Flexible Solutions International Inc 10-Q for FY2021 Q2
Flexible Solutions International Inc (FSI)
About this 10-Q
Flexible Solutions International Inc filed this 10-Q on August 13, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.54M
- up 10.7% from $7.71M a year earlier
- Net income
- $1.18M
- up 3.9% from net income of $1.13M a year earlier
- Diluted EPS
- $0.09
- unchanged from $0.09 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission
File Number:
(Exact Name of Issuer as Specified in Its Charter)
| (State or other jurisdiction | (Employer Identification No.) | |
| of incorporation or organization) |
| (Address of Issuer’s Principal Executive Offices) | (Zip Code) |
Issuer’s
telephone number: (
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No [X]
Indicate
by check mark whether the registrant (1) has filed all reports 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.
Indicate
by check mark whether the registrant has submitted electronically 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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ Yes ☒
| Class of Stock | No. Shares Outstanding | Date | ||
| Common | August 13, 2021 |
FORM 10-Q
Index
| i |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for the purposes of the federal and state securities laws, including, but not limited to: any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include but are not limited to:
| ● | Increased competitive pressures from existing competitors and new entrants; | |
| ● | Increases in interest rates or our cost of borrowing or a default under any material debt agreement; | |
| ● | Deterioration in general or regional economic conditions; | |
| ● | Adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations; | |
| ● | Loss of customers or sales weakness; | |
| ● | Inability to achieve future sales levels or other operating results; | |
| ● | The unavailability of funds for capital expenditures; | |
| ● | Operational inefficiencies in distribution or other systems. | |
| ● | New tariffs relating to raw materials imported from China; and | |
| ● | Impact of the COVID-19 virus |
For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
| 2 |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
(U.S. Dollars)
| June 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Term deposits | ||||||||
| Accounts receivable (Note 4) | ||||||||
| Inventories (Note 5) | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Property, equipment and leaseholds, net (Note 6) | ||||||||
| Patents (Note 7) | ||||||||
| Right of use assets (Note 3) | ||||||||
| Intangible assets (Note 8) | ||||||||
| Long term deposits (Note 9) | ||||||||
| Investments (Note 10) | ||||||||
| Goodwill (Note 8) | ||||||||
| Deferred tax asset | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Deferred revenue | ||||||||
| Income taxes payable | ||||||||
| Short term line of credit (Note 11) | ||||||||
| Current portion of lease liability (Note 3) | ||||||||
| Current portion of long term debt (Note 12) | ||||||||
| Total current liabilities | ||||||||
| Lease liability (Note 3) | ||||||||
| Deferred income tax liability | ||||||||
| Long term debt (Note 12) | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Capital stock (Note 15) | ||||||||
| Authorized: common shares with a par value of $ each; preferred shares with a par value of $ each | ||||||||
| Issued and outstanding: | ||||||||
| (December 31, 2020: ) common shares | ||||||||
| Capital stock (Note 15) Authorized: 50,000,000 common shares with a par value of $0.001 each; 1,000,000 preferred shares with a par value of $0.01 each Issued and outstanding: 12,315,746 (December 31, 2020: 12,260,545) common shares | ||||||||
| Capital in excess of par value | ||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated earnings | ||||||||
| Total stockholders’ equity – controlling interest | ||||||||
| Non-controlling interests (Note 16) | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
— See Notes to Unaudited Condensed Interim Consolidated Financial Statements —
| 3 |
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(U.S. Dollars — Unaudited)
| 2021 | 2020 | |||||||
| Three Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating Expenses | ||||||||
| Wages | ||||||||
| Administrative salaries and benefits | ||||||||
| Advertising and promotion | ||||||||
| Investor relations and transfer agent fee | ||||||||
| Office and miscellaneous | ||||||||
| Insurance | ||||||||
| Interest expense | ||||||||
| Lease expense | ||||||||
| Consulting | ||||||||
| Professional fees | ||||||||
| Travel | ||||||||
| Telecommunications | ||||||||
| Shipping | ||||||||
| Research | ||||||||
| Commissions | ||||||||
| Currency exchange | ( | ) | ||||||
| Utilities | ||||||||
| Total operating expenses | ||||||||
| Operating income | ||||||||
| PPP loan forgiveness | ||||||||
