LIQTECH INTERNATIONAL INC - Quarter Report: 2012 March (Form 10-Q)

liqt_10q-033112.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2012

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

For the transition period from _______________________ to ___________________________

Commission File Number: 000-53769

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, DK2750 Ballerup, Denmark
(Address of principal executive offices)	(Zip Code)

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

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 x No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No

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

Large accelerated filer		Accelerated filer
Non-accelerated filer	(Do not check if a smaller reporting company)	Smaller reporting company x

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

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, at May 14, 2012, was 24,111,500 shares .

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended March 31, 2012

TABLE OF CONTENTS

	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011	4

Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2012 and March 31, 2011 (unaudited)	6

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and March 31, 2011 (unaudited)	8

Notes to Consolidated Financial Statements (unaudited)	9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation	22

Item 3. Quantitative and Qualitative Disclosures About Market Risk	31

Item 4. Controls and Procedures	31

PART II. OTHER INFORMATION

Item 1A. Risk Factors	32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3. Defaults Upon Senior Securities	32

Item 4. Mine Safety Disclosures	32

Item 5. Other Information	32

Item 6. Exhibits	32

SIGNATURES	36

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. Our plans and objectives are based, in part, on assumptions involving the continued expansion of our business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	As of March 31, 2012		As of December 31, 2011
	(UNAUDITED)
Current Assets:
Cash	$	6,552,392	$	1,033,057
Accounts receivable, net		5,309,656		5,299,569
Other receivables		785,444		1,528,362
Inventories		3,399,566		2,980,583
Prepaid expenses		285,290		301,375
Current deferred tax asset		47,383		17,786
Total Current Assets		16,379,731		11,160,732

Property and Equipment, net of accumulated depreciation		7,049,330		6,647,217

Other Assets:
Other intangible assets		33,834		34,167
Other investments		41,361		6,483
Deposits		150,402		146,184

Total Other Assets		225,597		186,834

Total Assets	$	23,654,658	$	17,994,783

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

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	As of March 31, 2012			As of December 31, 2011
	(UNAUDITED)
CurrentLiabilities:
Lines of credit	$	-		$	1,259,936
Notes payable - current portion		-			259,396
Notes payable - related party, net of discount		3,467,750			3,328,183
Current portion of capital lease obligation		199,622			191,444
Accounts payable - trade		2,309,862			3,026,960
Accrued expenses		1,575,336			1,212,746
Accrued income taxes payable		126,130			3,710
Other accrued liabilities		5,919			154

Total Current Liabilities		7,684,619			9,282,529


Notes payable and long-term debt, less current portion		-			350,000
Long-term capital lease obligations, less current portion		929,689			950,351
Deferred tax liability		628,772			668,484

Total Long-Term Liabilities		1,558,461			1,968,835
Total Liabilities		9,243,080			11,251,364

Stockholders' Equity:
Common stock; par value $0.001, 100,000,000 shares authorized, 24,111,500 and 21,600,000 sharesissued and outstanding at March 31, 2012, and December 31, 2011, respectively		24,112			21,600
Additional paid-in capital		12,835,952			5,603,517
Retained earnings		5,607,185			5,284,583
Deferred compensation		(235,680	)		(268,282	)
Other comprehensive income, net		(378,192	)		(596,011	)
Note receivable from a shareholder, net of discount		(3,467,750	)		(3,328,183	)
Non-controlled interest in subsidiaries		25,951			26,195

Total Stockholders' Equity		14,411,578			6,743,419

Total Liabilities and Stockholders' Equity	$	23,654,658		$	17,994,783

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

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

(UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended March 31
	2012			2011

Net Sales	$	6,341,721		$	2,917,395
Cost of Goods Sold		4,252,037			2,237,660

Gross Profit		2,089,684			679,735

Operating Expenses:
Selling expenses		659,918			404,331
General and administrative expenses		722,512			277,793
Research and development		226,674			113,538

Total Operating Expenses		1,609,104			795,662

Income from Operations		480,580			(115,927	)

Other Income (Expense)
Interest and other income		38,963			10,726
Interest (expense)		(84,516	)		(5,779	)
(Loss) on currency transactions		(1,449	)		(27,372	)

Total Other Income (Expense)		(47,002	)		(22,425	)

Income Before Income Taxes		433,578			(138,352	)

Income Tax Expense		110,977			(26,678	)

Net Income (Loss)		322,601			(111,674	)

Less Net Income (Loss) Attributable To Non-Controlled Interests in Subsidiaries		-			16,528

Net Income (Loss) Attributable To LiqTech		322,601			(128,202	)

Basic Earnings Per Share	$	0.01		$	(0.01	)

Weighted Average Common Shares Outstanding		22,234,775			9,308,333

DilutedEarnings Per Share	$	0.01		$	(0.01	)

Weighted Average Common Shares Outstanding Assuming Dilution		27,415,788			9,308,333

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

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

	For the Three Months Ended March 31,
	2012			2011

Net Income(Loss)		322,601			(111,674	)

Currency Translation, Net of Taxes		217,575			323,891

Other Comprehensive Income (Loss)	$	540,176		$	212,217

Comprehensive Income (Loss) Attributable to Non-controlling Interest in Subsidiaries		(244	)		60,111

Comprehensive Income Attributableto LiqTech International, Inc.	$	540,420		$	152,106

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

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

(UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

	For The Three Months Ended March 31,
	2012			2011
Cash Flows from Operating Activities:
Net Income (Loss)	$	322,601		$	(111,674	)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization		348,607			295,855
Compensation from stock options		32,602			523
Bad debt expense		110,000			85,186
Change in deferred tax asset / liability		(50,216	)		(74,945	)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable		622,831			(4,237	)
(Increase) decrease in inventory		(418,983	)		309,612
(Increase) decrease in prepaid expenses/deposits		11,868			(989,231	)
Increase (decrease) in accounts payable		(717,098	)		175,181
Increase (decrease) in accrued expenses		471,682			(25,001	)

Total Adjustments		411,293			(227,057	)

Net Cash Provided (Used) by Operating Activities		733,894			(338,731	)

Cash Flows from Investing Activities:
Purchase of property and equipment		(636,993	)		(368,295	)
Purchase of intangible assets		-			(4,952	)
Purchase of long-term investments		(34,878	)		-

Net Cash Used by Investing Activities		(671,871	)		(373,247	)

Cash Flows from Financing Activities:
Payments on notes payable		(609,396	)		(25,000	)
Net proceeds (payments) on lines of credit		(1,259,936	)		238,960
(Payments) on notes payable - related party		-			-
(Payments) on capital lease obligation		(12,484	)		86,572
Proceeds from issuance of common stock and warrants		7,234,947			-
Repurchase of common stock		-			-
Payments on related party notes receivable		-			-

Net Cash Provided by Financing Activities		5,353,131			300,532

Gain on Currency Translation		104,181			326,307

Net Increase (Decrease) in Cash and Cash Equivalents		5,519,335			(85,139	)

Cash and Cash Equivalents at Beginning of Period		1,033,057			559,259
Cash and Cash Equivalents at End of Period	$	6,552,392		$	474,120

Supplemental Disclosures of Non-Cash Investing and Financing Activities:

For the Three Months Ended March 31, 2012

The Company recorded $32,602 in stock compensation for options granted to employees.

For the Three Months Ended March 31, 2011

The Company recorded $523 in stock compensation for options granted to employees.

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

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVERSE ACQUISITION

On August 24, 2011, pursuant to an Agreement and Plan of Merger, dated as of August 23, 2011, by and among, LiqTech International, Inc. (“Parent”) (formerly Blue Moose Media, Inc.), Blue Moose Delaware Merger Sub, Inc., ("BMD Sub"), a wholly owned subsidiary of Parent and LiqTech USA (the "Merger Agreement"), BMD Sub was merged with and into LiqTech USA (the "Merger") and as a result of the Merger, LiqTech USA became a wholly owned subsidiary of Parent. Prior to the Merger there were 4,155,250 shares of the common stock, par value $.001 per share of Parent outstanding, pursuant to the Merger each of the 17,444.75 outstanding shares of the common stock of LiqTech USA, was exchanged for 1,000 shares of Parent’s common stock, for a total of 17,444,750 shares resulting in 21,600,000 shares of Parent common stock being outstanding immediately following the Merger and warrants to acquire up to 6,500 shares of LiqTech USA’s common stock at an exercise price of $1,500 per share, were by their terms, converted into warrants to acquire up to 6,500,000 shares of Parent common stock at an exercise price of $1.50 per share.

Business and Basis of Presentation - The consolidated financial statements include the accounts of LiqTech International, Inc., "Company", “us", "we" and "our" as used in this report refer to LiqTech International, Inc. and its subsidiaries (set forth below), which engages in the development, design, production, marketing and sale of diesel particulate air and liquid filters and kiln furniture in United States of America, Canada, Europe, Asia and Brazil.

