LIQTECH INTERNATIONAL INC - Quarter Report: 2017 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-Q

(Mark One) 

For the three months ended March 31, 2017

or

For the transition period from _______________________ to _______________________

Commission File Number:000-53769

LiqTech International, Inc.

(Exact name of registrant as specified in its charter)

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 ☒ 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 ☒ No ☐.

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

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

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

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, at May 15, 2017, was

43,229,264 shares. 

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Period Ended March 31, 2017

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” regarding the plans and objectives of management for future operations and market trends and expectations.  Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties.  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

(Continued) 

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

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

(UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS

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

LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

 (UNAUDITED) CONSOLIDATED STATEMENTS OF OTHER

COMPREHENSIVE INCOME 

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

 LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

(UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

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

 LIQTECH INTERNATIONAL, INC. AND SUBSIDIARIES

(UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

During February 2016, the Company borrowed $81,643 to purchase a vehicle.

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

Business and Basis of Presentation

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

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

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

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

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

LiqTech Asia (“LiqTech Asia”) a 60% owned subsidiary of LiqTech Int. DK, incorporated in South Korea on July 20, 2006, was a dormant subsidiary. The company was closed on March 6, 2015.

LiqTech Germany (“LiqTech Germany”) a 100% owned subsidiary of LiqTech Int. DK, incorporated in Germany on December 9, 2011, engages in marketing and sale of liquid filters in Germany. The Company is in the process of closing operations, which is expected to be completed during 2017.

LiqTech PTE Ltd, (“LiqTech Sing”) a 95% owned subsidiary of LiqTech Int. DK, incorporated in Singapore on January 19, 2012, engages in marketing and sale of liquid filters in Singapore and other countries in the area. The Company is in the process of closing operations, which is expected to be completed during 2017.

LiqTech Systems A/S ("LiqTech Systems"), a Danish corporation (formerly Provital Solutions A/S) was incorporated on September 1, 2009 and engages in the manufacture of fully automated filtering systems for application within the pool and spa markets, marine applications, and a number of industrial applications within Denmark and international markets. The financial statements include the accounts of LiqTech Systems from the date of acquisition on July 31, 2014.

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 inter-company transactions and accounts have been eliminated in the consolidation.

Functional Currency / Foreign Currency Translation -- The functional currency of LiqTech International, Inc., LiqTech USA, Inc. and LiqTech NA is the U.S. Dollar. The Functional Currency of LiqTech Int. DK and LiqTech Systems is the Danish Krone (“DKK”), the functional currency of LiqTech Germany is the Euro and the functional currency of LiqTech Singapore is the Singapore Dollar. The Company’s reporting currency is U.S. Dollar for the purpose of these financial statements. The foreign subsidiaries balance sheet accounts are translated into U.S. Dollars at the period-end exchange rates and all revenue and expenses are translated into U.S. Dollars at the average exchange rates prevailing during the three months ended March 31, 2017 and 2016. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arose from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash, Cash Equivalents and Restricted Cash -- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company had no balances held in a financial institution in the United States in excess of federally insured amounts at March 31, 2017 and December 31, 2016.

  Accounts Receivable -- Accounts receivables 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, 2017 and the year ended December 31, 2016 is as follows:

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

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

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

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

Goodwill -- Goodwill is evaluated for impairment annually, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows.

Revenue Recognition and Sales Incentives -- The Company 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)

The Company has received long-term contracts for the installation of various water filtrations systems and grants from government entities for development and use of silicon carbide membranes in various water filtration and treatment applications. Revenues from long-term contracts and grants are recognized on the percentage-of-completion method, measured by the percentage of project costs incurred to date to estimated total project costs for each long-term contract or grant multiplied by the long-term contract or grant income on a project-by-project basis. This method is used because management considers costs incurred to be the best available measure of progress on contracts in process.

Project costs of the long-term contracts and grants include all direct material and labor costs and those indirect costs related to the project. Project costs are capitalized and accreted into cost of sales based on the percentage of the project completed. Should a loss be estimated on an incomplete project it would be recorded in the period in which such a loss is determined. Changes in estimated profitability of a project are recognized in the period in which the revisions are determined. The aggregate of costs incurred and income recognized on incomplete projects are recorded as costs in excess of billings and are shown as a current asset. 

The aggregate of billings in excess of related costs incurred and income recognized on projects is shown as a current liability.  

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

Advertising Cost -- Cost incurred in connection with advertising of the Company’s products is expensed as incurred. Such costs amounted to $2,803 and $5,966 for the three months ended March 31, 2017 and 2016, respectively.