| Gain on investment | ||||||||
| Interest income | ||||||||
| Income before income tax | ||||||||
| Income taxes | ||||||||
| Deferred income tax recovery | ||||||||
| Income tax expense | ( | ) | ( | ) | ||||
| Net income for the year including non-controlling interests | ||||||||
| Less: Net income attributable to non-controlling interests | ( | ) | ( | ) | ||||
| Net income (loss) attributable to controlling interest | $ | $ | ||||||
| Income per share (basic) | $ | $ | ||||||
| Income per share (diluted) | ||||||||
| Income per share (basic and diluted) | ||||||||
| Weighted average number of common shares (basic) | ||||||||
| Weighted average number of common shares (diluted) | ||||||||
| Other comprehensive income (loss): | ||||||||
| Net income | ||||||||
| Unrealized gain (loss) on foreign currency translations | ||||||||
| Total comprehensive income | $ | $ | ||||||
| Comprehensive income – non-controlling interest | ( | ) | ( | ) | ||||
| Comprehensive income attributable to Flexible Solutions International Inc. | $ | $ | ||||||
— See Notes to Unaudited Condensed Interim Consolidated Financial Statements —
| 4 |
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(U.S. Dollars — Unaudited)
| 2021 | 2020 | |||||||
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating Expenses | ||||||||
| Wages | ||||||||
| Administrative salaries and benefits | ||||||||
| Advertising and promotion | ||||||||
| Investor relations and transfer agent fee | ||||||||
| Office and miscellaneous | ||||||||
| Insurance | ||||||||
| Interest expense | ||||||||
| Lease expense | ||||||||
| Consulting | ||||||||
| Professional fees | ||||||||
| Travel | ||||||||
| Telecommunications | ||||||||
| Shipping | ||||||||
| Research | ||||||||
| Commissions | ||||||||
| Currency exchange | ( | ) | ||||||
| Utilities | ||||||||
| Total operating expenses | ||||||||
| Operating income | ||||||||
| PPP loan forgiveness | - | |||||||
| Gain on investment | ||||||||
| Interest income | ||||||||
| Income before income tax | ||||||||
| Income taxes | ||||||||
| Income tax expense | ( | ) | ( | ) | ||||
| Net income for the period including non-controlling interests | ||||||||
| Less: Net income attributable to non-controlling interests | ( | ) | ( | ) | ||||
| Net income attributable to controlling interest | $ | $ | ||||||
| Income per share (basic and diluted) | $ | $ | ||||||
| Weighted average number of common shares (basic) | ||||||||
| Weighted average number of common shares (diluted) | ||||||||
| Other comprehensive income (loss): | ||||||||
| Net income | ||||||||
| Unrealized gain (loss) on foreign currency translations | ( | ) | ||||||
| Total comprehensive income | $ | $ | ||||||
| Comprehensive income – non-controlling interest | ( | ) | ( | ) | ||||
| Comprehensive income attributable to Flexible Solutions International Inc. | $ | $ | ||||||
— See Notes to Unaudited Condensed Interim Consolidated Financial Statements —
| 5 |
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars — Unaudited)
| 2021 | 2020 | |||||||
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating activities | ||||||||
| Net income for the period including non-controlling interest | $ | $ | ||||||
| Adjustments to reconcile net income to cash provided by operations: | ||||||||
| Stock based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Lease right of use amortization | ||||||||
| Lease right of use financing | ||||||||
| Gain on investment | ( | ) | ( | ) | ||||
| PPP loan forgiveness | ( | ) | - | |||||
| Changes in non-cash working capital items: | ||||||||
| (Increase) Decrease in accounts receivable | ( | ) | ||||||
| (Increase) Decrease in inventories | ( | ) | ||||||
| (Increase) Decrease in prepaid expenses | ( | ) | ||||||
| Increase (Decrease) in accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
| Increase (Decrease) in taxes payable | ||||||||
| Increase (Decrease) deferred revenue | ( | ) | ||||||
| Cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Long term deposits | - | |||||||
| Investment | ( | ) | ( | ) | ||||
| Proceeds of equity method investment | ||||||||
| Net purchase of property, equipment and leaseholds | ( | ) | ( | ) | ||||
| Cash (used in) investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Repayment of short term line of credit | ( | ) | ( | ) | ||||
| Repayment of long term debt | ( | ) | ( | ) | ||||
| Lease financing costs | ( | ) | ( | ) | ||||
| Convertible note | - | ( | ) | |||||
| Distributions to non-controlling interest | ( | ) | ( | ) | ||||
| Proceeds of issuance of common stock | ||||||||
| Cash (used in) financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash | ||||||||
| Inflow (outflow) of cash | ||||||||
| Cash, cash equivalents and restricted cash, beginning | ||||||||
| Cash, cash equivalents and restricted cash, ending | $ | $ | ||||||