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

LiqTech USA, Inc. (“LiqTech USA“), a Delaware corporation and a wholly-owned subsidiary of Parent formed in May 2011.

LiqTech A/S (“LiqTech AS“), a Danish Corporation, incorporated on March 15, 1999, a wholly-owned subsidiary of LiqTech USA, engages in the development, design, production, marketing and sale of ceramic diesel particulate and liquid filters and kiln furniture in Europe, Asia and Brazil.

LiqTech International A/S, a Danish Corporation, incorporated on January 15, 2000, formerly known as CoMeTas A/S (“LiqTech Int. DK”), a 100% owned subsidiary of LiqTech AS, engages in development, design, application, marketing and sales of membranes on ceramic diesel particulate and liquid filters and catalytic converters in Europe, Asia and Brazil. LiqTech Int. DK was a 75% owned subsidiary from March 2011 to August 24, 2011 and a 60% owned subsidiary prior to March 2011.

LiqTech NA, Inc. (“LiqTech NA“) a 100% owned subsidiary of LiqTech AS, incorporated in Delaware on July 1, 2005, engages in the production, marketing and sale of ceramic diesel particulate and liquid filters and kiln furniture in United States of America and Canada. Prior to August 2011, LiqTech held a 90% interest in LiqTech NA.

LiqTech Asia (“LiqTech Asia“) a 60% owned subsidiary of LiqTech AS, incorporated in Korea on July 20, 2006, is currently a dormant subsidiary.

The accompanying financial statements are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2012 and 2011 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2011 audited financial statements. The results of operations for the periods ended March 31, 2012 and 2011 are not necessarily indicative of the operating results for the full year.

Consolidation - The consolidated financial statements include the accounts and operations of the Company. The non-controlling interests in the net assets of the subsidiaries are recorded in equity. The non-controlling interests of the results of operations of the subsidiaries are included in the results of operations and recorded as the non-controlling interest in subsidiaries. All material intercompany transactions and accounts have been eliminated in the consolidation.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]

Functional Currency / Foreign Currency Translation -- The Group functional currency is the Danish Krone (“DKK”) and its reporting currency is U.S. Dollars for the purpose of these financial statements. The Company’s consolidated balance sheet accounts are translated into U.S. dollars at the period-end exchange rates (5.5705DKK and 5.7456DKK to $1 at March 31, 2012 and at December 31, 2011, respectively) and all revenue and expenses are translated into U.S. dollars at the average exchange rates prevailing during the 2012 and 2011(5.6724DKK and 5.3621DKK to $1) in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.

Cash and Cash Equivalents-- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company had no balances held in financial institutions in the United States in excess of federally insured amounts at March 31, 2012 and December 31, 2011.

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

The roll forward of the allowance for doubtful accounts for the three months ended March 31, 2012 and twelve months ended December 31, 2011 is as follows:

	2012		2011

Allowance for doubtful accounts at the beginning of the period	$	389,032	$	452,266
Bad debt expense		110,000		208,275
Amount of receivables written off		-		(257,610	)
Effect of currency translation		15,434		(13,899	)
Allowance for doubtful accounts at the end of the period	$	514,466	$	389,032

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

Inventory consists of the following at March 31, 2012 and December 31, 2011:

	2012			2011

Furnace parts and supplies	$	197,867		$	151,412
Raw materials		623,477			920,065
Work in process		1,679,645			867,988
Finished goods		987,951			1,054,118
Reserve for obsolescence		(89,374	)		(13,000	)

Net Inventory	$	3,399,566		$	2,980,583

The Company’s inventory is held as collateral on the Company’s lines of credits.

Property and Equipment– Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized, upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the estimated useful lives of the assets which range from three to twenty years (See Note 4).

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

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

Revenue Recognition and Sales Incentives -- The Company's accounts for revenue recognition in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), FASB ASC 605 "Revenue Recognition". The Company recognizes revenue when rights and risk of ownership have passed to the customer, when there is persuasive evidence of an arrangement, product has been shipped or delivered to the customer, the price and terms are finalized, and collections of resulting receivable is reasonably assured. Products are primarily shipped FOB shipping point at which time title passes to the customer. In some instances, the Company uses common carriers for the delivery of products. In these arrangements, sales are recognized upon delivery to the customer. The Company's revenue arrangements with its customers often include early payment discounts and such sales incentives are recorded against sales.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]

Advertising Cost - Cost incurred in connection with advertising of the Company’s products is expensed as incurred. Such costs amounted to $20,447 and $20,023 for the three months ended March 31, 2012 and 2011, respectively.

Research and Development Cost - The Company expenses research and development costs for the development of new products as incurred. Included in operating expense for the three months ended March 31, 2012 and 2011 are $226,674, and $113,538, respectively, of research and development costs.

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

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

Stock Options - The Companies have stock option plans that provide for stock-based employee compensation, including the granting of stock options, to certain key employees and directors. The plans are more fully described in Note 13. During the years presented in the accompanying consolidated financial statements, the Company has granted options under its stock option plans. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, "Compensation – Stock Compensation". Non-cash compensation costs of $32,602 and $523 have been recognized for the vesting of options granted to employees with an associated recognized tax benefit of $0 for the three months ended March 31, 2012 and 2011, respectively.

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

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

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

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

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

Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Recent Accounting Pronouncements

In June 2011, the FASB issued amended standards to increase the prominence of items reported in other comprehensive income. These amendments eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and require that all changes in stockholders’ equity—except investments by, and distributions to, owners—be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, these amendments require that we present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. These new standards are effective for us beginning in the first quarter of 2012 and are to be applied retrospectively.

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

NOTE 2 - RELATED PARTY TRANSACTIONS

Notes Receivable From Related Parties - At December 31, 2010, LiqTech NA had a note receivable of $80,000 from an officer bearing interest at 4%. The note was secured by the officer’s stock in the Company and was due on demand. The note was paid in full during 2011. Interest income of $0 and $800 was recorded and received for the three months ended March 31, 2012 and 2011, respectively.

The Company has a 19,500,000 DKK (approximately $3,500,609) note receivable, before the discount of $32,859 as of March 31, 2012, from a shareholder resulting from the purchase of common shares and classified as equity in the accompanying financial statements. The note was discounted as the note does not accrue interest and is payable on June 30, 2012. During the three months ended March 31, 2012 the Company recorded interest income of $32,589 as a result of amortization of the discount.

Notes Payable From a Related Party - The Company has a 19,500,000 DKK (approximately $3,500,609) note payable before the discount of $32,859 as of March 31, 2012, to current and former shareholders of LiqTech AS in connection with the LiqTech AS’s reverse acquisition of LiqTech USA, concurrently with the Merger. The note was discounted as the note does not accrue interest and is payable on June 30, 2012. During the three months ended March 31, 2012 the Company recorded interest expense of $32,589 as a result of amortization of the discount.

NOTE 3 - INVENTORY

Inventory consists of the following at March 31, 2012 and December 31, 2011:

	2012			2011

Furnace parts and supplies	$	197,867		$	151,412
Raw materials		623,477			920,065
Work in process		1,679,645			867,988
Finished goods		987,951			1,054,118
Reserve for obsolescence		(89,374	)		(13,000	)

Net Inventory	$	3,399,566		$	2,980,583

The Company’s inventory is held as collateral on the Company’s lines of credits.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at March 31, 2012 and December 31, 2011:

	Useful Life		2012			2011

Production equipment		3 – 10	$	11,039,674		$	10,025,051
Lab equipment		3 – 10		360,747			349,750
Computer equipment		3 – 5		244,368			236,155
Vehicles		3		10,897			10,565
Furniture and fixture		5		49,403			47,898
Leasehold improvements		10		614,398			443,448

				12,319,487			11,112,867
Less Accumulated Depreciation				(5,270,157	)		(4,465,650	)

Net Property and Equipment			$	7,049,330		$	6,647,217

Depreciation expense amounted to $348,274 and $291,477, for the three months ended March 31, 2012 and 2011, respectively. The Company’s property and equipment is held as collateral on the lines of credit.

NOTE 5 – DEFINITE-LIFE INTANGIBLE ASSETS

At March 31, 2012 and December 31, 2011, definite-life intangible assets, net of accumulated amortization, consist of patents on the Company’s products of $33,834 and $34,167, respectively. The patents are recorded at cost and amortized over two to ten years. Amortization expense for the three months ended March 31, 2012 and 2011 is $333 and $4,378 respectively.