Research and Development Cost -- The Company expenses research and development costs for the development of new products and systems as incurred. Included in operating expense for the three months ended March 31, 2017 and 2016 were $139,336 and $188,513, respectively, of research and development costs.

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

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

Stock Options and Awards -- The Company has granted stock options and awards to certain key employees and directors. See Note 13. The Company accounts for options in accordance with the provisions of FASB ASC Topic 718, Compensation – Stock Compensation. Non-cash compensation costs of $96,178 and $110,526 have been recognized for the vesting of options granted to employees with an associated recognized tax benefit of $22,525 and $43,699 for the three months ended March 31, 2017 and 2016, 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. 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:

 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 allowance for doubtful accounts receivable, cost in excess of billings, reserve for obsolete inventory, depreciation and impairment of property plant and equipment and impairment of goodwill and liabilities billings in excess of cost commitment and contingencies, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.

Recent Accounting Pronouncements -- In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9 2015, the FASB agreed to delay the effective date by one year; accordingly, the new standard is effective for us beginning in the first quarter of 2018 and we expect to adopt it at that time. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method, nor have we determined the impact of the new standard on our consolidated financial statements.

In 2015, the FASB issued an amended standard requiring that we classify all deferred tax assets and liabilities as non-current on the balance sheet instead of separating deferred taxes into current and non-current. The amended standard was adopted by the Company effective January 1, 2017 and had no effect on the underlying financial statements.

In February 2016, the FASB issued changes to the accounting for leases that primarily affect presentation and disclosure requirements. The new standard will require the recognition of a right to use asset and underlying lease liability for operating leases with an initial life in excess of one year. This standard is effective for us beginning in the first quarter of 2019. We have not yet determined the impact of the new standard on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, that will require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date. The new standard defines substantial doubt and provides example indicators. Disclosures will be required if conditions give rise to substantial doubt. However, management will need to assess if its plans will alleviate substantial doubt to determine the specific disclosures. The Company adopted the new standard and management evaluated the Company’s ability to continue as a going concern and made the required disclosures (See Note 2).

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur, and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation are to be presented as a financing activity. The standard was adopted effective January 1, 2017 and did not have a material effect on the Company’s financial position, results of operations and cash flows.

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 - GOING CONCERN

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has limited cash and incurred significant recent losses. These factors raise substantial doubt about the ability of the Company to continue as a going concern. There is no assurance that the Company will be successful in raising additional cash through the issuance of debt or equity instruments or return to achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. 

NOTE 3 - INVENTORY

Inventory consisted of the following at March 31, 2017 and December 31, 2016:

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at March 31, 2017 and December 31, 2016:

Depreciation expense amounted to $258,654 and $351,743 for the three months ended March 31, 2017 and 2016, respectively. The property and equipment is held as collateral on lines of credit and guarantees with financial institutions. See Note 9.  

  NOTE 5 - INVESTMENTS AT COSTS

The following tables summarize Level 1, 2 and 3 financial assets and financial (liabilities) by their classification in the Statement of Financial Position:

At March 31, 2017, our total investments of $5,354 consisted of an investment of $5,354 in LEA Technology in France to strengthen our sales channels in the French market. 

At December 31, 2016, our total investments of $5,282 consisted of an investment of $5,282 in LEA Technology in France to strengthen our sales channels in the French market.

NOTE 6 - DEFINITE-LIFE INTANGIBLE ASSETS

At March 31, 2017 and December 31, 2016, definite-life intangible assets, net of accumulated amortization, consisted of patents on the Company’s products of $4,775 and $5,614, respectively. The patents are recorded at cost and amortized over two to ten years. Amortization expense for the three months ended March 31, 2017 and 2016 was $839 and $745, respectively. Expected future amortization expense for the years ended are as follows: 

NOTE 7 - GOODWILL

The Company recorded Goodwill in connection with the acquisition of LiqTech Systems. Goodwill is evaluated for impairment annually in the fourth quarter of the Company’s fiscal year, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows. Key variables included in evaluating goodwill for impairment include the pipeline of proposed potential customer sales, budgeted reoccurring sales, risk free interest rate and risk premium rate and future budgeted operating results. The Company recorded an impairment charge of $7,343,208 during the year ended December 31, 2016, as management's estimated fair value of the reporting unit did not exceed the carrying value during 2016 fourth quarter testing. 