| Cash, cash equivalents and restricted cash are comprised of: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Term deposits | - | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Income taxes paid | $ | $ | ||||||
| Interest paid | $ | $ | ||||||
— See Notes to Unaudited Condensed Interim Consolidated Financial Statements —
| 6 |
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONDENSED INTERIM Consolidated Statements of Stockholders’ Equity
(U.S. Dollars – Unaudited)
| Shares | Par Value | Capital in Excess of Par Value | Accumulated Earnings | Other Comprehensive Income (Loss) | Total | Non- Controlling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||
| Balance December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Translation adjustment | — | |||||||||||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||||||
| Common stock issued | ||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Translation adjustment | — | |||||||||||||||||||||||||||||||
| Net income (loss) | — | |||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Balance June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
— See Notes to Unaudited Condensed Interim Consolidated Financial Statements –
| 7 |
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONDENSED INTERIM Consolidated Statements of Stockholders’ Equity
(U.S. Dollars – Unaudited)
| Shares | Par Value | Capital in Excess of Par Value | Accumulated Earnings | Other Comprehensive Income (Loss) | Total | Non- Controlling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||
| Balance December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Translation adjustment | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||||||
| Common stock issued | ||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Translation adjustment | — | |||||||||||||||||||||||||||||||
| Net income (loss) | — | |||||||||||||||||||||||||||||||
| Net income (loss) | — | |||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Balance June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
— See Notes to Unaudited Condensed Interim Consolidated Financial Statements —
| 8 |
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the Period Ended June 30, 2021
(U.S. Dollars)
1. BASIS OF PRESENTATION.
These
consolidated financial statements include the accounts of Flexible Solutions International, Inc. (the “Company”), its wholly-owned
subsidiaries Flexible Fermentation Ltd. , NanoChem Solutions Inc. (“NanoChem”), Flexible Solutions Ltd., Flexible Biomass
LP, FS Biomass Inc., NCS Deferred Corp., Natural Chem SEZC Ltd., and InnFlex Holdings Inc. and its
In
2018, NanoChem, a wholly-owned subsidiary of the Company, completed the purchase of a
The Company and its subsidiaries develop, manufacture and market specialty chemicals which slow the evaporation of water. One product, HEATSAVR®, is marketed for use in swimming pools and spas where its use, by slowing the evaporation of water, allows the water to retain a higher temperature for a longer period of time and thereby reduces the energy required to maintain the desired temperature of the water in the pool. Another product, WATERSAVR®, is marketed for water conservation in irrigation canals, aquaculture, and reservoirs where its use slows water loss due to evaporation. In addition to the water conservation products, the Company also manufactures and markets water-soluble chemicals utilizing thermal polyaspartate biopolymers (hereinafter referred to as “TPAs”), which are beta-proteins manufactured from the common biological amino acid, L-aspartic. TPAs can be formulated to prevent corrosion and scaling in water piping within the petroleum, chemical, utility and mining industries. TPAs are also used as proteins to enhance fertilizers in improving crop yields and can be used as additives for household laundry detergents, consumer care products and pesticides. The TPA division also manufactures two nitrogen conservation products for agriculture that slows nitrogen loss from fields.
The outbreak of the novel strain of coronavirus, specifically identified as “COVID-19”, has resulted in a widespread health crisis that has affected economies and financial markets around the world resulting in an economic downturn. This outbreak may also cause staff shortages, reduced customer demand, increased government regulations or interventions, all of which may negatively impact the business, financial condition or results of options of the Company. The duration and impact of the COVID-19 outbreak is unknown at this time and it is not possible to reliably estimate the length and severity of these developments.
2. SIGNIFICANT ACCOUNTING POLICIES.
These consolidated financial statements have been prepared on a historical cost basis, except where otherwise noted, in accordance with accounting principles generally accepted in the United States applicable to a going concern and reflect the policies outlined below.