Expected future amortization expense for the years ended are as follows:

Year ending December 31,

2012	$	4,246
2013		5,627
2014		5,627
2015		5,627
2016		5,627
Thereafter		7,080
	$	33,834

NOTE 6 – LINES OF CREDIT

LiqTech AS has a DKK 6,000,000 (Approximately $1,077,110 at March 31, 2012) standby line of credit with a bank, subject to certain borrowing base limitations. Outstanding borrowings are due on demand. There was $0 and $882,003 outstanding as of March 31, 2012 and December 31, 2011, respectively. Interest is charged quarterly at 4.46% per annum at March 31, 2012 and the line is secured by certain of the Company’s receivables, inventory and equipment. At March 31, 2012, the line had been paid down to $0 outstanding, with $1,077,110 available on the line of credit.

LiqTech Int. DK has a DKK 3,000,000 (Approximately $538,555 at March 31, 2012) standby line of credit with a bank, subject to certain borrowing base limitations. Outstanding borrowing is due on demand. There was $0 and $377,933 outstanding as of March 31, 2012 and December 31, 2011, respectively. Interest is charged quarterly at 4.46% per annum at March 31, 2012 and the line is secured by certain of the Company’s receivables, inventory and equipment. At March 31, 2012, the line had been paid down to $0 outstanding, with $538,555 available on the line of credit.

NOTE 7 – NOTES PAYABLE

Note Payable – In September 2011 LiqTech AS entered into a note payable agreement with a financial institution, wherein LiqTech AS borrowed $475,000. On March 31, 2012, the note payable was paid off.

NOTE 8 – LEASES

Operating Leases - The Company leases office and production facilities under operating lease agreements expiring in August, 2013, March 2014, and July 2016. Some of these lease agreements have an option to extend

The future minimum lease payments for non-cancelable operating leases having remaining terms in excess of one year as of March 31, 2012 are as follows:

Year ending December 31,	Lease Payments

2012	$	422,986
2013	$	545,264
2014	$	579,806
2015	$	594,256
2016	$	480,689
Thereafter	$	51,196
Total Minimum Lease Payments	$	2,674,197

Lease expense charged to operations was $165,104 and $131,274 for the three months ended March 31, 2012 and 2011, respectively.

Capital Lease - The Company leases equipment on various capital leases calling for monthly payments of $2,109, $2,961, $11,799, $4,573 and $694 expiring through April 2017. At March 31, 2012 and at December 31, 2011, the Company had recorded equipment on capital lease at $1,595,325 and $1,546,696, respectively, with related accumulated depreciation of $498,789 and $430,070, respectively.

During the three months ended March 31, 2012and 2011, depreciation expense for equipment on capital lease amounted to $54,204, and $45,198, respectively, and has been included in depreciation expense. During the three months ended March 31, 2012 and 2011, interest expense on capital lease obligation amounted to $17,699, and $17,621, respectively.

Future minimum capital lease payments are as follows for the periods ended December 31:

	As of March 31, 2012

2012	$	230,144
2013		257,297
2014		252,580
2015		220,334
2016		213,292
Thereafter		136,957
Total minimum lease payments		1,310,604
Less amount representing interest		(181,293	)
Total present value of minimum lease payments		1,129,311
Less current portion		(199,622	)
Long-term lease payments	$	929,689

NOTE 9 - 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 ending March 31, 2012 and 2011, matching contributions were expensed and totaled $5,993 and $3,921, respectively.

NOTE 10 – INCOME TAXES

The Company accounts for income taxes in accordance with FASB ASC Topic 740, "Accounting for Income Taxes" which requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carry forwards. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which cannot be determined.

The temporary differences, tax credits and carry forwards gave rise to the following deferred tax asset (liabilities) at March 31, 2012 and December 31, 2011:

	2012			2011

Vacation accrual	$	13,234		$	13,234
Reserve for sales returns	$	10,504			-
Reserve for obsolete inventory		23,645			4,552
Net current tax assets	$	47,383		$	17,786

Business tax credit carryover		-			-
Net operating losscarryover		217,241			130,118
Excess of book over tax depreciation		(846,013	)		(798,602	)
Net deferred tax liability	$	(628,772	)	$	(668,484	)

In accordance with prevailing accounting guidance, the Company is required to recognize and disclose any income tax uncertainties. The guidance provides a two-step approach to recognizing and measuring tax benefits and liabilities when realization of the tax position is uncertain. The first step is to determine whether the tax position meet the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%.

The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is dependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which can difficult to determine and can only be estimated. Management estimates that it is more likely than not that the Company will generate adequate net profits to use the deferred tax assets; management has estimated that all of the deferred tax will be realized and consequently, a valuation allowance was not recorded.

As of March 31, 2012, the Company had net operating loss carryovers of $211,553 for U.S. Federal purposes expiring through 2032.

A reconciliation of income tax expense at the federal statutory rate to income tax expense at the Company’s effective rate is as follows at March 31, 2012 and 2011:

	2012			2011

Computed tax at expected statutory rate	$	147,417		$	(52,659	)
State and local income taxes, net of federal benefits		6,945			979
Non-deductible expenses		849			1,898
Non-US income taxed at different rates		(34,477	)		23,104
Manufacture and other tax credits		(13,600	)		-
Other items		3,843			-
Income tax expense	$	110,977		$	(26,678	)

The components of income tax expense (benefit) from continuing operations for the years ended March 31, 2012 and 2011 consist of the following:

	2012			2011

Current income tax expense:
Danish	$	120,106		$	-
Federal		60,600			37,000
State		2,779			500
Current tax expense	$	183,485		$	37,500

Deferred tax expense (benefit) arising from:
Excess of tax over financial accounting depreciation	$	43,766		$	-


Net operating loss carryover		(87,021	)		(64,178	)
Allowance for doubtful accounts		(10,504	)		-
Reserve for obsolete inventory		(18,750	)		-
Deferred tax expense	$	(72,509	)		(64,178	)
Income Tax Expense (Benefit)		110,976			(26,678	)

Deferred income tax expense/(benefit) results primarily from the reversal of temporary timing differences between tax and financial statement income.

The Company files Danish and U.S. federal, and Minnesota state income tax returns, and LiqTech AS and LiqTech International AS are generally no longer subject to tax examinations for years prior to 2007 for their Danish tax returns. LiqTech NA is generally no longer subject to tax examinations for years prior to 2008 for U.S. federal and U.S. states tax returns.

NOTE 11 - ACQUISITIONS

On August 24, 2011, pursuant to the Merger Agreement, BMD Sub was merged with and into LiqTech USA, and as a result of the Merger, LiqTech USA became a wholly owned subsidiary of the Parent. Prior to the Merger there were 4,155,250 shares of common stock, par value $.001 per share of the Parent outstanding, pursuant to the Merger each of the 17,444.75 outstanding shares of the common stock of LiqTech USA was exchanged for 1,000 shares of the Parent’s common stock, for a total of 17,444,750 shares resulting in 21,600,000 shares of the Parent’s common stock being outstanding immediately following the Merger and warrants to acquire up to 6,500 shares of LiqTech USA’s common stock at an exercise price of $1,500 per share, were by their terms, converted into warrants to acquire up to 6,500,000 shares of Parent common stock at an exercise price of $1.50 per share.

In connection with the Merger, shareholders of the Parent contributed and cancelled 89,960,000 common shares of the Parent thereby reducing the common shares outstanding to 4,155,250. Prior to the Merger, LiqTech USA completed a private placement offering of 63 Units at $100,000 per Unit (the “Offering”) each such Unit consisting of 40 shares of LiqTech USA common stock (2,520,000 common shares of Parent after giving effect to the 1,000 for 1 share conversion into Parent upon the closing of the Merger) and a LiqTech USA Warrant for 20 shares of LiqTech USA common stock (1,260,000 warrants to purchase common shares of Parent after giving effect to the 1,000 for 1 share conversion into Parent upon closing of the Merger) for gross proceeds of $4,800,000 in cash and a promissory note for $1,500,000 payable on September 7, 2011. Prior to the Offering, LiqTech USA issued 2,946,417 common shares (2,949,417 common shares of the Parent after giving effect to the 1,000 for 1 shares conversion into Parent upon the closing of the Merger) and warrants to purchase 1,440 common shares at an exercise price of $1,500 per share (warrants to purchase 1,440,000 common shares of Parent at an exercise price of $1.50 per share after giving effect to the 1,000 for 1 share conversion into Parent upon closing of the Merger) for gross proceeds of $50,000 in cash and a 19,500,000 DKK notes payable ($3,765,351 based upon the currency exchange rate of $1.00 = 5.1788 DKK as of August 22, 2011). The note was discounted $120,600 as the note does not accrue interest and is payable on June 30, 2012. In connection with the Merger, LiqTech USA acquired all of the outstanding equity interests in LiqTech AS and all of the outstanding equity interests in LiqTech Int. DK and LiqTech NA not owned by LiqTech AS, directly from the holders of such equity interests. In exchange for such equity interests LiqTech USA paid the holders, in the aggregate of $4,577,999, promissory notes in the aggregate principal amount of 19,500,000 DKK ($3,765,351 based upon the currency exchange rate of $1.00 = 5.1788 DKK as of August 22, 2011) and 9,308.333 common shares of LiqTech USA (9,308,333 common shares of Parent after giving effect to the 1,000 for 1 shares conversion into the Parent upon closing of the Merger.)