NOTE 8 - NOTES PAYABLE

The Company had a 4.02% note payable used to purchase a vehicle with $51,065 and $54,929 balance outstanding as of March 31, 2017 and December 31, 2016. The note calls for monthly payments of $1,338, matures August 1, 2020 and is secured by the vehicle purchased.

The following represents the future maturities of long-term debt as of March 31, 2017:

NOTE 9 - LINES OF CREDIT

In connection with certain orders, we have to give the customer a working guarantee or a prepayment guarantee or security bond. For that purpose, we previously had a guarantee credit line of DKK 94,620 (approximately $13,600 at March 31, 2017) with a bank, subject to certain base limitations. As of March 31, 2017, we had DKK 94,620 (approximately $13,600) in working guarantee against the line. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Systems such as receivables, inventory and equipment.

NOTE 10 - LEASES

Operating Leases -- The Company leases office and production facilities under operating lease agreements expiring in March 2021, August 2018, May 2018, and June 2017. In some of these lease agreements, the Company has the right to extend.

The future minimum lease payments for non-cancelable operating leases having remaining terms in excess of one year as of March 31, 2017 are as follows:

Lease expense charged to operations was $152,100 and $185,115 for the three months ended March 31, 2017 and 2016, respectively.

Capital Leases -- The Company leases equipment on various variable rate capital leases currently calling for monthly payments of approximately $9,447, $599 and $539 expiring through July 2018. Included in property and equipment, at March 31, 2017 and December 31, 2016, the Company had recorded equipment on capital lease at $1,257,402 and $1,240,358, respectively, with related accumulated depreciation of $1,161,272 and $1,126,550, respectively. 

During the three months ended March 31, 2017 and 2016, depreciation expense for equipment on capital leases amounted to $31,064, and $33,915, respectively, and has been included in depreciation expense. During the three months ended March 31, 2017 and 2016, interest expense on a capital lease obligation amounted to $5,672 and $5,146, respectively. 

The following represents future minimum capital lease payments as of March 31, 2017: 

NOTE 11 - AGREEMENTS AND COMMITMENTS

401(K) Profit Sharing Plan -- LiqTech NA has a 401(k) profit sharing plan and trust covering certain eligible employees. The amount LiqTech NA contributes is discretionary. For the three months ended March 31, 2017 and 2016, matching contributions were expensed and totaled $2,706 and $2,826, respectively.

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

On September 9, 2014, Mr. Raffaele Bruno Tronchetti Provera (“Plaintiff”), the 60% owner of LiqTech Italy s.r.l. (the “Venture”), sued LiqTech International A/S, the 40% owner of the Venture (“Defendant”), 750,000 Euros before the Court of Como, Italy alleging, among other things, that certain products provided by Defendant to the Venture were defective.  As of May 15, 2017, the case is in the preliminary stages where the court has appointed an expert in order to verify the quality of the products in order to determine whether there is sufficient evidence to proceed.  An evaluation of the outcome will only be possible after the results of the court appointment expert are known. This outcome of the court appointment expert is expected to be reported in the second quarter of 2017. Defendant believes that the claims are without merit and intends to vigorously defend any litigation.

In connection with certain orders, we have to give the customer a working guarantee or a prepayment guarantee or security bond. For that purpose, we have a guarantee line of DKK 94,620 (approximately $13,600 at March 31, 2017) with a bank, subject to certain base limitations. As of March 31, 2017, we had DKK 94,620 (approximately $13,600 at March 31, 2017) in working guarantee against the line. 

NOTE 12 - 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. 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 meets 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%, Actual results could differ from these estimates.

As of March 31, 2017, the Company had net operating loss carryovers of approximately $11,743,000 for U.S. Federal purposes expiring through 2036; approximately $6,649,000 for Danish tax purposes, which do not expire; approximately $437,000 for German tax purposes, which do not expire and approximately $571,000 for Singapore tax purposes which do not expire.

As of March 31, 2017 and December 31, 2016, the Company established a valuation allowance of $3,675,000 and $3,542,000 for the tax components of LiqTech International Inc. and Liqtech NA, $1,157,000 and $1,095,000 for the tax components of LiqTech International AS and LiqTech Systems, $122,000 and $122,000 for the tax component of LiqTech Germany and $97,000 and $97,000 for the tax component of LiqTech Singapore as management could not determine that it was more than likely not that sufficient income could be generated by these components to realize the resulting net operating loss carry forwards and other deferred tax assets of these components. The change in the valuation allowance for the period ended March 31, 2017 was $133,400, $62,000, $0 and $0 for the US, Danish, German and Singapore components.

