notes to Condensed Consolidated Financial Statements (unaudited)	11

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	23

Item 3. Quantitative and Qualitative Disclosures About Market Risk	2928

Item 4. Controls and Procedures	3028

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	3129

Item 1A. Risk Factors	3129

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3129

Item 3. Defaults Upon Senior Securities	3129

Item 4. Mine Safety Disclosures	3129

Item 5. Other Information	3129

Item 6. Exhibits	3230

SIGNATURES	3331

Table of Contents

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.

Table of Contents

As of

As of

September 30,

December 31,

2019

2018

(Unaudited)

Current Assets:

Cash
$ 9,957,472 $ 3,776,111
Restricted Cash
1,678,936 -
Accounts receivable, net
6,560,857 1,308,122
Other receivables
3,697,315 1,098,796
Contract assets
641,356 624,275
Inventories, net
5,186,234 4,432,055
Prepaid expenses
203,024 133,847

Total Current Assets
27,925,194 11,373,206

Long-Term Assets:

Property and Equipment, net
2,783,420 1,431,649
Operating lease right-of-use asset
2,200,130 -
Construction in progress
2,138,406 -
Investments at cost
5,433 5,714
Other intangible assets
- 748
Deposits
475,769 347,932
Goodwill
605,313 -

Total Long-Term Assets
8,208,471 1,786,043

Total Assets
$ 36,133,665 $ 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

For the Three Months
Ended

For the Nine Months
Ended

September 30,

September 30,

2019

2018

2019

2018

Net Income (Loss)
656,357 (921,949
)
837,387 (2,718,764
)

Income (Loss), net of taxes:

Currency Translation
(1,014,265
)
(63,279
)
(846,970
)
(521,839
)

Total Comprehensive Loss
$ (357,908
)
$ (985,228
)
$ (9,583
)
$ (3,240,603
)

	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	)

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

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

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
)

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
)

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

Net additional offering cost of $73,184, for capital raise in May 2019
(73,184
)

Currency translation, net
(1,014,265
)

Net Income for the period ended September 30, 2019
656,357

BALANCE, September 30, 2019
- - 20,547,668 20,548 61,483,032 (31,448,837
)
(6,591,826
)
(23,332
)

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 Loss 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 Loss 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
)

Stock based compensation expenses recognized for the period ended September 30, 2018
5,833

Currency translation, net
(63,279
)

Net Loss for the period ended September 30, 2018
(921,949
)

BALANCE, September 30, 2018
- - 18,185,137 18,185 46,411,430 (31,190,458
)
(5,562,631
)
(46,666
)

										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 Nine months ended

September 30,

2019

2018

Cash Flows from Operating Activities:

Net Income (Loss)
$ 837,387 $ (2,718,764
)
Adjustments to reconcile net loss to net cash provided (used) by operations:

Depreciation and amortization
852,705 621,460
Stock-based compensation
174,778 93,267
Changes in assets and liabilities:

Accounts receivable
(4,652,294
)
(1,369,207
)
Other receivables
(2,593,412
)

Inventory
(430,776
)
290,567
Construction in progress
(2,138,406
)
-
Prepaid expenses and deposits
(104,928
)
(47,243
)
Account payable
1,481,881 (301,016 )
Accrued expenses
1,769,893 (326,932
)
Operating lease liability
(347,747
)
-
Contract assets and liabilities, net
632,268 (80,338
)

Total Adjustments
(5,356,038
)
(1,119,442
)

Net Cash Used in Operating Activities
(4,518,651
)
(3,838,206
)

Cash Flows from Investing Activities:

Purchase of property and equipment
(510,403
)
(145,984
)
Proceeds from sale/recovery of property and equipment
23,700 -
Net cash paid for acquisition
(1,154,902
)
-

Net Cash Used in Investing Activities
(1,641,605
)
(145,984
)

Cash Flows from Financing Activities:

Net proceeds/payments on capital lease obligation
(13,789
)
48,127
Proceeds from exercise of stock options
133,200 -
Proceeds from issuance of common stocks, net
14,601,554 5,865,077

Net Cash Provided by Financing Activities
14,720,965 5,913,204

Gain (Loss) on Currency Translation
(700,412
)
(553,618 )

Net Change in Cash, Cash Equivalents and Restricted Cash
7,860,297 1,375,396

Cash, Cash Equivalents and Restricted Cash at Beginning of Period
3,776,111 2,486,199

Cash, Cash Equivalents and Restricted Cash at End of Period
$ 11,636,408 $ 3,861,595

	For the Three Months Ended
	March 31,
	2020			2019
Cash Flows from Operating Activities:
Net Income	$	303,499		$	34,244
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation and amortization		534,021			278,400
Stock-based compensation		141,222			128,444
Change in deferred tax asset / liability		(15,309	)		-
Changes in assets and liabilities:
Accounts receivable		(1,769,341	)		(1,403,171	)
Inventory		(125,261	)		135,340
Contract assets		527,818			(3,342,724	)
Deposits		-			(945,496	)
Prepaid expenses and other current assets		(255,908	)		(122,094	)
Accounts payable		(1,112,956	)		3,418,700
Accrued expenses		67,435			701,038
Operating lease liabilities		(183,180	)		(92,691	)
Contract liabilities		(69,710	)		321,911

Total Adjustments		(2,261,169	)		(922,343	)

Net Cash used in Operating Activities		(1,957,670	)		(888,099	)

Cash Flows from Investing Activities:
Purchase of property and equipment		(1,064,960	)		(169,546	)
Purchase of other intangible assets		(2,739	)		-

Net Cash used in Investing Activities		(1,067,699	)		(169,546	)