NOTE 12 - 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 three months ended March 31, 2012 and 2011:

	For the Three Months Ended March 31
	2012		2011

Net Income (Loss) attributable to LiqTech International Inc.	$	322,601	$	(128,202	)

Weighted average number of common shares used in basic earnings per share		22,234,775		9,308,333

Effect of dilutive securities, stock options and warrants		5,181,013		-

Weighted average number of common shares and potentially dilutive securities		27,415,788		9,308,333

The Company included all outstanding common stock equivalents in the calculation of weighted average common shares and potential dilutive common shares outstanding.

The weighted average common shares outstanding used in the calculation of earning per shares for the three months ended March 31, 2011 reflects the 9,308,333 issued to the former shareholders of LiqTech AS in connection with the reverse acquisition.

NOTE 13 - STOCKHOLDERS' EQUITY

Common Stock – The Company has authorized 100,000,000 shares of common stock, $0.001 par value. As of March 31, 2012 and 2011, respectively, there were 24,111,500 and 9,308,333 common shares issued, and 24,111,500 and 9,308,333 common shares outstanding.

Voting

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

Dividends

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

Liquidation Rights

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

Other Matters

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

Preferred Stock

Our Board of Directors has the authority to issue preferred stock in one or more classes or series and to fix the designations, powers, preferences and rights, and 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 of us without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.

Common Stock Purchase Warrants

We have outstanding warrants to purchase 6,625,575 shares of common stock. 6,500,000 warrants are exercisable for cash at a price of $1.50 per share of common stock and will expire on December 31, 2016 and 125,575 warrants are exercisable for cash at a price of $4.0625 per share of common stock and will expire on March 7, 2017. The exercise price of the warrants and the number of shares underlying the warrants are subject to adjustment for stock dividends, subdivisions of the outstanding shares of common stock and combinations of the outstanding shares of common stock. While the warrants remain outstanding, we are required to keep reserved from our authorized and unissued shares of common stock a sufficient number of shares to provide for the issuance of the shares underlying the warrants.

Stock Options – In August 2011, the Company’s Board of Directors adopted a Stock Option Plan. Under the terms and conditions of the Plan, the board is empowered to grant stock options to employees, officers, and directors of the Companies. At March 31, 2012, the total number of shares of common stock granted under the Plan was 2,301,131 options.

The Company recognizes compensation costs for stock option awards to employees based on their grant-date fair value. The value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average assumptions used to estimate the fair values of the stock options granted using the Black-Scholes option-pricing model are as follows:

		LiqTech International, Inc.

Expected term		3.0 - 3.5 Years
Volatility		0.07% - 52.69%
Risk free interest rate		2.33%
Dividend yield		0%

The Company recognized employee stock based compensation expense of $32,602 and $523 for the three months ended March 31, 2012 and 2011, respectively. At March 31, 2012 the Company had approximately $235,680 of unrecognized compensation cost related to Non-vested options expected to be recognized through December 31, 2013.

A summary of the status of the options outstanding under the Company’s stock option plans at March 31, 2012 is presented below:

	Options Outstanding					Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price

$1.50-$3.60	2,274,130		2.88 years	$	2.994		758,043	$	2.994

A summary of the status of the options granted under the Company’s stock option plans at March 31, 2012, and changes during the year is presented below:

	March 31, 2012
	Shares		Weighted Average Exercise Price		Average Remaining Life		Intrinsic Value
LiqTech International Inc.

Outstanding at beginning of period		2,060,000	$	2.653		3.11	$	2,341,400
Granted		214,130		3.280		2.98		-
Exercised		-		-		-		-
Forfeited		-		-		-		-
Expired		-		-		-		-

Outstanding at end of period		2,274,130	$	2.994		2.88	$	1,553,554
Vested and expected to vest		2,274,130	$	2.994		2.88	$	1,553,554
Exercisable at end of period		758,043	$	2.994		2.88	$	517,851

The Company had at December 31, 2011 2,060,000 non-vested options with a weighted average exercise price of $2.653. At March 31, 2012 the Company had 2,274,130 non-vested options with a weighted average exercise price of $2.994 and with a weighted average grant date fair value of $0.18, resulting in unrecognized compensation expense of $235,680, which is expected to be expensed over a weighted-average period of 1.75 years.

The total intrinsic value of options exercised during the year ended March 31, 2012 was $0. Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at March 31, 2012 (for outstanding options), less the applicable exercise price.

NOTE 14 - SIGNIFICANT CUSTOMERS / CONCENTRATION

The Company had four customers who accounted for 19%, 17%, 11% and 8% of total sales at March 31, 2012. The Company had four significant customers who accounted for 13%, 11%, 10% and 8% of total sales at March 31, 2011.

The Company sells filters throughout the world; sales by geographical region are as follows for the three months ended March 31, 2012 and 2011:

	For the Three Months Ended March 31
	2012		2011

United States and Canada	$	1,897,671	$	977,163
South America		201,604		10,500
Asia		544,558		364,213
Europe		3,697,888		1,565,519
	$	6,341,721	$	2,917,395

The Company’s sales by product line are as follows for the three months ended March 31, 2012 and 2011:

	For the Three Months Ended March 31
	2012		2011

Ceramic diesel particulate	$	5,337,566	$	2,393,473
Liquid filters		901,926		497,233
Kiln furniture		102,229		26,689
	$	6,341,721	$	2,917,395

NOTE 15 – INSURANCE CLAIMS

On July 19, 2011, the building housing LiqTech Int. DK (formerly CoMeTas AS) corporate office and production facility suffered damages resulting from a fire in the roof structure and portions of the corporate offices. The production facility suffered structural and water damage making the facility unsafe for future use. The Company located a new facility and moved their operations and usable equipment. The Company filed claims under two insurance policies on LiqTech Int. DK, a DKK 15,500,000 (approximately $2,750,000 USD) policy for casualty losses and a DKK 10,000,000 (approximately $1,800,000 USD) policy for business interruption.

The business interruption policy covered a period of twelve months from the date of the fire. The Company settled with the insurance company and received DKK 5,408,000 (approximately $1,000,000 USD) under the business interruption policy. The Company will record the proceeds from the policy ratably over twelve month period covered. For the period ending March 31, 2012, the Company recorded DKK 1,600,903 (approximately $300,000 USD) as an increase in sales, DKK 248,903 (approximately $50,000 USD) as an increase in costs of goods sold and DKK 1,352,000 (approximately $250,000 USD) as a deferral under the business interruption policy.

NOTE 16 – SUBSEQUENT EVENT

The Company’s management reviewed material events through May 14, 2012.

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.

Overview

We are a clean technology company that provides state-of-the-art technologies for gas and liquid purification by manufacturing ceramic silicon carbide filters. For more than a decade, we have developed and manufactured products of re-crystallized silicon carbide. We specialize in three business areas: diesel particulate filters for the control of soot exhaust particles from diesel engines, ceramic membranes for liquid filtration and kiln furniture for the refractory industry. Using nanotechnology, we develop proprietary products using patented silicon carbide technology. Our products are based on unique silicon carbide membranes which facilitate new applications and improve existing technologies. We market our products from our offices in the United States and Denmark, and through local representatives in Italy, Germany, France, Korea, Brazil and Singapore. The products are shipped directly to customers from our production facilities in the United States and Denmark.

The terms “LiqTech”, “we”, “our”, “us”, the “Company” or any derivative thereof, as used herein refer to LiqTech International, Inc., a Nevada corporation, together with its direct and indirect wholly-owned subsidiaries, including LiqTech USA, Inc., a Delaware corporation (“LiqTech USA”), which owns all of the outstanding equity interest in LiqTech A/S, a Danish limited company, organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“LiqTech Denmark”), LiqTech International A/S (formerly known as Cometas A/S), a Danish limited company, organized under the Danish Act on Limited Companies of the Kingdom of Denmark (“LiqTech Denmark International”) and LiqTech NA, Inc., a Delaware corporation (“LiqTech Delaware”). Collectively, LiqTech USA, LiqTech Denmark, LiqTech Denmark International and LiqTech Delaware are referred to herein as our “Subsidiaries”.