The Company is not relying on the reversal of deferred tax liabilities to realize the deferred tax assets. The same variable used by the Company in evaluating goodwill for impairment was used in assessing the realization of deferred tax assets (See Note 7).

The Company further considered the following positive and negative evidence: 

Positive Evidence

1) The Company executed in a Diesel Particular Filtration supplier contract with a Chinese entity.

2) For Danish tax purposes the Company is able to obtain tax refunds for research and development expenditures.

Negative Evidence 

1) The Company has noted a longer than anticipated sales cycle from proposals to signing filtration systems order.

2) The Company has a net loss from operations for the years ended December 31, 2016 and 2015.

3) The Company has experienced a decrease in liquid filter sales.

4) The Company has experienced delays in requested shipment date of large DPF sales orders and collection of receivables from large water treatment systems.

The temporary differences, tax credits and carry forwards gave rise to the following deferred tax asset (liabilities) at March 31, 2017 and December 31, 2016:  

A reconciliation of income tax expense at the federal statutory rate to income tax expense at the Company’s effective rate is as follows for the three months ended March 31, 2017 and 2016: 

The components of income tax expense (benefit) from continuing operations for the three months ended March 31, 2017 and 2016 consisted of the following:

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

The Company files Danish, U.S. federal and Minnesota state income tax returns. LiqTech International AS is generally no longer subject to tax examinations for years prior to 2011 for their Danish tax returns. LiqTech NA is generally no longer subject to tax examinations for years prior to 2013 for U.S. federal and U.S. states tax returns. 

NOTE 13 - INCOME (LOSS) 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, 2017 and 2016:

For the three months ended March 31, 2017, Parent had 630,000 options outstanding to purchase shares of common stock of Parent at $0.74 to $1.01 per share and Parent had 700,000 warrants outstanding to purchase shares of common stock of Parent at $0.81 to $1.65 per share, which were not included in the loss per share computation because their effect would be anti-dilutive.

For the three months ended March 31, 2016, Parent had 1,071,000 options outstanding to purchase shares of common stock of Parent at $0.74 to $1.90 per share and Parent had 7,325,575 warrants outstanding to purchase shares of common stock of Parent at $0.81 to $4.06 per share, which were not included in the loss per share computation because their effect would be anti-dilutive.

NOTE 14 - STOCKHOLDERS' EQUITY

Common Stock -- Parent has 100,000,000 authorized shares of common stock, $0.001 par value. As of March 31, 2017 and December 31, 2016, respectively, there were 36,929,264 and 36,835,514 common shares issued and outstanding.      

Voting -- Holders of Parent 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 Parent common stock are entitled to receive ratably such dividends as our Board of Directors from time to time may declare out of funds legally available.  

Liquidation Rights -- In the event of any liquidation, dissolution or winding-up of affairs of Parent, 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 Parent common stock will be entitled to share ratably in the distribution of any of our remaining assets.   

Other Matters -- Holders of Parent 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 Parent preferred stock in one or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action by the stockholders. The issuance of Parent 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 Cancelation 

On December 31, 2016, the Company canceled 2,696,521 common shares of the previously issued common shares held in escrow issued in connection with the acquisition of all of the issued and outstanding capital stock of LiqTech Systems (formerly Provital Solutions A/S), as LiqTech Systems failed to meet the 2014, 2015 and 2016 catchup gross revenue and EBITDA thresholds for the shares release from escrow.

Common Stock Issuance  

On April 13, 2015, the Company issued an additional 100,000 shares of restricted stock valued at $75,000 for services provided and to be provided to a member of the Board of Directors. The Company will recognize the non-cash compensation of the award over the requisite service period, of which 33,333 shares vested on January 1, 2016, 33,333 shares will vest on January 1, 2017 and 33,334 shares will vest on January 1, 2018.

On January 2, 2016, the Company issued an additional 27,253 shares of restricted stock valued at $20,167 for services provided by the Board of Directors. The Company will recognize the non-cash compensation of the award over the requisite service period. The shares will vest immediately.

On January 2, 2017, the Company issued an additional 93,750 shares of restricted stock valued at $60,000 for services provided by the Board of Directors. The Company will recognize the non-cash compensation of the award over the requisite service period. The shares will vest immediately.

For the three months ended March 31, 2017 and 2016, the Company has recorded non-cash compensation expense of $66,250 and $19,417 relating to the awards, respectively.   