Cash Flows from Financing Activities:
Payments on finance lease obligation		(8,434	)		(7,138	)
Proceeds from exercise of stock options		-			133,200

Net Cash provided by (used in) Financing Activities		(8,434	)		126,062

Loss on Currency Translation		(451,087	)		(243,483	)

Net change in Cash, Cash Equivalents and Restricted Cash		(3,484,890	)		(1,175,066	)

Cash, Cash Equivalents and Restricted Cash at Beginning of Period		9,783,932			3,776,111

Cash, Cash Equivalents and Restricted Cash at End of Period	$	6,299,042		$	2,601,045

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation

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

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

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

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

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

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

BS Plastic A/S, a Danish Corporation ("(“BS ~~Plastic"~~Plastic”) ~~was~~, acquired on September 1, 2019, ~~and engages~~engaged in the manufacture of specialized machined and welded plastic parts within Denmark and international markets.

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

LiqTech Germany (“LiqTech Germany”), a 100% owned subsidiary of LiqTech Int. DK, incorporated in Germany on December 9, ~~2011, engaged in marketing and sale of liquid filters in Germany.~~2011. The Company is in the process of closing operations, which is expected to be completed during ~~2019.~~2020.

LiqTech PTE Ltd (“LiqTech Sing”), a 95% owned subsidiary of LiqTech Int. DK, incorporated in Singapore on January 19, ~~2012, engaged in marketing and sale of liquid filters in Singapore and other countries in the area.~~2012. The Company is in the process of closing operations, which is expected to be completed during ~~2019.~~2020.

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

Functional Currency / Foreign currency translation -- The functional currency of LiqTech International, Inc., LiqTech USA, Inc. and LiqTech NA is the U.S. Dollar. The Functional Currency of LiqTech Int. DK, LiqTech Systems, LiqTech Ceramics and BS Plastic is the Danish Krone (“DKK”),; the functional currency of LiqTech Germany is the ~~Euro~~Euro; and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is the U.S. Dollar for the purpose of these consolidated financial statements. The ~~foreign subsidiaries~~ balance sheet accounts of the foreign subsidiaries are translated into U.S. Dollars at the period-end exchange rates, and all revenue and expenses are translated into U.S. Dollars at the average exchange rates prevailing during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.

Table of Contents

Cash, Cash Equivalents and Restricted Cash-- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. As of ~~September 30,~~March 31, 2020 and December 31, 2019, ~~and 2018,~~ the Company ~~holds $1,678,936~~held $2,711,273 and ~~$0,~~$2,714,173, respectively, of restricted cash. The restricted cash is held as security by a local financial institution for ensuring a leasing facility and for payment guarantees issued for the benefit of customers in connection with prepayments of sales orders and for warranties after the delivery of sales orders. The restricted cash is held in a local financial ~~institution and will be released as order deliveries is made and accepted by the customer.~~institution. The Company had no balances held in a financial institution in the United States in excess of federally insured amounts at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~ 2019.

~~Table of Contents~~

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

The ~~roll forward~~roll-forward of the allowance for doubtful accounts for the ~~nine months~~period ended ~~September 30, 2019~~March 31, 2020 and ~~the year ended~~ December 31, ~~2018~~2019 is as follows:

	September 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
Addition from acquisition		21,895			-
Bad debt expense		3,763			353,562			327			25,044
Receivables written off during the periods		(3,494	)		-			(327	)		(362,244	)
Effect of currency translation		(48,057	)		(42,371	)		(12,571	)		(22,138	)
Allowance for doubtful accounts at the end of the period	$	945,879		$	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

NOTE 2 - INVENTORY

Inventory consisted of the following at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:

	2020			2019
Furnace parts and supplies	$	925,300		$	621,991
Raw materials		1,967,234			2,125,921
Work in process		1,877,131			1,624,499
Finished goods and filtration systems		1,209,729			1,492,135
Reserve for obsolescence		(654,895	)		(665,308	)
Net Inventory	$	5,324,499		$	5,199,238

2019

2018

Furnace parts and supplies
$ 611,911 $ 596,806
Raw materials
2,101,188 1,659,826
Work in process
1,644,988 1,691,175
Finished goods and filtration systems
1,608,185 1,596,042
Reserve for obsolescence
(780,038
)
(1,111,794
)
Net Inventory
$ 5,186,234 $ 4,432,055

NOTE 3 - LINES OF CREDIT

In connection with certain orders, we ~~have to~~ provide the customer ~~with~~ a working guarantee, or a prepayment guarantee or security bond. For that purpose, we have a ~~guaranteed~~guarantee credit line 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 ~~$13,800~~$13,882 at ~~September 30, 2019)~~March 31, 2020) with a bank, subject to certain base limitations. AsThis line of ~~September 30, 2018, we had DKK 94,620 (approximately $14,690) in working guarantee against the~~ credit ~~line. The credit line~~ is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by ~~a restricted account at the bank~~certain assets of LiqTech ~~Systems.~~Systems such as receivables, inventory and equipment.