(a) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with several financial institutions.
| 9 |
(b) Inventories and Cost of Sales
The
Company has three major classes of inventory: completed goods, work in progress and raw materials and supplies. In all classes, inventories
are stated at the lower of cost and net realizable value. The Company applies the first-in, first-out or weighted average cost formula
to inventories in different subsidiaries. Cost of sales includes all expenditures incurred in bringing the goods to the point of sale.
Inventory costs and costs of sales include direct costs of the raw material, inbound freight charges, warehousing costs, handling costs
(receiving and purchasing) and utilities and overhead expenses related to the Company’s manufacturing and processing facilities.
Shipping and handling charges billed to customers are included in revenue (2021 - $
(c) Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall customer credit-worthiness and historical experience.
(d) Property, Equipment, Leaseholds, Right of Use Assets and Intangible Assets.
The following assets are recorded at cost and depreciated using the methods and annual rates shown below:
SCHEDULE OF METHOD OF DEPRECIATION
| Computer hardware | ||
| Furniture and fixtures | ||
| Manufacturing equipment | ||
| Office equipment | ||
| Boat | ||
| Building and improvements | ||
| Trailer | ||
| Automobile | ||
| Patents | ||
| Technology | ||
| Right of Use Asset | ||
| Leasehold improvements | ||
| Customer Relationships – ENP Investments | ||
| Software – ENP Investments |
(e) Impairment of Long-Lived Assets.
In accordance with FASB Codification Topic 360, Property, Plant and Equipment (ASC 360), the Company reviews long-lived assets, including, but not limited to, property, equipment and leaseholds, patents and other assets, for impairment annually or whenever events or changes in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived assets is assessed for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets. If the expected future cash flows of an asset are less than its carrying value, an impairment measurement is indicated. Long-lived assets are written down to net realizable value when management determines there has been a change in circumstances which indicates their carrying amounts may not be recoverable. Impairment charges are recorded to the extent that an asset’s carrying value exceeds its fair value. Accordingly, actual results could vary significantly from such estimates. There were no impairment charges during the periods presented.
| 10 |
(f) Foreign Currency.
The functional currency of the Company is the U.S. dollar. The functional currency of three of the Company’s subsidiaries is the Canadian Dollar. The translation of the Canadian Dollar to the reporting currency of the Company, the U.S. Dollar, is performed for assets and liabilities using exchange rates in effect at the balance sheet date. Revenue and expense transactions are translated using average exchange rates prevailing during the year. Translation adjustments arising on conversion of the Company’s financial statements from the subsidiary’s functional currency, Canadian Dollars, into the reporting currency, U.S. Dollars, are excluded from the determination of income (loss) and are disclosed as other comprehensive income in the consolidated statements of operations and comprehensive income.
Foreign exchange gains and losses relating to transactions not denominated in the applicable local currency are included in operating income (loss) if realized during the year and in comprehensive income (loss) if they remain unrealized at the end of the year.
(g) Revenue Recognition.
The Company generates revenue primarily from energy and water conservation products and biodegradable polymer, as further discussed in Note 17.
The Company follows a five-step model for revenue recognition. The five steps are: (1) identification of the contract(s) with the customer, (2) identification of the performance obligation(s) in the contract(s), (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligation, and (5) recognition of revenue when (or as) the performance obligation is satisfied. The Company has fulfilled its performance obligations when control transfers to the customer, which is generally at the time the product is shipped since risk of loss is transferred to the purchaser upon delivery to the carrier. For shipments which are F.O.B. shipping point, the Company has elected to account for shipping and handling activities as a fulfillment cost rather than as an additional promised service and performance obligation.
The Company recognizes revenue when there are no significant remaining performance obligations. When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled. To date, there have been no such significant post-delivery obligations.
Since the Company’s inception, product returns have been insignificant; therefore, no provision has been established for estimated product returns.
Deferred revenues consist of products sold to distributors with payment terms greater than the Company’s customary business terms due to lack of credit history or operating in a new market in which the Company has no prior experience. The Company defers the recognition of revenue until the criteria for revenue recognition has been met, and payments become due or cash is received from these distributors.
(h) Stock Issued in Exchange for Services.
The Company’s common stock issued in exchange for services is valued at estimated fair market value based upon trading prices of the Company’s common stock on the dates of the stock transactions. The corresponding expense of the services rendered is recognized over the period that the services are performed.
(i) Stock-based Compensation.