Common Stock Purchase Warrants 

A summary of the status of the warrants outstanding at March 31, 2017 is presented below:

At March 31, 2017, the Company had 66,667 non-vested warrants. We have recorded non-cash compensation expense of $4,409 for the three months ended March 31, 2017 related to the warrants issued.

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. For so long as 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 of common stock underlying the warrants.

On February 15, 2016, the Company issued to LCL Finance Limited a warrant to purchase 100,000 shares

of common stock at an exercise price of $0.81 per share. The warrants are exercisable immediately and will remain exercisable until December 31, 2017.

Stock Options  

In August 2011, Parent’s Board of Directors adopted a Stock Option Plan (the “Plan”). Under the terms and conditions of the Plan, the Board of Directors is empowered to grant stock options to employees, officers, and directors of the Company. At March 31, 2017, 630,000 options were granted and outstanding under the Plan. 

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:

The Company recognized stock based compensation expense related to the options of $25,519 and $110,526 for the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017, the Company had approximately $80,408 of unrecognized compensation cost related to non-vested options expected to be recognized through December 31, 2025. 

A summary of the status of the options outstanding under the Plan at March 31, 2017 is presented below: 

A summary of the status of the options at March 31, 2017, and changes during the period are presented below:

At March 31, 2017, the Company had 333,333 non-vested options to purchase shares of Parent common stock with a weighted average exercise price of $0.74 and with a weighted average grant date fair value of $0.46, resulting in unrecognized compensation expense of $80,408, which is expected to be expensed over a weighted-average period of 1.0 years.

The total intrinsic value of options at March 31, 2017 was $0. Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at March 31, 2017 (for outstanding options), less the applicable exercise price.  

NOTE 15 - SIGNIFICANT CUSTOMERS / CONCENTRATION

For the three months ended March 31, 2017, our four largest customers accounted for approximately 22%, 21%, 9% and 7%, respectively, of our net sales (approximately 59% in total).

For the three months ended March 31, 2016, our four largest customers accounted for approximately 34%, 7%, 6% and 4% of our net sales (approximately 51% in total).

The Company sells products throughout the world; sales by geographical region are as follows for the three months ended March 31, 2017 and 2016:

The Company’s sales by product line are as follows for the three months ended March 31, 2017 and 2016:

NOTE 16 – SUBSEQUENT EVENTS

On March 1, 2017, we announced that due to regulatory issues it has not been feasible for Hunan Yonker Investment Group (Yonker) to complete the agreed investment in LiqTech before the deadline of February 28, 2017. The parties amended the Investment Agreement and the deadline for completion of the US$4,000,000 investment in LiqTech was extended to April 15, 2017, however Yonker subsequently informed the Company that the National Development and Reform Commission (NDRC) is still reviewing and verifying the submitted documents.

On May 12, 2017, the Parent completed a private placement of 6,300,000 shares of its common stock at a per share price of $0.25 for aggregate proceeds to Parent of $1,575,000. Immediately prior to the closing of the private placement, Parent had 36,929,264 of its common stock issued and outstanding, and after the issuance of the 6,300,000 shares of common stock in the private placement, or 17.1% of the total shares of common stock issued and outstanding immediately prior to the closing of the private placement, Parent has 43,229,264 shares issued and outstanding as of the date of this Report. The private placement was completed pursuant to Rule 506 of Regulation D and/or Regulation S of the Securities Act. In connection with the private placement, each investor executed a subscription agreement, which contains customary representations and warranties of Parent and of each investor. The private placement was made directly by Parent and no underwriter or placement agent was engaged by Parent.

Except as set forth above, the Company's management reviewed material events through May 15, 2017 and there were no other subsequent events. 

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

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report. In addition, the following discussion should be read in conjunction with our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 30, 2017, and the financial statements and notes thereto. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Overview

We are 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 two business areas: ceramic membranes for liquid filtration and diesel particulate filters (DPFs) for the control of soot exhaust particles from diesel engines. We are phasing out the fabrication of 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. The products are shipped directly to customers from our production facilities in the United States and Denmark.

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

We conduct operations in the Kingdom of Denmark and the United States. Our Danish operations are located in the Copenhagen area and LiqTech Systems are located in Hobro in Jutland, Denmark, and our U.S. operations are conducted by LiqTech Delaware located in White Bear Lake, Minnesota.