NOTE 4 - LEASES

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

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

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Supplemental balance sheet information related to leases as of ~~September 30,~~March 31, 2020 and December 31, 2019 ~~and 2018~~ was as follows:

	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Operating leases:
Operating lease right-of-use	$	2,200,130		$	-		$	4,876,698		$	5,053,614

Operating lease liabilities – current	$	681,481		$	-
Operating lease liabilities - current							$	985,360		$	999,685
Operating lease liabilities – long-term		1,561,076			-			3,994,609			4,141,855
Total operating lease liabilities	$	2,242,557		$	-		$	4,979,969		$	5,141,540

Finance leases:
Property and equipment, at cost	$	1,115,891		$	1,171,295		$	1,334,310		$	1,362,272
Accumulated depreciation		(1,115,891	)		(1,162,256	)		(1,141,792	)		(1,156,145	)
Property and equipment, net	$	-		$	9,039		$	192,518		$	206,127

Finance lease liabilities – current	$	-		$	13,789
Finance lease liabilities - current							$	34,403		$	34,772
Finance lease liabilities – long-term		-			-			160,006			172,273
Total finance lease liabilities	$	-		$	13,789		$	194,409		$	207,045

Weighted average remaining lease term:
Operating leases		4.3			-			10.3			10.2
Finance lease		-			0.8
Finance leases								5.2			5.5

Weighted average discount rate:
Operating leases		6.9	%		-			6.3	%		6.4
Finance leases		-	%		7.3	%		3.9	%		3.9	%

Operating
lease

Finance lease

October 2019 – September 2020
$ 711,058 $ -
October 2020 – September 2021
574,753 -
October 2021 – September 2022
468,283 -
October 2022 – September 2023
433,132 -
October 2023 – September 2024
357,179 -
Thereafter
- -
Total payment under lease agreements
2,544,405 -
Less imputed interest
(301,848
)
-
Total lease liability
$ 2,242,557 $ -

	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

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

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 three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ matching contributions were expensed and totaled ~~$3,007~~$3,949 and ~~$2,569, respectively. For the nine months ended September 30, 2019 and 2018, the expense was $8,684 and $8,275,~~$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 September 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 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 September 30, 2019.~~

~~In connection with certain orders, we have to provide the customer with a working guarantee or a prepayment guarantee or security bond. For that purpose, we have a guaranteed line~~as of DKK 94,620 (approximately $13,800 at September 30, 2019) with a bank, subject to certain base limitations. As of September 30, 2018, we had DKK 94,620 (approximately $14,690) in working guarantees against the credit line. March 31, 2020.

Product Warranties - The Company provides a standard warranty on its systems, generally for a period of one to three years after customer acceptance. The Company estimates the costs ~~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 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 3^rdthird quarter of 2019 based on realized warranty expenses for the 4four years passed since the start-up of ~~delivery of~~producing water treatment systems. Based on the assessment, the Company has ~~decided to reduce~~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
621,142
Change in estimate related to pre-existing warranties
-
Payments made
(307,596
)
Foreign currency effect
(31,001
)
Balance at September 30, 2019
$ 714,770

	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 ~~as per September 30, 2019 of which~~and the Company has ~~prepaid $1.6 million as installments.~~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 ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:

	For the Three Months					For the Nine Months					For the Three Months Ended March 31,
	Ended September 30,					Ended September 30,					2020		2019
	2019		2018			2019		2018
Net Income (Loss) attributable to LiqTech International, Inc.	$	656,357	$	(921,949	)	$	837,387	$	(2,718,764	)
Net Income attributable to LiqTech International Inc.											$	303,499	$	34,244
Weighted average number of common shares used in basic earnings per share		20,547,667		18,185,137			19,350,533		15,199,809			20,554,524		18,267,068
Effect of dilutive securities, stock options and warrants		15,873		-			16,012		-
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		20,563,540		18,185,137			19,366,545		15,199,809			20,711,035		19,145,875

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

For the ~~nine~~three months ended ~~September 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.

NOTE 7 - STOCKHOLDERS' EQUITY

Common Stock –-- The Company has 25,000,000 authorized shares of common stock, $0.001 par value. As of ~~September 30,~~March 31, 2020 and 2019, ~~and December 31, 2018,~~ respectively, there were ~~20,547,668 (after the 4-to-1 reverse stock split effective on April 8, 2019)~~20,555,880 and ~~18,228,887~~18,302,880 common shares issued and outstanding.

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

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

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

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

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

The Company has 2,500,000 authorized ~~shares of preferred~~Preferred stock, $0.001 par value. As of ~~September 30,~~March 31, 2020 and 2019 ~~and December 31, 2018,~~ there were 0 mandatory convertible preferred shares issued and outstanding.

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Stock ~~Issuances~~Issuance

Since January 1, ~~2019,~~2020, the Company has made the following issuances of common ~~stock (adjusted to account for the 4-to-1 reverse stock-split on April 8, 2019):~~stock:

On ~~March 5, 2019,~~January 15, 2020, the Company issued an additional ~~24,827~~8,212 shares of restricted stock valued at ~~$112,500~~$45,000 for services provided by the Board of Directors. The Company will recognize the stock-based compensation of the award over the requisite service period. The shares vested immediately.

On January 24, January 28, February 6 and March 1, 2019, the Company issued a total of 45,000 shares in connection with employees exercising stock options granted under the 2015 Stock Options Plan (the "Plan"). The shares were issued at a share price of $2.96 and generated net proceeds of $133,200.

On May 22, 2019, the Company completed a registered public offering of its common stock. At closing, the Company issued 2,215,862 shares of common stock at a per share price of $7.25 and generated net proceeds of $14,599,338 including cost of $1,463,446 for underwriter’s fee, lawyer’s fee, auditor’s fee and other cost related to the capital raise.

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

For the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company has recorded ~~non-cash~~stock-based compensation expense of ~~$62,278~~$141,222 and ~~$33,267 relating to stock awards,~~$128,444, respectively.

Stock Options

In August 2015, the Company’s Board of Directors adopted ~~the~~a Stock Option ~~Plan.~~Plan (the “Plan”). Under the terms and conditions of the Plan, the Board of Directors is empowered to grant stock options to employees, officers, and directors of the Company. At ~~September 30, 2019,~~March 31, 2020, 25,000 options were granted and outstanding under the Plan.