The Company recognizes compensation expense for all share-based payments in accordance with FASB Codification Topic 718, Compensation — Stock Compensation, (ASC 718). Under the fair value recognition provisions of ASC 718, the Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.
The fair value at grant date of stock options is estimated using the Black-Scholes option-pricing model. Compensation expense is recognized on a straight-line basis over the stock option vesting period based on the estimated number of stock options that are expected to vest. Shares are issued from treasury upon exercise of stock options.
| 11 |
(j) Other Comprehensive Income.
Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income, but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders’ equity. The Company’s other comprehensive income is comprised only of unrealized foreign exchange gains and losses.
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding in the period. Diluted earnings per share is calculated giving effect to the potential dilution of the exercise of options and warrants. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options and warrants are included in diluted net income per share to the extent that these shares are dilutive. Common equivalent shares that have an anti-dilutive effect on net income per share have been excluded from the calculation of diluted weighted average shares outstanding for the three and six months ended June 30, 2021 and 2020.
(l) Use of Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and would impact the results of operations and cash flows.
Estimates and underlying assumptions are reviewed at each period end. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Significant areas requiring the use of management estimates include assumptions and estimates relating to the valuation of goodwill and intangible assets, asset impairment analysis, share-based payments and warrants, valuation allowances for deferred income tax assets, determination of useful lives of property, equipment and leaseholds and intangible assets, recoverability of accounts receivable, recoverability of investments, discount rates for right of use assets and the valuation of inventory.
(m) Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs described below, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
| ● | Level 1 – Quoted prices in active markets for identical assets or liabilities | |
| ● | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| ● | Level 3 — Unobservable inputs that are supported by little or no market activity which is significant to the fair value of the assets or liabilities. |
| 12 |
The fair values of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and the short term line of credit for all periods presented approximate their respective carrying amounts due to the short term nature of these financial instruments.
The fair value of the long term debt for all periods presented approximate their respective carrying amounts due to these financial instruments being at market rates.
(n) Contingencies
Certain conditions may exist as of the date the consolidated financial statements are issued which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Legal fees associated with loss contingencies are expensed as incurred.
(o) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance so that the assets are recognized only to the extent that when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized.
Per FASB ASC 740 “Income taxes” under the liability method, it is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At June 30, 2021, the Company believes it has appropriately accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be affected. Interest and penalties associated with the Company’s tax positions are recorded as interest expense in the consolidated statements of operations and comprehensive income.
(p) Risk Management.
The
Company’s credit risk is primarily attributable to its accounts receivable. The amounts presented in the accompanying consolidated
balance sheets are net of allowances for doubtful accounts, estimated by the Company’s management based on prior experience and
the current economic environment. The Company is exposed to credit-related losses in the event of non-payment by customers. Credit exposure
is minimized by dealing with only credit worthy counterparties. Revenue for the Company’s three primary customers totaled $
| 13 |
The credit risk on cash and cash equivalents is limited because the Company limits its exposure to credit loss by placing its cash and cash equivalents with major financial institutions. The Company maintains cash balances at financial institutions which at times exceed federally insured amounts. The Company has not experienced any losses in such accounts.
The Company is exposed to foreign exchange risk to the extent that market value rate fluctuations materially differ from financial assets and liabilities, subject to fixed long-term rates.
In order to manage its exposure to foreign exchange risks, the Company is closely monitoring the fluctuations in the foreign currency exchange rates and the impact on the value of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities. The Company has not hedged its exposure to currency fluctuations.
The Company is exposed to interest rate risk to the extent that the fair value or future cash flows for financial liabilities will fluctuate as a result of changes in market interest rates. The Company is exposed to interest rate risk on its long-term debt.
In order to manage its exposure to interest rate risk, the Company is closely monitoring fluctuations in market interest risks and will refinance its long-term debt where possible to obtain more favourable rates.
(q) Equity Method Investment
The
Company accounts for investments using the equity method of accounting if the investment provides the Company the ability to exercise
significant influence, but not control, over the investee.