Our Strategy

Our strategy is to create stockholder value by leveraging our competitive and strengths and focusing on the opportunities in the end-markets we serve. Key features of our strategy include:

Developments

Signed Contracts

On January 5, 2017, we announced that we and Grundfos Biobooster A/S (Grundfos) have signed a framework agreement for the delivery of silicon carbide ceramic discs. The agreement has a value of minimum $450,000 and an initial term of 2 years. The ceramic discs will be used in Grundfos´s Ultra Filtration systems for water re-use.

On January 17, 2017, we announced that we had received a $120,000 order for the Company´s water treatment systems for flue gas condensate. The order was received from Tjæreborg Industri A/S, a Danish company who specializes in the development and manufacturing of equipment for power plants. The system will be installed at Uldum Varmeværk, Denmark in 2017.

On March 1, 2017, we announced that due to regulatory issues it has not been feasible for Hunan Yonker Investment Group (Yonker) to complete the agreed investment in LiqTech before the deadline of February 28, 2017. The parties amended the Investment Agreement and the deadline for completion of the US$4,000,000 investment in LiqTech was extended to April 15, 2017, however Yonker subsequently informed the Company that the National Development and Reform Commission (NDRC) is still reviewing and verifying the submitted documents.

Results of Operations

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

The following table sets forth our revenues, expenses and net income for the three months ended March 31, 2017 and 2016: 

Comparison of the Three Months Ended March 31, 2017 and March 31, 2016
 

Revenues 

Net sales for the three months ended March 31, 2017 were $2,968,074 compared to $3,629,968 for the same period in 2016, representing a decrease of 661,894 or 18.2%. The decrease in sales consisted of a decrease in sales of liquid filters and systems of $1,559,165 offset by an increase in sales of DPFs of $860,070 and an increase in sales of kiln furniture of $37,201. The decrease in demand for our liquid filters and systems is mainly due to a delay in certain business opportunities compared to the same period last year where various projects were realized. The increase in demand for our DPFs is mainly due to an increase in market activity in China compared to the same period last year. The increase in demand for our kiln furniture is due to an increase activity compared to the same period last year. We have decided not to focus on this product line anymore and expect very limited activity going forward.

Gross Profit

Gross profit for the three months ended March 31, 2017 was $271,417 compared to a gross profit of $745,958 for same period in 2016, representing a decrease of $474,541 or 63.6%. The decrease in gross profit was due to lower sales activity for our liquid filters and systems, which historically have a higher gross margin, compared to the same period in 2016. Included in gross profit is depreciation of $259,493 and $352,488 for the three months ended March 31, 2017 and 2016, respectively.

Expenses

Total operating expenses for the three months ended March 31, 2017 were $1,279,535 representing a decrease of $423,391 or 24.9%, compared to $1,702,926 for the same period in 2016. This decrease in operating expenses is attributable to a decrease in selling and marketing expenses of $140,685, or 23.8%, a decrease in general and administrative expenses of $162,356, or 21.5%, a decrease in non-cash compensation expenses of $71,173, or 42.5% and a decrease in research and development expenses of $49,177, or 26.1%, compared to the same period in 2016.   

Selling expenses for the three months ended March 31, 2017 were $450,383 compared to $591,068 for the same period in 2016, representing a decrease of $140,685, or 23.8%. This decrease is attributable to a cost reduction in selling expenses in general and a centralization of the sales structure compared to the same period in 2016.

General and administrative expenses for the three months ended March 31, 2017 were $593,638 compared to $755,994 for the same period in 2016, representing a decrease of $162,356, or 21.5%. This decrease is attributable to a general cost reduction in general expenses.

Non-cash compensation expenses for the three months ended March 31, 2017 were $96,178 compared to $167,351 for the same period in 2016, representing a decrease of $71,173, or 42.5%. This decrease is attributable to decreased non-cash compensation expense for options, shares and warrants for services performed granted to directors, employees and management.

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

Research and development expenses for the three months ended March 31, 2017 were $139,336 compared to $188,513 for the same period in 2016, representing a decrease of $49,177, or 26.1%. This decrease is attributable to a cost reduction in research and development expenditures in general for the three months ending March 31, 2017 compared to the same period in 2016.

Net Income Attributable to the Company

Net loss attributable to the Company for the three months ended March 31, 2017 was a loss of $833,270 compared to a loss of $3,753,695 for the comparable period in 2016, representing a decrease in net loss of $2,920,425, or 77.8%. This decrease in net loss was primarily attributable to a tax expense of $2,774,283 in 2016 and a decrease in total operating expenses total operating expenses offset by a decrease in gross profit compared to same period in 2016.

Liquidity and Capital Resources 

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has limited cash and incurred significant recent losses raising substantial doubt about the ability of the Company to continue as a going concern.