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

The Company recognized stock-based compensation expense related to ~~the~~ options of $0 ~~and $33,267~~ for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018, respectively. At September 30, 2019,~~2019. On March 31, 2020, the Company had $0 of unrecognized compensation cost related to non-vested options.

A summary of the status of the options outstanding under the Company’s stock option ~~plan at September 30, 2019~~plans on March 31, 2020 is presented below:

		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		0.87	$	2.96		25,000	$	2.96	2.96		25,000		0.37	$	2.96		25,000	$	2.96
Total	Total		25,000		0.87	$	2.96		25,000	$	2.96	Total		25,000		0.37	$	2.96		25,000	$	2.96

NOTE 8 - SIGNIFICANT CUSTOMERS / CONCENTRATION / DISAGGREGATED REVENUE

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

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,					For the three months ended
	2019			2018		2019			2018		March 31, 2020			March 31, 2019
Customer A		34	%		*		31	%		*		35	%		13	%
Customer B		*			*		20	%		*		12	%		20	%
Customer C		28	%		*		17	%		*		12	%		*
Customer D												11	%		*
Customer E												*			19	%

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

2019

2018

2019

2018

United States and Canada
$ 701,194 $ 273,806 $ 1,389,423 $ 643,556
Australia
139,451 181,174 354,965 463,967
South America
- 22,775 - 50,452
Asia
2,962,521 154,715 5,135,327 1,083,332
Europe
5,869,550 2,714,734 19,511,385 7,095,307
$ 9,672,716 $ 3,347,204 $ 26,391,100 $ 9,336,614

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

2019

2018

2019

2018

Ceramic diesel particulate
$ 1,330,337 $ 1,841,136 $ 4,320,839 $ 5,085,203
Liquid filters and systems
7,920,745 1,426,107 21,414,214 3,878,355
Development projects
137,148 79,961 371,561 373,056
Plastic products
284,486 - 284,486 -
$ 9,672,716 $ 3,347,204 $ 26,391,100 $ 9,336,614

~~NOTE 9 - ACQUISITION~~

On September 4, 2019 our wholly owned subsidiary LiqTech International acquired the outstanding equity of BS Plastic, a specialized plastic manufacturer based in Denmark. The acquisition allows LiqTech to in-source certain components of its proprietary ceramic silicon carbide water filtration systems for closed loop marine scrubber applications.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The purchase accounting process has not been completed primarily because the valuation of acquired assets has not been finalized. We expect to complete the purchase accounting as soon as practicable but no later than one year from the acquisition date. We do not believe there will be material adjustments. The initial purchase price of $1,332,090 was funded through existing cash. The prior equity holder of BS Plastic may also receive an additional $888,060 if certain targets are met on an annual basis over the next 3 years. This contingent earn-out is accrued as long-term and short-term liability in the balance sheet. Based on the estimated fair value at the time of purchase, the Company recorded an estimate of intangible assets in the amount of $614,300 which may include goodwill once the final valuation analysis is completed.

~~The purchase price calculation is as follows:~~

Cash
$ 1,332,090
Liabilities short-term
296,020
Liabilities long-term
592,040
Total
$ 2,220,150

~~The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of purchase:~~

Cash and bank balances
$ 177,188
Account receivables
600,441
Inventory
323,403
Other receivables / deferred expenses
59,235
Deposits
53,304
Property and Equipment
1,397,421
Account payables
(99,490
)
Other debt and accrued expenses
(660,990
)
Accrued income tax
(31,146
)
Deferred tax liability
(213,516
)
1,605,850
Goodwill
614,300
$ 2,220,150

Transaction and other costs directly related to the acquisition of BS Plastic A/S, consisting primarily of professional fees, have amounted to approximately $29,500 and were expensed as incurred and are included in general and administrative expenses.

NOTE 109 - SUBSEQUENT EVENTS

The Company’s management reviewed material events through ~~November 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 subsequent events~~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 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 ~~and LiqTech NA, Inc., a Delaware corporation (“LiqTech NA”) and~~ 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 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 and LiqTech NA, Inc., a Delaware corporation (“LiqTech ~~Systems”) and BS Plastic A/S, a Danish limited company, organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“BS Plastic”~~Delaware”). Collectively, LiqTech USA, LiqTech Int. DK, LiqTech Systems, BS Plastic and LiqTech NADelaware 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~~Hobro and ~~testing operations are located in Hobro in Jutland, Denmark~~Aarhus, and ~~the plastic manufacturing plant of BS Plastic are located in Aarhus in Jutland, Denmark. Our~~our U.S. operations are conducted ~~by LiqTech NA 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.

	●	~~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 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.

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Developments

Results of Operations

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

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

	Three Months Ended September 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		9,672,716			100.0	%		3,347,204			100.0	%		6,325,512			189.0	%
Revenue																				10,281,844			100.0	%		7,421,198			100.0	%		2,860,646			38.5	%
Cost of Goods Sold		7,444,978			77.0			3,058,465			91.4			4,386,513			143.4			7,642,768			74.3			5,946,118			80.1			1,696,650			28.5
Gross Profit		2,227,738			23.0			288,739			8.6			1,938,999			671.5			2,639,076			25.7			1,475,080			19.9			1,163,996			78.9

Operating Expenses
Selling expenses		461,010			4.8			414,504			12.4			46,506			11.2			676,800			6.6			483,587			6.5			193,213			40.0
General and administrative expenses		1,318,505			13.6			663,547			19.8			654,958			98.7			1,470,393			14.3			770,864			10.4			699,529			90.7
Research and development expenses		189,216			2.0			152,849			4.6			36,367			23.8			310,954			3.0			203,172			2.7			107,782			53.0
Total Operating Expenses		1,968,731			20.4			1,230,900			36.8			737,831			59.9			2,458,147			23.9			1,457,623			19.6			1,000,524			68.6