(r) Goodwill and intangible assets
Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to the assets acquired and liabilities assumed. Goodwill is not amortized, but is reviewed for impairment annually or more frequently if certain impairment conditions arise. The Company performs an annual goodwill impairment review in the fourth quarter of each year at the reporting unit level. The evaluation begins with a qualitative assessment of the factors that could impact the significant inputs used to estimate fair value. If after performing the qualitative assessment, it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, including goodwill, then no further analysis is necessary. However, if the results of the qualitative test are unclear, the Company performs a quantitative test, which involves comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company uses an income-based valuation method, determining the present value of future cash flows, to estimate the fair value of a reporting unit. If the fair value of a reporting unit exceeds its positive carrying amount, goodwill of the reporting unit is considered not impaired, and no further analysis is necessary. If the fair value of the reporting unit is less than its carrying amount, goodwill impairment would be recognized equal to the amount of the carrying value in excess of the reporting unit’s fair value, limited to the total amount of goodwill allocated to the reporting unit.
Intangible assets primarily include trademarks and trade secrets with indefinite lives and customer-relationships with finite lives. Intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis, or more frequently if indicators of impairment are present. Indefinite lived intangible assets are assessed using either a qualitative or a quantitative approach. The qualitative assessment evaluates factors including macro-economic conditions, industry and company-specific factors, legal and regulatory environments, and historical company performance in assessing fair value. If it is determined that it is more likely than not that the fair value of the intangible asset is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is required. When using a quantitative approach, the Company compares the fair value of the intangible asset to its carrying amount, including goodwill. If the estimated fair value of the intangible asset is less than the carrying amount of the intangible asset, impairment is indicated, requiring recognition of an impairment charge for the differential.
| 14 |
Qualitative assessments of goodwill and indefinite-lived intangible assets were performed in 2021 and 2020. Based on the results of the assessment, it was determined that it is more likely than not the reporting unit, customer lists and trademarks had a fair value in excess of their carrying value. Accordingly, no further impairment testing was completed and no impairment charges related to goodwill or indefinite-lived intangibles were recognized during the three or six months ended June 30, 2021.
Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company reviews for impairment indicators of finite-lived intangibles and other long-lived assets as described in the “Impairment of Long Lived Assets” significant accounting policy.
(s) Recent Accounting Pronouncements
The Company has implemented all applicable new accounting pronouncements that are in effect. Those pronouncements did not have any material impact on the consolidated financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
3. LEASES
Accounting
and reporting guidance for leases requires that leases be evaluated and classified as either operating or finance leases by the lessee
and as either operating, sales-type or direct financing leases by the lessor. For leases with terms greater than 12 months, the Company
records the related right-of-use (“ROU”) asset and lease obligation at the present value of lease payments over the term.
Leases may include fixed rental escalation clauses, renewal options and / or termination options that are factored into the determination
of lease payments when appropriate. The Company’s operating leases are included in ROU assets, lease liabilities-current portion
and lease liability-less current portion in the accompanying consolidated balance sheets. ROU assets represent the Company’s right
to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the
lease. The Company’s leases do not usually provide a readily determinable implicit rate; therefore, an estimate of the Company’s
incremental borrowing rate is used to discount the lease payments based on information available at the lease commencement date. The
discount rate used was
The table below summarizes the right-of-use asset and lease liability for the six months ended June 30, 2021:
SUMMARY OF RIGHT-OF-USE ASSET AND LEASE LIABILITY