We have historically satisfied our capital and liquidity requirements through offerings of equity instruments, internally generated cash from operations and our available lines of credit. At March 31, 2017, the Company did not have any available lines of credit with any lender. At March 31, 2017, we had cash of $515,467 and working capital of $2,744,622 and at December 31, 2016, we had cash of $1,208,650 and working capital of $3,497,578. At March 31, 2017, our working capital decreased by $752,956 compared to December 31, 2016. Total current assets were $8,319,800 and $8,506,321 at March 31, 2017 and at December 31, 2016, respectively, and total current liabilities were $5,575,178 and $5,008,743 at March 31, 2017 and at December 31, 2016, respectively. 

The Company entered into an Investment Agreement with Yonker for a US$4,000,000 investment in LiqTech no later than April 15, 2017. The funds were not received by April 15, 2017 and Yonker has informed us that the NDRC is still reviewing and verifying the submitted documents.

On May 12, 2017, the Parent completed a private placement of 6,300,000 shares of its common stock at a per share price of $0.25 for aggregate proceeds to Parent of $1,575,000. Immediately prior to the closing of the private placement, Parent had 36,929,264 of its common stock issued and outstanding, and after the issuance of the 6,300,000 shares of common stock in the private placement, or 17.1% of the total shares of common stock issued and outstanding immediately prior to the closing of the private placement, Parent has 43,229,264 shares issued and outstanding as of the date of this Report. The private placement was completed pursuant to Rule 506 of Regulation D and/or Regulation S of the Securities Act. In connection with the private placement, each investor executed a subscription agreement, which contains customary representations and warranties of Parent and of each investor. The private placement was made directly by Parent and no underwriter or placement agent was engaged by Parent.

In connection with certain orders, we have to give the customer a working guarantee or a prepayment guarantee or security bond. For that purpose, we have a guarantee credit line of DKK 94,620 (approximately $13,600 at March 31, 2017) with a bank, subject to certain base limitations. As of March 31, 2017, we had DKK 94,620 (approximately $13,600) in working guarantee against the line. This line of credit is guaranteed by Vækstfonden (the Danish state's investments fund) and is secured by certain assets of LiqTech Systems such as receivables, inventory and equipment.

We will need additional funds to sustain our business. We may raise such funds from time to time through public or private sales of equity or debt securities. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our financial condition and results of operations. Additional equity financing may be dilutive to holders of our common stock, and debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate our business. In the event that the Company is unable to raise funds, there is substantial doubt about the ability of the Company to continue as a going concern.

Cash Flows 

Three months ended March 31, 2017 Compared to three months ended March 31, 2016

Cash provided (used) by operating activities is net income (losses) adjusted for certain non-cash items and changes in assets and liabilities. Cash used by operating activities for the three months ended March 31, 2017 was $512,322, representing an increase of $224,926 compared to cash used by operating activities of $287,396 for the three months ended March 31, 2016. The $224,926 increase in cash used by operating activities for the three months ended March 31, 2017 was mainly due to an increase of $161,687 in accounts receivable, an increase of $226,956 accounts payable and an increase of $91,263 in accrued expenses. This was partially offset by an increase of $91,824 in inventory, an increase of $60,820 in prepaid expenses/deposits and a decrease of $31,843 in long-term contracts.

The increase in in accounts receivable, increase in accounts payable, increase in accrued expenses, increase in inventory, increase in prepaid expenses/deposits and the decrease in long-term contracts were all due to normal variations in the ordinary course of business.

Cash used in investing activities was $48,601 for the three months ended March 31, 2017, as compared to cash used in investing activities of $51,942 for the three months ended March 31, 2016. Cash used in investing activities decreased by $3,341 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016. This decrease was due to a period over period increase of $7,008 in the purchase of property offset by proceeds from sale of property and equipment of $10,349.

Cash used by financing activities was $31,292 for the three months ended March 31, 2017, as compared to cash used by financing activities of $39,171 for the three months ended March 31, 2016. This change of $7,879 in cash used by financing activities for the three months ended March 31, 2017, compared to 2016, was mainly due to a decrease in payments proceeds on loans payable.

Off Balance Sheet Arrangements

As of March 31, 2017, we had no off-balance sheet arrangements other than normal operating leases. We are not aware of any material transactions, which are not disclosed in our consolidated financial statements. 

Operating Leases -- The Company leases office and production facilities under operating lease agreements expiring in March 2021, August 2018, May 2018, and June 2017, In some of these lease agreements, the Company has the right to extend.