We conduct operations in the Kingdom of Denmark and the United States. Our Danish operations are conducted by LiqTech Denmark and LiqTech Denmark International located in the Copenhagen, Denmark area and our U.S. operations are conducted by LiqTech Delaware located in White Bear Lake, Minnesota. In October 2011, the Company opened sales offices in France and Germany and in January 2012, we opened a sales office in Singapore.

Reverse Acquisition

Prior to August 24, 2011, Blue Moose was a “shell” company with no business or operations. On August 24, 2011, pursuant to the Merger Agreement by and among Blue Moose, BMD Sub and LiqTech USA, BMD Sub was merged with and into LiqTech USA and, as a result of the merger, LiqTech USA became a wholly owned subsidiary of Blue Moose. Pursuant to the Merger, (a) each of the 17,444.75 outstanding shares of the common stock of LiqTech USA was exchanged for 1,000 shares of our common stock, for a total of 17,444,750 shares of our common stock resulting in 21,600,000 shares of our common stock being outstanding immediately following the merger and (b) warrants to acquire up to 6,500 shares of LiqTech USA’s common stock at a price of $1,500 per share, were by their terms, converted into warrants to acquire up to 6,500,000 shares of our common stock at a price of $1.50 per share.

LiqTech USA owns all of the outstanding equity interests in LiqTech Denmark, LiqTech Denmark International and LiqTech Delaware. In June and July 2011, LiqTech USA entered into agreements to acquire (i) all of the outstanding equity interests in LiqTech Denmark and (ii) all of the outstanding equity interests in LiqTech Denmark International and LiqTech Delaware not owned by LiqTech Denmark, directly from the holders of such equity interests (the “LiqTech Acquisition Agreements”). In exchange for such equity interests, LiqTech USA agreed to pay to such holders in the aggregate (i) $4,637,315 in cash, (ii) promissory notes in the principal amounts of DKK 19,500,000 (which was equal to $3,765,351 based upon the currency exchange rate of $1.00 = DKK 5.1788 as of August 22, 2011) and (iii) 9,308.333 shares of LiqTech USA’s common stock.

Prior to completion of the merger, LiqTech USA completed a private placement offering of 63 units at $100,000 per unit, each such unit consisting of 40 shares of LiqTech USA’s common stock and 20 warrants to purchase LiqTech USA common stock, and received $4,800,000 in cash and a promissory note for $1,500,000 payable on September 7, 2011. Thereafter, in August 2011, LiqTech USA closed the transactions contemplated by the LiqTech Acquisition Agreements.

As a result of the merger, Blue Moose changed its management and reconstituted its board of directors. As of the effective time of the merger, Gordon Tattarsall, the president, the chief financial officer and the sole director of Blue Moose, resigned as president and chief financial officer. As Blue Moose’s sole director, Mr. Tattersall appointed Aldo Petersen as a director of Blue Moose. The Directors then appointed Lasse Andreassen and Soren Degn as the officers of Blue Moose, and Lasse Andreassen, Paul Burgon, John Nemelka and Michael Sonneland as directors of Blue Moose. However, in accordance with the rules and regulations of the SEC, the other new directors did not take office until September 5, 2011, which is ten days after we filed an Information Statement pursuant to Rule 14f-1 of the Securities and Exchange Act of 1934, as amended, and mailed that statement to our stockholders of record. In addition, at the effective time of the merger, Mr. Tattarsall resigned as a director of Blue Moose effective as of September 5, 2011.

Our Products

We manufacture and sell (i) diesel particulate filters for the control of soot exhaust particles from diesel engines; (ii) ceramic membranes for the filtration of liquid and (iii) to a much lesser extent, kiln furniture to support ceramics during the firing process.

Diesel Particulate Filters

We offer our diesel particulate filters (“DPF”) for exhaust emission control solutions to the verified retrofit and OEM market through our direct sales force. DPF sales are generally made to distributors specializing in sales to end users. We use a proprietary nano washcoat to provide catalytic coating for anything from diesel particulate filters to catalytic converters. We have developed a robust silicon carbide diesel particulate filter that is especially useful for vehicles that produce a high soot load, and, if properly maintained, should last as long as the vehicle’s engine. Our DPFs are ideal for off-road vehicles because of their strength, chemical non-reactive nature, temperature resilience and thermal conductivity. Our DPF products are sold worldwide, under the LiqTech brand names.

For the three months ended March 31, 2012 and 2011, our sales of DPFs were $5,337,566 and $2,393,473, respectively.

Ceramic Silicon Carbide Membranes for Liquid Filtration

Under the “LiqTech” and “CoMeTas” brand names, we manufacture and sell ceramic silicon carbide membranes for liquid filtration using our patented silicon carbide technology (“SiC Filters”) that currently focus on hydrocarbon production-derived contaminated water, which we refer to herein as “produced water” and pre-filtration for reverse osmosis. Our SiC Filters have been used in the following applications by our clients:

	·	Produced water; and
	·	Pre-filtration of reverse osmosis drinking water;

		and for use in:

	·	Industrial applications;
	·	Drinking water;
	·	Waste water treatment; and
	·	Ballast water.

Our SiC Filters are sold through our direct sales force under the LiqTech and CoMeTas brand names.

For the year ended December 31, 2010 we received $434,957 of grants from governmental entities. In 2011 we received a $2 million grant from The Danish National Advanced Technology Foundation to develop a SiC-based membrane that can perform reverse osmosis. If successful, we believe this will be the first inorganic reverse osmosis membrane ever developed. The goal is to produce clean drinking water from sea water.

We believe increased government regulation on the treatment of produced water may increase our sales of SiC membranes. Existing technology may have difficulty meeting any increased requirements because the hydro-cyclone technology currently used in most treatments of produced water is not effective at removing suspended solids and is prone to clogging.

For the three months ended March 31, 2012 and 2011, our sales of liquid filters were $901,926 and $497,233, respectively.

Kiln Furniture

Kiln furniture refers to all items used in a kiln to support ceramics that creates additional space to maximize the number of items for each firing. Our high-quality SiC kiln furniture is thinner (allowing more items to be added for each firing), withstands higher heat, lasts longer and reduces the firing time (reducing energy costs) as compared to cordierite, mullite and oxide bonded kiln furniture.

We intend to produce kiln furniture as a means to maximize the efficiency of our manufacturing process and not as one of our primary products.

We began selling kiln furniture in 2011 and our sales for the three months ended March 31, 2012 and 2011 were $102,229 and $26,689, respectively.

Our Manufacturing

We currently manufacture our products in facilities located in Ballerup and Gentofte, Denmark and White Bear Lake, Minnesota. The main raw materials that we use in our manufacturing processes are silicon carbide, platinum and palladium. We purchase these commodities from various sources generally based upon availability and price. Our principal suppliers of these raw materials are the Saint Gobain Group, Washington Mills Ceramics Corporation, ESK Ceramics GmbH and Heraeus Germany. There is a limited supply of silicon carbide available to us. As other industries develop products utilizing silicon carbide, we may not be able to obtain adequate supplies of silicon carbide required for the manufacture of our existing and planned future water filtration products. Any increased demand for silicon carbide, platinum or palladium could increase the price we must pay to obtain it and could adversely affect our profitability. However, our management believes that we could obtain satisfactory substitutes for these materials should they become unavailable.

Prior to our entry into the new subcontract agreement with Scandinavian Brake Systems, as discussed below, our manufacturing facilities operated at peak capacity. We currently have a subcontract agreement for production capacity with a subcontractor located in Tennessee. We have also recently entered into a new subcontract agreement with Scandinavian Brake Systems to utilize the production capacity of their Notox division. The new subcontract arrangement, which extends until the end of 2014, is expected to significantly increase our production capacity.

We have plans to expand our production capacity in both Denmark and Minnesota, primarily through additional investment in equipment relating to our liquid filtration products.

Our Sales

Our products are sold primarily to large industrial customers that use our products for gas and liquid filtration. To date, most of our sales have been in the transportation sector, and we are seeking to broaden our sales into other areas such as produced water in the oil and gas sector, desalination sector and other water purification areas. For the three months ended March 31, 2012, our four largest customers accounted for approximately 19%, 17%, 11% and 8%, respectively, of our net sales (approximately 55% in total). For the three months ended March 31, 2011, our four largest customers accounted for approximately 13%, 11%, 10% and 8%, respectively, of our net sales (approximately 42% in total). We plan to actively market our existing products to new customers as we increase our production capacity. We currently have 16 full time salesmen or distribution agents. We promote our products through direct contact to potential customers and by meeting potential customers in trade fairs and exhibitions.