Profit (Loss) from Operation		259,007			2.7			(942,161	)		(28.1	)		1,201,168			(127.5	)
Income from Operations																				180,929			1.8			17,457			0.3			163,473			936.5

Other Income (Expense)
Interest and other income		28,736			0.3			1,814			0.1			26,922			1,484.1			4,490			0.0			7,277			0.1			(2,787	)		(38.3	)
Interest (expense)		(35,292	)		(0.4	)		(5,463	)		(0.2	)		(29,829	)		546.0			(104,856	)		(1.0	)		(38,648	)		(0.5	)		(66,208	)		171.3
Gain (loss) on currency transactions		403,432			4.2			23,861			0.7			379,571			1,590.8
Gain (loss) on sale of fixed assets		474			0.0			-			-			474			-
Total Other Income (Expense)		397,350			4.1			20,212			0.6			377,138			1,865.9
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		656,357			6.8			(921,949	)		(27.5	)		1,578,306			(171.2	)
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)		656,357			6.8			(921,949	)		(27.5	)		1,578,306			(171.2	)
Net Income																				303,499			3.0			34,244			0.5			269,255			786.3

Table of Contents

Nine Months Ended September 30,

Period to Period Change

2019

As a %
of Sales

2018

As a %
of Sales

$

Percent
%

Net Sales
26,391,100 100.0
%
9,336,614 100.0
%
17,054,486 182.7
%
Cost of Goods Sold
20,613,172 78.1 8,447,645 90.5 12,165,527 144.0
Gross Profit
5,777,928 21.9 888,969 9.5 4,888,959 550.0

Operating Expenses

Selling expenses
1,458,633 5.5 1,288,294 13.8 170,339 13.2
General and administrative expenses
3,057,807 11.6 2,008,194 21.5 1,049,613 52.3
Research and development expenses
591,572 2.2 498,526 5.3 93,046 18.7
Total Operating Expenses
5,108,012 19.4 3,795,014 40.6 1,312,998 34.6

Profit (loss) from Operation
669,916 2.5 (2,906,045
)
(31.1
)
3,575,961 (123.1
)

Other Income (Expense)

Interest and other income
54,186 0.2 12,271 0.1 41,915 341.6
Interest (expense)
(110,442
)
(0.4
)
(65,937
)
(0.7
)
(44,505
)
67.5
Gain (Loss) on currency transactions
244,872 0.9 240,947 2.6 3,925 1.6
Gain (Loss) on sale of fixed assets
(21,145
)
(0.1
)
- - (21,145
)
-
Total Other Income (Expense)
167,471 0.6 187,281 2.0 (19,810
)
(10.6
)

Profit (loss) Before Income Taxes
837,387 3.2 (2,718,764
)
(29.1
)
3,556,151 (130.8
)
Income Taxes Expense (Income)
- - - - - -

Net Profit (loss)
837,387 3.2 (2,718,764
)
(29.1
)
3,556,151 (130.8
)
25
~~Table of Contents~~

Comparison of the Three Months Ended March 31, 20~~September~~20 ~~30, 2019~~ and March 31, 201~~September~~ ~~30, 2018~~9

Revenues

~~Net sales~~Revenue for the three months ended ~~September 30, 2019 were $9,672,716~~March 31, 2020 was $10,281,844 compared to ~~$3,347,204~~$7,421,198 for the same period in ~~2018,~~2019, representing an increase of ~~$6,325,512~~$2,860,646 or ~~189%~~38.5%. The ~~increase~~change in sales ~~consisted~~consists of an increase in ~~sales of~~ liquid filters ~~and systems~~ of ~~$6,494,640,~~$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 $510,800 and an increase in revenue related to development projects of $57,188. Further, the revenue from plastic products (acquired at September 1, 2019) amounted to $284,486.~~$683,205. The increase in ~~revenue~~demand for our liquid filters and ~~water treatment~~ systems is due to ~~projects related to~~the ramp-up in delivery of water treatment systems for the marine scrubber industry. The decrease in demand for our ~~DPF revenue~~DPFs is mainly due to ~~a decrease in demand~~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 ~~September 30, 2019~~March 31, 2020 was ~~$2,227,738~~$2,639,076 compared to a gross profit of ~~$288,739~~$1,475,080 for the same period in ~~2018,~~2019, representing an increase of ~~$1,938,999~~$1,163,996 or ~~671.5%~~78.9%. The increase in gross profit ~~was~~is due to ~~high~~a favorable mix shift toward liquid filters and systems, where sales ~~activity, even though that several low margin strategic projects were delivered with~~command a ~~low~~higher gross margin. ~~This was offset by improved manufacturing costs~~Included in the gross profit is depreciation of $416,265 and ~~also a reassessment of~~$307,283 for the ~~warranty provisions which contributed to improved gross profit.~~three months ended March 31, 2020 and 2019, respectively.