The future minimum lease payments for non-cancelable operating leases having remaining terms in excess of one year as of March 31, 2017 are as follows:

Significant Accounting Policies and Critical Accounting Estimates

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

Recently Enacted Accounting Standards

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

Subsequent Events

On March 1, 2017, we announced that due to regulatory issues it has not been feasible for Hunan Yonker Investment Group (Yonker) to complete the agreed investment in LiqTech before the deadline of February 28, 2017. The parties amended the Investment Agreement and the deadline for completion of the USD 4 million investment in LiqTech was extended to April 15, 2017, however Yonker has informed the Company that the NDRC is still reviewing and verifying the submitted documents.

On May 12, 2017, the Parent completed a private placement of 6,300,000 shares of its common stock at a per share price of $0.25 for aggregate proceeds to Parent of $1,575,000. Immediately prior to the closing of the private placement, Parent had 36,929,264 of its common stock issued and outstanding, and after the issuance of the 6,300,000 shares of common stock in the private placement, or 17.1% of the total shares of common stock issued and outstanding immediately prior to the closing of the private placement, Parent has 43,229,264 shares issued and outstanding as of the date of this Report. The private placement was completed pursuant to Rule 506 of Regulation D and/or Regulation S of the Securities Act. In connection with the private placement, each investor executed a subscription agreement, which contains customary representations and warranties of Parent and of each investor. The private placement was made directly by Parent and no underwriter or placement agent was engaged by Parent.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable. 

ITEM 4.  CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management, under supervision and with the participation of both of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation 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 Chief Executive Officer 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 Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.　

(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

Not required for a “smaller reporting company.”  

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

On May 12, 2017, the Parent completed a private placement of 6,300,000 shares of its common stock at a per share price of $0.25 for aggregate proceeds to Parent of $1,575,000. Immediately prior to the closing of the private placement, Parent had 36,929,264 of its common stock issued and outstanding, and after the issuance of the 6,300,000 shares of common stock in the private placement, or 17.1% of the total shares of common stock issued and outstanding immediately prior to the closing of the private placement, Parent has 43,229,264 shares issued and outstanding as of the date of this Report. The private placement was completed pursuant to Rule 506 of Regulation D and/or Regulation S of the Securities Act. In connection with the private placement, each investor executed a subscription agreement, which contains customary representations and warranties of Parent and of each investor. The private placement was made directly by Parent and no underwriter or placement agent was engaged by Parent.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

 None.

ITEM 4.    MINE SAFETY DISCLOSURES

 None.

ITEM 5.    OTHER INFORMATION

On November 8, 2016, the Company entered into a joint venture agreement with Hunan Yonker Water Co., Ltd. (“HYW”), pursuant to which the Company and HYW agreed to set up a joint venture company in China relating to filtration systems based on the Company’s Silicon Carbide Membrane technology used in water and wastewater treatment for industrial municipal facilities.  Furthermore, on November 8, 2016, the Company and Hunan Yonker Investment Group Co., Ltd (Yonker) entered into an agreement pursuant to which Yonker agreed to purchase 4,000,000 shares of common stock of the Company at $1.00 per share. The closing of the purchase of the shares is subject to receipt of all US and China government approvals. Such approvals were expected to be received by February 28, 2017. On March 1, 2017, we announced that due to regulatory issues it has not been feasible for Yonker to complete the agreed investment in LiqTech before the deadline of February 28, 2017. The parties amended the Investment Agreement and the deadline for completion of the US$4,000,000 investment in LiqTech was extended to April 15, 2017, however Yonker subsequently informed the Company that the NDRC is still reviewing and verifying the submitted documents.

On May 12, 2017, the Parent completed a private placement of 6,300,000 shares of its common stock at a per share price of $0.25 for aggregate proceeds to Parent of $1,575,000. Immediately prior to the closing of the private placement, Parent had 36,929,264 of its common stock issued and outstanding, and after the issuance of the 6,300,000 shares of common stock in the private placement, or 17.1% of the total shares of common stock issued and outstanding immediately prior to the closing of the private placement, Parent has 43,229,264 shares issued and outstanding as of the date of this Report. The private placement was completed pursuant to Rule 506 of Regulation D and/or Regulation S of the Securities Act. In connection with the private placement, each investor executed a subscription agreement, which contains customary representations and warranties of Parent and of each investor. The private placement was made directly by Parent and no underwriter or placement agent was engaged by Parent.

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.

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