Government Regulation

We do not believe that we are subject to any special governmental regulations affecting our products in the countries in which we have operations, except that in Minnesota, we are required to comply with the Minnesota Air Pollution standards related to the use of our incinerator located in our Minnesota facilities. We are subject to numerous health and safety laws and regulations. In the United States, these laws and regulations include the Federal Occupation Safety and Health Act and comparable state legislation. We are also subject to similar requirements in other countries in which we have extensive operations, including Denmark, where we are subject to various regulations. These regulations are frequently changing, and it is impossible to predict the effect of such laws and regulations on us in the future. We actively seek to maintain a safe, healthy and environmentally friendly workplace for all of our employees and those who work with us.

Research and Development

We currently have five full-time employees spending a majority of their working hours on research and development. For the three months ended March 31, 2012 and 2011, we spent $226,674 and $113,538, respectively, for research and development.

Competition

Our products compete with other filters that are made using both ceramic and plastic membranes. Most of our competitors are large industrial companies. However, we believe our patented technology allows us to produce high quality, low cost products that give us an advantage over many of our competitors, many of which have greater financial, technological, manufacturing and personnel resources. We intend to continue to devote resources to improving our products in order to maintain our existing customers and to add new customers.

Recent Developments

Letter of Intent with Pirelli & C. Eco Technology S.p.A.

On February 29, 2012, we entered into a non-binding letter of intent with Pirelli & C. Eco Technology S.p.A. (“Pirelli”) to acquire all of the outstanding equity interests in S.C. Pirelli & C. Eco Technology RO SRL (“S.C. Pirelli”), Pirelli’s Romanian subsidiary, which, among other assets, has a manufacturing facility in Bumbesti, Romania. The fixed assets of S.C. Pirelli that are used for its diesel particulate filter business, including the buildings at the Romanian manufacturing facility, are anticipated to have a net book value of Romanian Leu (RON) 66,978,129 (equivalent to approximately Euro 15.6 million or $21 million) at December 31, 2011 as determined in accordance with International Financial Reporting Standards (IFRS). The land on which the manufacturing facility is located is under a long-term lease, and S.C. Pirelli will have the right to recover the investment made with respect to the buildings at the manufacturing site (net of accumulated depreciation over a period of 30 years). The letter of intent contemplates that we will pay $15 million in cash to Pirelli as consideration for such purchase. At the time of the purchase, it is contemplated that the subsidiary will have no debt or other liabilities and that Pirelli will indemnify us against any such pre-closing debt and liabilities to the extent not reflected on the closing balance sheet.

The letter of intent also contemplates that Pirelli will invest $19 million in shares of our common stock at a per share price equal to the lower of $3.90 and the weighted average price of a share of our common stock for the 10 business days preceding the closing date of the transactions contemplated by the letter of intent. Pirelli will also receive one share of voting preferred stock, which will permit Pirelli to appoint one member of our board of directors. This share of preferred stock will automatically convert into one share of our common stock upon Pirelli ceasing to own in the aggregate 50% of the shares (as adjusted for stock splits and stock dividends) of our common stock acquired in connection with these transactions. If the maximum number of shares offered in this offering are sold, and assuming that the shares will be issued to Pirelli at a per share price of $3.90, Pirelli will beneficially own approximately 14.0% of our outstanding shares of common stock.

It is contemplated that Pirelli and we will enter into an agreement for the supply of diesel particulate filters to Pirelli and for the assembly of retrofit systems for Pirelli. It is also contemplated that Pirelli will guarantee to cover up to RON 6.6 million of fixed costs and Euro 560,000 of salary in 2012 and RON 6.15 million of fixed costs and Euro 660,000 of salary in 2013 if the EBITDA of S.C. Pirelli is negative for such years. Furthermore, it is contemplated that Pirelli will support our research and development and worldwide sales efforts for filters and membranes.

In connection with such transactions, it is contemplated that Pirelli and Aldo Petersen will enter into a shareholder agreement pursuant to which each party will have rights of first refusal and tag along rights on sales of our common stock by the other party. All shares acquired by Pirelli in connection with the transactions contemplated by the letter of intent will be subject to a lock-up provision for one year from the closing date of such transactions. Mr. Petersen is also contemplated to enter into a lock-up agreement restricting his ability to transfer the shares beneficially owned by him for one year from the closing date of the transactions contemplated by the letter of intent. It is contemplated that Pirelli will be granted registration rights in respect of the shares of our common stock that it acquires pursuant to the above transactions upon the expiration of the lock-up period. Pirelli is also contemplated to receive certain veto rights in respect of strategic decisions relating to S.C. Pirelli.

The transactions contemplated by the letter of intent are subject to the execution of definitive agreements mutually agreeable to both parties and there is no assurance that such agreements will be executed or that the contemplated transactions will occur as described above or at all.

Subcontract with Scandinavian Brake Systems

We have recently entered into a new subcontract agreement with Scandinavian Brake Systems to utilize the production capacity of their Notox division. The new subcontract arrangement, which extends until the end of 2014, is expected to significantly increase our production capacity. We believe that the additional production capacity provided under this subcontract will allow us to meet our capacity requirements until the end of the subcontract period.

Opening of Singapore Office

On January 17, 2012, we announced the establishment of a representative office in Singapore. The new Singapore office will service the South East Asian markets covering our entire product portfolio.

March 2012 Registered Offering of Common Stock

On March 2, 2012, we completed the initial closing of a registered public offering of our common stock. As part of the initial closing, we issued 2,511,500 shares of our common stock in a registered direct placement of our shares at a per share price of $3.25. The net proceeds to us from the initial closing are approximately $7.4 million. We intend to use the net proceeds from the offering for the development and marketing of our products, the engineering, development and testing of our membranes, and the opening of local sales offices in certain countries outside of the U.S. and Denmark. Pending application of such proceeds, we expect to invest the proceeds in short-term, interest-bearing, investment-grade marketable securities or money market obligations. Sunrise Securities Corp. acted as the exclusive placement agent for this transaction. As part of the compensation for the placement agent, we also issued to the placement agent and certain of its agents for $100, warrants to purchase an aggregate of 125,575 shares of our common stock (equal to 5% of the shares of common stock sold by the placement agent and its agents in the offering). The warrants will have an exercise price equal to $4.06 (or 125% of the offering price of the shares sold in the offering) and may be exercised on a cashless basis. The warrants are exercisable for a period of five years commencing after the effective date of the registration statement related to the offering. The warrants are subject to a lock-up restriction for 180 days pursuant to FINRA Rule 5110(g). The warrants are not redeemable by us.

Results of Operations

The following table sets forth our revenues, expenses and net income for the three months ended March 31, 2012 and 2011. The financial information below is derived from our unaudited condensed consolidated financial statements included elsewhere in this report.

	Period ended March 31,
													Period to period change
	2012			As a % of Sales			2011			As a % of Sales			US$			Percent %

NET SALES		6,341,721			100	%		2,917,395			100	%		3,424,326			117.4
Cost of goods sold		4,252,037			67.0			2,237,660			76.7			2,014,377			90.0
Gross Profit	$	2,089,684			33.0		$	679,735			23.3			1,409,949			207.4
OPERATING EXPENSES:
Selling and Marketing		659,918			10.4			404,331			13.9			255,587			63.2
General and Administrative Expenses		722,512			11.4			277,793			9.5			444,719			160.1
Research and Development		226,674			3.6			113,538			3.9			113,136			99.6
Total Operating Expenses		1,609,104			25.4			795,662			27.3			813,442			102.2
Income from Operating		480,580			7.6			(115,927	)		(4.0	)		596,507			514.6
Interest and Other Income		38,963			0.6			10,726			0.4			28,237			263.3
Interest (Expense)		(84,516	)		(1.3	)		(5,779	)		(0.2	)		(78,737	)		1362.5
(Loss) on investments		-			-			-			-			-			-
Gain on Currency Transactions		(1,449	)		(0.0	)		(27,372	)		(0.9	)		25,923			(94.7	)
Gain (Loss) on Sale of Fixed Assets		-			-			-			-			-			-
Total Other Income (Expense)		(47,002	)		(0.7	)		(22,425	)		(0.8	)		(24,577	)		109.6
Income Before Income Taxes		433,578			6.8			(138,352	)		(4.7	)		571,930			413.4
Income Taxes Expense		110,977			1.7			(26,678	)		(0.9	)		137,654			516.0
Net Income		322,601			5.1			(111,674	)		(3.8	)		434,276			388,9
Less Net income attributable to the Non-controlled interest in Subsidiaries		-			-			16,528			0.6			(16,528	)		(100.0	)
Net Income attributable to LiqTech	$	322,601			5.1		$	(128,202	)		(4.4	)		450,804			351.6

Comparison of the three month periods ended March 31, 2012 and March 31, 2011

Revenues

Net sales for the three month period ended March 31, 2012 were $6,341,721 compared to $2,917,395for the same period in 2011, representing an increase of $3,424,326, or 117.4%. The increase in demand for our products resulted in an increase in sales of DPFs to $5,337,566, Liquid filters to $901,926 and Kiln furniture to $102,229. The increase in demand for our DPFs is mainly due to the adoption of the Low Emission Zone in London and a general increase in our sales activities. The increase in demand for our Liquid filters and Kiln furniture is due to an increase in general investing in our sales activities all over the world.