Expenses

Total operating expenses for the three months ended ~~September 30, 2019~~March 31, 2020 were ~~$1,968,731,~~$2,458,147, representing an increase of ~~$737,831,~~$1,000,524, or ~~59.9%~~68.6%, compared to ~~$1,230,900~~$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 $654,958, or 98.7%, and an increase in selling expenses of $46,506 or 11.2% and an increase in research and development expenses of $36,367, or 23.8%, 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 hiring of additional employees in administration (finance, supply change management and project managers) and related expenses (purchase of IT equipment, office furniture, HR consultants etc.). Further costs for consultants assisting in preparing for SOX404 compliance has impacted expenses for the quarter.
~~Non-cash compensation, included in general~~General and administrative expenses for the three months ended ~~September 30, 2019~~March 31, 2020 were ~~$23,167,~~$1,470,393 compared to ~~$5,833~~$770,864 for the same period in ~~2018,~~2019, representing an increase of ~~$17,334,~~$699,529, or ~~297.2%~~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 September 30,

For the Three Months Ended

2019

2018

March 31,

March 31,

Compensation for vesting of restricted stock awards issued to the board of directors
$ 23,167 $ 5,833

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
$ 23,167 $ 5,833 $ 141,222 $ 128,444

~~Net Income~~
~~Net profit~~Research and development expenses for the three months ended ~~September 30, 2019 was $656,357~~March 31, 2020 were $310,954 compared to a loss of $921,949 for the comparable period in 2018, representing a change of $1,578,306. This improvement was attributable to the substantial increase in revenue and gross profit for the three months ending September 30, 2019, compared to the same period in 2018. Included in Net Profit is Other Income/Expenses which amounts to income of $397,350 for the three months ended September 30, 2019 compared to income of $20,212$203,172 for the same period in ~~2018. The increase in Net Other Income/Expense of $377,138 is principally related to gain on currency exchanges.~~
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~~Table of Contents~~
~~Comparison of the~~ ~~Nine~~ ~~Months Ended~~ ~~September~~ ~~30,~~ 2019, ~~and~~ ~~September~~ ~~30, 2018~~
~~Revenues~~
~~Net sales for the nine months ended September 30, 2019 were $26,391,100 compared to $9,336,614 for the same period in 2018,~~ representing an increase of ~~$17,054,486~~$107,782, or ~~182.7%~~53.0%. The increase in sales consisted of an increase in sales of liquid filters and water treatment systems of $17,535,860, a decrease in sales of DPF of $764,365 and a decrease in sales of development projects of $1,495. Further, the revenue from plastic products (acquired at September 1, 2019) amounted to $284,486. The increase in revenue for our liquid filters and water treatment systems is due to projects related to the marine scrubber industry. The decrease in our DPF revenue is mainly due to a decrease in demand compared to the same period last year.
~~Gross Profit~~
Gross profit for the nine months ended September 30, 2019 was $5,777,928 compared to a gross profit of $888,969 for same period in 2018, representing an increase of $4,888,959 or 550%. 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.
~~Expenses~~
~~Total operating expenses for the nine months ended September 30, 2019 were $5,108,012 representing an increase of $1,312,998 or 34.6%, compared to $3,795,014 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 ~~$1,049,613, or 52.3%, an increase~~employees engaged in research and development ~~expenses~~activities as the Company focuses on the further development of ~~$93,046, or 18.7%,~~existing and ~~an increase in selling expenses of $170,339, or 13.2%, which include expenses related to marketing.~~new products for the marine industry.

~~The main reason for the increase in operating expenses is the hiring~~
25
Table of ~~additional employees in administration (finance, supply change management and project managers) and related expenses (purchase of IT equipment, office furniture, HR consultants etc.).~~
Non-cash compensation, included in general and administrative expenses, for the nine months ended September 30, 2019 was $174,778, compared to $93,267 for the same period in 2018, representing an increase of $81,511, or 87.4%. 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 Nine Months
Ended September 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
174,778 77,500
Total Non-Cash Compensation
$ 174,778 $ 93,267
Contents

Net Income

Net income for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~$837,387,~~$303,499 compared to ~~a loss of $2,718,764~~$34,244 for the ~~same~~comparable period in ~~2018,~~2019, representing an ~~improvement~~increase of ~~$3,556,151, or 130.8%.~~ $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 ~~nine months ending September 30, 2019, compared~~growth in headcount to ~~the same period in 2018.~~support additional sales and production.
27
~~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 ~~September 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 ~~$11,636,408~~$9,783,932 and net working capital of ~~$19,779,324 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 September 30, 2019, our working capital increased~~had decreased by ~~$13,025,731~~$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 $18,427,192 and $7,597,095 at September 30, 2019 and at December 31, 2018, respectively, and total current liabilities (excluding finance debt and tax) were $9,571,535 and $4,605,254 at September 30, 2019 and at December 31, 2018, respectively.

In connection with certain orders, we ~~have to~~ provide the customer ~~with~~ 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 ~~$13,800~~$13,882 at ~~September 30, 2019)~~March 31, 2020) with a bank, subject to certain base limitations. AsThis line of ~~September 30, 2018, we had DKK 94,620 (approximately $14,690) in working guarantees against the~~ credit ~~line. The credit line~~ is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by ~~a restricted account at the bank~~certain assets of LiqTech ~~Systems.~~
~~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~~Systems such as receivables, inventory and cash equivalents at September 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.equipment.

Cash Flows

~~Nine~~Three months ended March 31, 2020 Compared to three months ended March 31, 201~~September~~ ~~30, 2019~~ c~~ompared to~~ ~~nine~~ ~~months ended~~ ~~September~~ ~~30, 2018~~9

Cash ~~used in~~provided (used) by operating activities is net income ~~(loss)~~ adjusted for certain non-cash items and changes in assets and liabilities. Cash used by operating activities for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~$4,518,651,~~$1,957,670, representing an increase of ~~$680,445~~$1,069,569 compared to cash used inby operating activities of ~~$3,838,206~~$888,099 for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. The ~~net result improved the cash position by $3,556,151 compared to the same period last year. Further improvement~~change in cash ~~flow from account payables improved~~used by operating activities for the cash position by $1,782,897 and accrued expenses by $2,096,824. Cash flow from account receivables had a negative impact on cash used of $3,283,087 related to the larger number of shipped orders in the September 2019. Further cash flow from other receivables increased by $2,546,169three months ended March 31, 2020 was mainly due to ~~the larger number~~an increase in Contract assets of ~~shipped orders, as this increase relates to the last payment~~$4,816,038, off-set by a decrease in cash from accounts payables of most orders, which is normally invoiced when the commissioning has taken place. Deposits have increased by $2,138,406 due to prepayments made for the new furnaces in the production facility in Ballerup.$4,531,656.