Gross profit

Gross profit for the three month period ended March 31, 2012 were $2,089,684 compared to $679,735 for the same period in 2011 representing an increase of $1,409,949 or 207.4% The increase in gross profit is mainly due to the increase in sales and an increase in the gross margin.

Expenses

Total operating expenses for the three month period ended March 31, 2012 were $1,609,104, an increase of $813,442, or 102.2%, compared to $795,662 for the same period in 2011. This increase in operating expenses is attributable to an increase in general and administrative expenses of $444,719 or 160.1%, an increase in research and development expenses of $113,139 or 99.6%, and an increase in selling expenses of $255,587 or 63.2% compared to the same period in 2011.

Selling expenses for the three month period ended March 31, 2012 were $659,918 compared to $404,331 for the same period in 2011, representing an increase of $255,587 or 63.2%. This increase is attributable to an increase in costs in general and our increase in investment in our sales resources and investment in new markets primarily in Germany and Singapore.

General and administrative expenses for the three month period ended March 31, 2012 were $722,512 compared to $277,793 for the same period in 2011, representing an increase of $444,719, or 160.1%. This increase is mainly attributable to an increase in costs incurred in connection with the reverse acquisition in August 2011 and costs related to our March 2012 registered offering. During the period ended March 31, 2012, the Company added an additional $110,000 to its bad debt reserve compared to the same period in 2011. Furthermore, we have included an additional $32,602 of compensation expense for options granted to employees and management which were not a part of the costs for three months period ended March 31, 2011.

Research and development expenses for the three month period ended March 31, 2012 were $226,674 compared to $113,538 for the same period in 2011, representing an increase of $113,136, or 99.6%. This increase is attributable to an increase in investment in our products consistent with our plan to continuously improve and develop our products.

Net Income

Net income for the three month period ended March 31, 2012 was $322,601compared to $(128,202) for the same period in 2011, representing an increase of $450,804. This increase was primarily attributable to an increase of $1,409,949 in our gross profit, partly offset by an increase of $813,442 in operating expenses. The largest contributors to the increase in operating expenses was an increase in general and administrative expenses of $444,719, or 160.1%, research and development expenses of $113,139 or 99.6% and selling expenses of $255,587 or 63.2%, compared to the same period in 2011.

Liquidity and Capital Resources

We have historically satisfied our capital and liquidity requirements through internally generated cash from operations and our available lines of credit. At March 31, 2012, we had cash of $6,552,392 and working capital of $8,695,122 and at December 31, 2011 we had cash of $1,033,056 and working capital of $1,878,203. At March 31, 2012, our working capital increased by $6,816,919 including the notes payable to related parties classified as a current liability, compared to December 31, 2011. We intend to repay these notes when we collect the $3,467,750 of notes receivable classified as equity in the accompanying financial statements. Excluding these notes payable to related parties from the calculation of working capital, working capital at March 31, 2012 was $12,162,872 representing a $10,284,669 increase compared to December 31, 2011.

On March 2, 2012, we completed the closing of a registered public offering of our common stock. As part of the initial closing, we issued 2,511,500 shares of our common stock in a registered direct placement of our shares at a per share price of $3.25. The net proceeds to us from the initial closing were approximately $7.4 million. We intend to use the net proceeds from the offering for the development and marketing of our products, the engineering, development and testing of our membranes, and the opening of local sales offices in certain countries outside of the U.S. and Denmark. Pending application of such proceeds, we expect to invest the proceeds in short-term, interest-bearing, investment-grade marketable securities or money market obligations.

The notes payable to related parties at March 31, 2012 represent promissory notes issued by LiqTech USA to the previous shareholders of LiqTech Denmark as part of LiqTech USA’s acquisition of the outstanding equity interests in LiqTech Denmark, LiqTech Int. DK (formerly known as Cometas), and LiqTech Delaware in accordance with the terms of the LiqTech Acquisition Agreements. The promissory notes due to the related parties will mature on June 30, 2012 but may be prepaid at the option of LiqTech USA. The promissory notes are guaranteed by us. The promissory notes are personally guaranteed by David Nemelka, a shareholder, and are secured by 2,700,000 shares of our common stock owned by Mr. Nemelka. The notes payable are offset against notes receivable from stockholders of $3,467,750 as of March 31, 2012.

LiqTech AS has a DKK 6,000,000 (approximately $1,077,110 at March 31, 2012) standby line of credit with a bank, subject to certain borrowing base limitations. Outstanding borrowings are due on demand. There was $0 and $882,003 outstanding as of March 31, 2012 and December 31, 2011, respectively. Interest is charged quarterly at 4.46% p.a. at March 31, 2012 and the line is secured by the Company’s receivables, inventory and equipment. At March 31, 2012, the line had been paid down to $0 outstanding, with $1,077,110 available on the line of credit.

LiqTech Int. DK has a DKK 3,000,000 (approximately $538,555 at March 31, 2012) standby line of credit with a bank, subject to certain borrowing base limitations. Outstanding borrowing is due on demand. There was $0 and $377,933 outstanding as of March 31, 2012 and December 31, 2011, respectively. Interest is charged quarterly at 4.46% p.a. at March 31, 2012 and the line is secured by certain of the Company’s receivables, inventory and equipment. At March 31, 2012, the line had been paid down to $0 outstanding, with $538,555 available on the line of credit.

In general, lines of credit in Denmark are due on demand. We do not believe that any of our lines of credit will be called but, if they were called, we believe that we could refinance with other lenders in Denmark with similar terms.

In September 2011 LiqTech AS entered into a note payable agreement with a financial institution, wherein LiqTech AS borrow $475,000.During March 31, 2012, the note payable was paid off.

Cash Flows

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. Cash from operations for the three months ended March 31, 2012 was $733,894, an increase of $1,019,206 compared to the three months ended March 31, 2011 due to an increase in working capital of $458,068 and an increase in adjustment

Changes in assets and liabilities as of March 31, 2012 compared to December 31, 2011 included the following:

Accounts receivable increased by $10,087 in the quarter ended March 31, 2012 compared to the quarter ended December 31, 2011, other receivables decreased by $742,918, mainly due to the collecting of approx. $730,000 from the business interruption insurance. Accounts payable decreased by $717,098 due to the lower activity level in the quarter ended March 31, 2012 compared to the quarter ended December 31, 2011.

Cash used for investing activities increased during the three months ended March 31, 2012, compared to the same period in 2011. This increase is primarily attributable to an approximately $210,901 or 49.5% increase in investment in production equipment and an $34,878 increase in investment in the purchase of long-term investments. We have and will continue to invest in additional production equipment in order to meet the continuing increase in the demand for our products.

The increase of approximately $5,052,599 in cash provided by financing activities in the three months ended March 31, 2012, compared to the same period in 2011 was primarily due to the approx. $ 7.4 million in cash received in connection with the March 2012 registered offering of 2,511,500 common shares during the reporting period.

Significant Accounting Policies

Critical Accounting Estimates

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

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

We discuss these policies further below, as well as the estimates and judgments involved.

Accounts Receivable/ Allowance for Doubtful Accounts / Bad Debt

We assess the collectability of accounts receivable on an ongoing basis and establish an allowance for doubtful accounts when collection is no longer reasonably assured. In establishing the allowance, factors we consider include known troubled accounts, historical experience, age, and other currently available evidence.

The roll forward of the allowance for doubtful accounts for the three months ended March 31, 2012 and year ended December 31, 2011 is as follows:

	2012		2011

Allowance for doubtful accounts at the beginning of the period	$	389,032	$	452,266
Bad debt expense		110,000		208,275
Amount of receivables written off		-		(257,610	)
Effect of currency translation		15,434		(13,899	)
Allowance for doubtful accounts at the end of the period	$	514,466	$	389,032

Long-Lived Assets

We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. We measure the recoverability of assets that will continue to be used in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows. If an asset grouping’s carrying value is not recoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is measured by comparing the difference between the asset grouping’s carrying value and its fair value. Long-lived assets such as goodwill, intangible assets, and property, plant and equipment are considered non-financial assets, and are recorded at fair value only if an impairment charge is recognized.