~~Cash~~Net cash used in investing activities was ~~$1,641,605~~$1,067,699 for the ~~nine~~three months ended ~~September 30, 2019, representing an increase of $1,495,621,~~March 31, 2020 as compared to net cash used in investing activities of ~~$145,984~~$169,546 for the ~~nine~~three months ended ~~September 30, 2018. The~~March 31, 2019, representing an increase ~~in cash used in investing activities~~of $898,153. This increase was ~~mainly~~ due to a period-over-period increase of $919,635 for the ~~acquisition~~purchase of ~~BS Plastic AS that included a cash payment~~property and equipment related to the installation of ~~$1,154,902.~~new furnaces in Ballerup to increase production capacity in the context of growing demand.

Cash ~~provided by~~used in financing activities was ~~$14,720,965~~$8,434 for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020 as compared to net cash provided by financing activities of ~~$5,913,204~~$126,062 for the ~~nine~~three months ended ~~September 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 ~~$1,463,446 during~~$133,200, for the ~~nine months ended September 30,~~employee exercise of stock options in 2019.

Off Balance Sheet Arrangements

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

28
26
Table of Contents

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.
● ~~the recognition and measurement of warranty provisions, which impacts the gross margin, and~~
● ~~the assessment of interest rates and term of life for Right-of-Use fixed assets, which impacts cost of sales and external expenses, and also short and long term liabilities.~~

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 ~~November 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
Table of Contents

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
29
~~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 have hired additional qualified employees into the finance department, and we plan to enhance our control environment to remedy this lack of effectiveness during 2019 and 2020 in connection with 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.

30
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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.

31
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Table of Contents
ITEM 6.    EXHIBITS

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~~
~~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
32
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: May 11, 2020
~~LiqTech International, Inc.~~
~~Dated: November 14, 2019~~
/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: November 14, 2019~~
~~/s/ Claus Toftegaard~~
~~Claus Toftegaard, Chief Financial Officer~~
~~(Principal Financial and Accounting Officer)~~

33
31

Liabilities and Stockholders’ Equity	As of			As of			As of			As of
	September 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019
	(Unaudited)						(Unaudited)
Current Liabilities:
Current portion of capital lease obligations	$	-		$	13,789
Accounts payable							$	3,226,114		$	4,339,070
Accrued expenses								3,290,386			3,222,951
Current portion of finance lease obligations								34,403			34,772
Current maturities of operating lease liabilities		681,481			-			985,360			999,685
Current portion of contingent earn-out		291,690			-			293,436			299,585
Accounts payable		3,703,850			2,122,479
Accrued expenses		3,623,012			1,868,229
Contract liabilities		1,165,684			516,335			1,351,666			1,421,376
Income taxes payable		31,260			-			14,402			14,692
Deferred revenue		842,254			98,781

Total Current Liabilities		10,339,231			4,619,613			9,195,767			10,332,131

Net deferred income tax liability		210,393			-
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								3,994,609			4,141,855
Contingent earn-out, net of current portion		583,380			-			586,872			599,170
Operating lease liabilities, net of current maturities		1,561,076			-

Total Long-term Liabilities		2,354,849			-			5,058,074			5,252,061

Total Liabilities		12,694,080			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 September 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 September 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		61,483,032			46,575,986			61,539,364			61,398,150
Accumulated deficit		(31,448,837	)		(32,286,224	)		(31,943,109	)		(32,246,608	)
Deferred compensation		(23,332	)		(23,499	)
Accumulated other comprehensive loss		(6,591,826	)		(5,744,856	)		(6,662,518	)		(6,166,559	)

Total Stockholders' Equity		23,439,585			8,539,636			22,954,293			23,005,531

Total Liabilities and Stockholders' Equity	$	36,133,665		$	13,159,249		$	37,208,134		$	38,589,723

	For the Nine Months Ended September 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	$	4,909	$	54,655	$	16,514	$	23,541
Income Taxes	$	-	$	-	$	-	$	-

Supplemental Disclosures of Non-Cash Investing and Financing:
Common stock issued for conversion of mandatory preferred stock	$	-	$	8,803
Offering costs for common stocks issuance	$	1,463,446	$	747,423

	For the Three Months Ended						For the Nine Months Ended						For the Three Months Ended March 31,
	September 30,						September 30,						2020			2019
	2019			2018			2019			2018

Net Sales	$	9,672,716		$	3,347,204		$	26,391,100		$	9,336,614
Revenue													$	10,281,844		$	7,421,198
Cost of Goods Sold		7,444,978			3,058,465			20,613,172			8,447,645			7,642,768			5,946,118

Gross Profit		2,227,738			288,739			5,777,928			888,969			2,639,076			1,475,080

Operating Expenses:
Selling expenses		461,010			414,504			1,458,633			1,288,294			676,800			483,587
General and administrative expenses		1,318,505			663,547			3,057,807			2,008,194			1,470,393			770,864
Research and development expenses		189,216			152,849			591,572			498,526			310,954			203,172

Total Operating Expense		1,968,731			1,230,900			5,108,012			3,795,014			2,458,147			1,457,623