Impairments of long-lived assets are determined for groups of assets related to the lowest level of identifiable independent cash flows. Due to our asset usage model and the interchangeable nature of our ceramic filter manufacturing capacity, we must make subjective judgments in determining the independent cash flows that can be related to specific asset groupings. In addition, as we make manufacturing process conversions and other factory planning decisions, we must make subjective judgments regarding the remaining useful lives of assets, primarily process-specific filter manufacturing tools and building improvements. If we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of depreciation over the assets’ new, shorter useful lives. During the three months ended March 31, 2012 and 2011, no impairment charge of long-lived assets has been recorded.

Income Taxes

We must make estimates and judgments in determining the provision for taxes for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes in these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that we will ultimately recover the deferred tax assets recorded on our consolidated balance sheets. However, should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determined that the recovery was not likely. Recovery of a portion of our deferred tax assets is impacted by management's plans and methods of allocating research and development costs to the underlying reporting units.

The calculation of our tax liabilities involves uncertainties in the application of complex tax regulations in Denmark and the United States. When a tax position is determined uncertain, we recognize liabilities based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. If uncertainties arise we re-evaluate the tax positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

Inventory

The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. The estimate of future demand is compared to work-in-process and finished goods inventory levels to determine the amount, if any, of obsolete or excess inventory.

Inventory consists of the following at March 31, 2012 and December 31, 2011:

	2012			2011

Furnace parts and supplies	$	197,867		$	151,412
Raw materials		623,477			920,065
Work in process		1,679,645			867,988
Finished goods		987,951			1,054,118
Reserve for obsolescence		(89,374	)		(13,000	)

Net Inventory	$	3,399,566		$	2,980,583

The Company’s inventory is held as collateral on the Company’s lines of credits.

The estimated future demand is included in the development of our short-term manufacturing plans to enable consistency between inventory valuation and build decisions. Product-specific facts and circumstances reviewed in the inventory valuation process include a review of the customer base, acceptance of the product by the customer and the various environmental authorities, competitor’s products, as well as an assessment of the selling price in relation to the product cost. If our demand forecast for specific products is greater than actual demand, and we fail to reduce manufacturing output accordingly, we could be required to write off inventory, which would negatively impact our gross margin.

In order to determine what costs can be included in the valuation of inventory, we must determine normal capacity at our manufacturing and assembly and test facilities, based on historical production, compared to total available capacity. If the factory production is below the established normal capacity level, a portion of our manufacturing overhead costs would not be included in the cost of inventory, and therefore would be recognized as cost of sales in that period, which would negatively impact our gross margin. We refer to these costs as excess capacity charges. Over the past two years we have experienced no excess capacity charges. We have had to outsource the firing of certain kiln furniture products to meet demand.

Loss Contingencies and Litigation

We are subject to various legal and administrative proceedings and asserted and potential claims, accruals related to product warranties and potential asset impairments (loss contingencies) that arise in the ordinary course of business. An estimated loss from such contingencies is recognized as a charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a loss contingency is required if there is at least a reasonable possibility that a loss has been incurred. The outcomes of legal and administrative proceedings and claims, and the estimation of product warranties and asset impairments, are subject to significant uncertainty. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. With respect to estimating the losses associated with repairing and replacing parts in connection with product warranty, we make judgments with respect to customer claim rates. Current warranty estimates are immaterial for accrual or further disclosure. At least quarterly, we review the status of each significant matter, and we may revise our estimates. These revisions could have a material impact on our results of operations and financial position.

Recent 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.

Off Balance Sheet Arrangements

We are not aware of any material transactions which are not disclosed in our consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company we are not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of both of our president and chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”), Based upon that evaluation, both of our president and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our president and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

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

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS.

As a smaller reporting company we are not required to provide the information required by this Item.

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

Effective January 1, 2012, the Company's Board of Directors adopted the Amended and Restated Bylaws of the Company and the Code of Business Conduct and Ethics which are filed herewith as Exhibits 3.4 and 14.1, respectively. The Bylaws were primarily updated to provide for uncertificated shares, and the Code of Business Conduct Ethics was adopted with the purpose of assuring that all employees and officers of the Company and its subsidiaries understand and adhere to high ethical standards of conduct.

ITEM 6. EXHIBITS

Exhibit No.	Description	Location

1.1	Placement Agency Agreement, dated March 2, 2012, by and between LiqTech International, Inc. and Sunrise Securities Corp.	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the SEC on March 8, 2012

2.1	Agreement and Plan of Merger dated as of August 23, 2011 by and among Blue Moose Media, Inc., LiqTech USA, Inc. and BMD Sub	Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K/A as filed with the SEC on October 11, 2011

3.1	Articles of Incorporation	Incorporated by reference to Exhibit 3(i) to the Company’s Registration Statement on Form 10 (SEC Accession No. 0001078782-09-001287) as filed with the SEC on August 19, 2009

3.2	Certificate of Amendment to the Articles of Incorporation	Incorporated by reference to Exhibit A to the Company’s Information Statement on Schedule 14C as filed with the SEC on September 20, 2011

3.3	Bylaws	Incorporated by reference to Exhibit 3(ii) to the Company’s Registration Statement on Form 10 (SEC Accession No. 0001078782-09-001287) as filed with the SEC on August 19, 2009

3.4	Amended and Restated Bylaws, effective January 1, 2012	Provided herewith

4.1	Form of Common Stock Certificate	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

4.2	Form of Warrant issued to Investors in the Private Placement	Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K as filed with the SEC on August 25, 2011

4.3	Form of Warrant issued to Sunrise Securities Corp.	Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K as filed with the SEC on March 8, 2012

10.1	Form of Securities Purchase Agreement by and between LiqTech USA, Inc. and each of the investors in the Private Placement	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the SEC on August 25, 2011

10.2	Employment Agreement dated July 29, 2011 between LiqTech A/S and Lasse Andreasson	Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A as filed with the SEC on October 11, 2011 (translated in English)

101	Employment Agreement dated November 16, 2005 between LiqTech NA, Inc. and Donald S. Debelak	Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K/A as filed with the SEC on October 11, 2011

10.4	Addendum to Employment Agreement, dated December 15, 2011, between LiqTech NA, Inc. and Donald S. Debelak	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

10.5	Employment Agreement, dated July 29, 2011, between LiqTech International Inc. and Soren Degn (translated in English)	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

10.6	Lease Agreements for 1800 - 1810 Buerkle Road, White Bear Lake, Minnesota 55110	Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K/A as filed with the SEC on November 15, 2011

10.7	Lease Agreement for 1800 - 1816 Buerkle Road, White Bear Lake, Minnesota 55110	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

10.8	Lease Agreement for Grusbakken 12, DK-2820 Gentofte Denmark	Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K/A as filed with the SEC on November 15, 2011 (translated in English)

10.9	Lease Agreement for Industriparken 22C, 2750 Ballerup, Denmark	Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K/A as filed with the SEC on November 15, 2011 (translated in English)

10.10	DKK 6,000,000 Line of Credit Agreement, between LiqTech A/S and Sydbank A/S	Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K/A as filed with the SEC on November 15, 2011 (translated in English)

10.11	DKK 3,000,000 Line of Credit Agreement, between LiqTech A/S and Sydbank A/S	Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K/A as filed with the SEC on November 15, 2011 (translated in English)

10.12	Note Payable Agreement between LiqTech A/S and Sydbank A/S, for the principal amount of $475,000 USD	Incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q as filed with the SEC on November 15, 2011 (translated in English)

10.13	Form of Guarantee in respect of obligations of LiqTech A/S (translated in English)	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

10.14	Form of Guarantee in respect of obligations of LiqTech International A/S (translated in English)	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

10.15	Form of Guarantee in respect of obligations of LiqTech NA, Inc. (translated in English)	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

10.16	Form of Promissory Note payable to certain related parties	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

10.17	Business Mortgage of LiqTech A/S (translated in English)	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

10.18	Business Mortgage of LiqTech International A/S (translated in English)	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

14.1	Code of Conduct and Ethics, effective January 1, 2012	Provided herewith

21	List of Subsidiaries	Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the SEC on March 29, 2012

31.1	Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Provided herewith

31.2	Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Provided 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, not filed 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, not filed herewith

101. INS	XBRL Instance Document	Provided herewith

101. CAL	XBRL Taxonomy Extension Calculation Link base Document	Provided herewith

101. DEF	XBRL Taxonomy Extension Definition Link base Document	Provided herewith

101. LAB	XBRL Taxonomy Label Link base Document	Provided herewith

101. PRE	XBRL Extension Presentation Link base Document	Provided herewith

101. SCH	XBRL Taxonomy Extension Scheme Document	Provided herewith

SIGNATURES

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

	LiqTech International, Inc.

Dated: May 15, 2012	/s/ Lasse Andreassen
	Lasse Andreassen, Chief Executive Officer
	(Principal Executive Officer)

Dated: May 15, 2012	/s/ Soren Degn
	Soren Degn, Chief Financial Officer
	(Principal Financial and Accounting Officer)