Income (Loss) from Operations		259,007			(942,161	)		669,916			(2,906,045	)
Income from Operations														180,929			17,457

Other Income (Expense)
Interest and other income		28,736			1,814			54,186			12,271			4,490			7,277
Interest expense		(35,292	)		(5,463	)		(110,442	)		(65,937	)		(104,856	)		(38,648	)
Gain (Loss) on currency transactions		403,432			23,861			244,872			240,947
Gain (Loss) on sale of fixed assets		474			-			(21,145	)		-
Gain on currency transactions														207,627			48,158

Total Other Income (Expense)		397,350			20,212			167,471			187,281
Total Other Income														107,261			16,787

Income (Loss) Before Income Taxes		656,357			(921,949	)		837,387			(2,718,764	)
Income Before Income Taxes														288,190			34,244

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

Net Income (Loss)	$	656,357		$	(921,949	)	$	837,387		$	(2,718,764	)
Net Income													$	303,499		$	34,244


Basic and Diluted Income (Loss) Per Share	$	0.03		$	(0.05	)	$	0.04		$	(0.18	)
Basic Income Per Share													$	0.01		$	0.00

Diluted Income Per Share													$	0.01		$	0.00

Basic Weighted Average Common Shares Outstanding		20,547,667			18,185,137			19,350,533			15,199,809			20,554,524			18,267,068

Diluted Weighted Average Common Shares Outstanding		20,563,540			18,185,137			19,366,545			15,199,809			20,711,035			19,145,875

	For the Nine months ended
	September 30,
	2019			2018
Cash Flows from Operating Activities:
Net Income (Loss)	$	837,387		$	(2,718,764	)
Adjustments to reconcile net loss to net cash provided (used) by operations:
Depreciation and amortization		852,705			621,460
Stock-based compensation		174,778			93,267
Changes in assets and liabilities:
Accounts receivable		(4,652,294	)		(1,369,207	)
Other receivables		(2,593,412	)
Inventory		(430,776	)		290,567
Construction in progress		(2,138,406	)		-
Prepaid expenses and deposits		(104,928	)		(47,243	)
Account payable		1,481,881			(301,016	)
Accrued expenses		1,769,893			(326,932	)
Operating lease liability		(347,747	)		-
Contract assets and liabilities, net		632,268			(80,338	)

Total Adjustments		(5,356,038	)		(1,119,442	)

Net Cash Used in Operating Activities		(4,518,651	)		(3,838,206	)

Cash Flows from Investing Activities:
Purchase of property and equipment		(510,403	)		(145,984	)
Proceeds from sale/recovery of property and equipment		23,700			-
Net cash paid for acquisition		(1,154,902	)		-

Net Cash Used in Investing Activities		(1,641,605	)		(145,984	)

Cash Flows from Financing Activities:
Net proceeds/payments on capital lease obligation		(13,789	)		48,127
Proceeds from exercise of stock options		133,200			-
Proceeds from issuance of common stocks, net		14,601,554			5,865,077

Net Cash Provided by Financing Activities		14,720,965			5,913,204

Gain (Loss) on Currency Translation		(700,412	)		(553,618	)

Net Change in Cash, Cash Equivalents and Restricted Cash		7,860,297			1,375,396

Cash, Cash Equivalents and Restricted Cash at Beginning of Period		3,776,111			2,486,199

Cash, Cash Equivalents and Restricted Cash at End of Period	$	11,636,408		$	3,861,595

	Operating lease			Finance lease
October 2019 – September 2020	$	711,058		$	-
October 2020 – September 2021		574,753			-
October 2021 – September 2022		468,283			-
October 2022 – September 2023		433,132			-
October 2023 – September 2024		357,179			-
Thereafter		-			-
Total payment under lease agreements		2,544,405			-
Less imputed interest		(301,848	)		-
Total lease liability	$	2,242,557		$	-

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

	2019
Balance at December 31, 2018	$	432,225
Current year warranty expense		621,142
Change in estimate related to pre-existing warranties		-
Payments made		(307,596	)
Foreign currency effect		(31,001	)
Balance at September 30, 2019	$	714,770

										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		0.87	$	-		25,000	$	2.96		0.37	$	-
Vested and expected to vest		25,000		$	2.96		0.87	$	-		25,000	$	2.96		0.37	$	-
Exercisable end of period		25,000		$	2.96		0.87	$	-		25,000	$	2.96		0.37	$	-

	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Customer A		49	%		58	%		40	%		39	%
Customer C		16	%		*			16	%		15	%
Customer B								11	%		*
Customer E								*			*

Cash	$	1,332,090
Liabilities short-term		296,020
Liabilities long-term		592,040
Total	$	2,220,150

Cash and bank balances	$	177,188
Account receivables		600,441
Inventory		323,403
Other receivables / deferred expenses		59,235
Deposits		53,304
Property and Equipment		1,397,421
Account payables		(99,490	)
Other debt and accrued expenses		(660,990	)
Accrued income tax		(31,146	)
Deferred tax liability		(213,516	)
		1,605,850
Goodwill		614,300
	$	2,220,150

	For the Three Months Ended September 30,				For the Three Months Ended
	2019		2018		March 31,		March 31,
Compensation for vesting of restricted stock awards issued to the board of directors	$	23,167	$	5,833
					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	$	23,167	$	5,833	$	141,222	$	128,444

	●	~~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.
	●	~~the recognition and measurement of warranty provisions, which impacts the gross margin, and~~
	●	~~the assessment of interest rates and term of life for Right-of-Use fixed assets, which impacts cost of sales and external expenses, and also short and long term liabilities.~~