| June 30, 2021 | ||||
| Right of Use Assets | ||||
| Balance at December 31, 2020 | $ | |||
| Depreciation | ( | ) | ||
| Balance at June 30, 2021 | $ | |||
| Lease Liability | ||||
| Balance at December 31, 2020 | $ | |||
| Lease interest expense | ||||
| Payments | ( | ) | ||
| Balance at June 30, 2021 | $ | |||
| Short-term portion | $ | |||
| Long-term portion | ||||
| Total | $ | |||
| 15 |
Undiscounted rent payments for the next five years are as follows:
SCHEDULE OF UNDISCOUNTED RENT PAYMENTS
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total | $ | |||
| Impact of discounting | ||||
| Lease liability, June 30, 2021 | $ |
4. ACCOUNTS RECEIVABLE
SCHEDULE OF ACCOUNTS RECEIVABLE
| June
30, 2021 | December
31, 2020 | |||||||
| Accounts receivable | $ | $ | ||||||
| Allowances for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable net | $ | $ | ||||||
5. INVENTORIES
SCHEDULE OF INVENTORIES
| June
30, 2021 | December
31, 2020 | |||||||
| Completed goods | $ | $ | ||||||
| Work in progress | ||||||||
| Raw materials and supplies | ||||||||
| Total inventory | $ | $ | ||||||
6. PROPERTY, PLANT & EQUIPMENT
SCHEDULE OF PROPERTY, EQUIPMENT AND LEASEHOLDS
| Cost | Accumulated Depreciation | Net | ||||||||||
| June 30, 2021 | Accumulated | June 30, 2021 | ||||||||||
| Cost | Depreciation | Net | ||||||||||
| Buildings and improvements | $ | $ | $ | |||||||||
| Automobiles | ||||||||||||
| Computer hardware | ||||||||||||
| Furniture and fixtures | ||||||||||||
| Office equipment | ||||||||||||
| Manufacturing equipment | ||||||||||||
| Trailer | ||||||||||||
| Boat | ||||||||||||
| Leasehold improvements | ||||||||||||
| Technology | ||||||||||||
| Land | ||||||||||||
| $ | $ | $ | ||||||||||
| 16 |
| Cost | Accumulated Depreciation | Net | ||||||||||
| December 31, 2020 | Accumulated | December 31, 2020 | ||||||||||
| Cost | Depreciation | Net | ||||||||||
| Buildings and improvements | $ | $ | $ | |||||||||
| Automobiles | ||||||||||||
| Computer hardware | ||||||||||||
| Furniture and fixtures | ||||||||||||
| Office equipment | ||||||||||||
| Manufacturing equipment | ||||||||||||
| Trailer | ||||||||||||
| Boat | ||||||||||||
| Leasehold improvements | ||||||||||||
| Technology | ||||||||||||
| Land | ||||||||||||
| $ | $ | $ | ||||||||||
Amount
of depreciation expense for the six months ended June 30, 2021: $
7. PATENTS
In fiscal 2005, the Company started the patent process for additional WATER$AVR® products. Patents associated with these costs were granted in 2006 and they have been amortized over their legal life of 17 years.
SCHEDULE OF PATENTS
June 30, 2021 Cost | Accumulated
Amortization | June 30, 2021 Net | ||||||||||
| Patents | $ | $ | $ | |||||||||
December 31, 2020 Cost | Accumulated
Amortization | December 31, 2020 Net | ||||||||||
| Patents | $ | $ | $ | |||||||||
The
increase in the carrying amount of patents is primarily due to foreign currency translation effects. The 2021 cost in Canadian dollars
- $
Amount
of amortization for 2021 - $
Estimated amortization expense over the next two years is as follows:
SCHEDULE OF ESTIMATED AMORTIZATION EXPENSE
| 2021 | ||||
| 2022 |
8. GOODWILL AND INDEFINITE LIVED INTANGIBLE ASSETS
SCHEDULE OF GOODWILL AND INDEFINITE LIVED INTANGIBLE ASSETS
| Goodwill | ||||
| Balance as of December 31, 2019 | $ | |||
| Additions | ||||
| Impairment | ||||
| Balance as of December 31, 2020 and June 30, 2021 | $ | |||
| Indefinite Lived Intangible Assets | ||||
| Balance as of December 31, 2019 | $ | |||
| Additions | ||||
| Impairment | ||||
| Balance as of December 31, 2020 and June 30, 2021 | $ |
Goodwill relates to the acquisition of ENP Investments. Indefinite lived intangible assets consist of trade secrets and trademarks related to the acquisition of ENP Investments.
| 17 |
| Definite Life Intangible Assets | ||||
| Balance as of December 31, 2019 | $ | |||
| Amortization | ( | ) | ||
| Balance as of December 31, 2020 | ||||
| Balance as of December 31, 2020 | ||||
| Amortization | ( | ) | ||
| Balance as of June 30, 2021 | $ |
Definite
life intangible assets consist of customer relationships and software related to the acquisition of ENP Investments. Customer relationships
and software are amortized over their estimated useful life of
Estimated amortization expense over the next five years is as follows:
SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 |
9. LONG TERM DEPOSITS
The Company has reclassified certain security deposits to better reflect their long term nature. Long term deposits consist of damage deposits held by landlords and security deposits held by various vendors.
SCHEDULE OF LONG TERM DEPOSITS
| June 30, 2021 | December 31, 2020 | |||||||
| Long term deposits | $ | $ | ||||||
10. INVESTMENTS
(a)
The Company has a
SCHEDULE OF EQUITY METHOD INVESTMENT
| Balance, December 31, 2019 | $ | |||
| Return of equity | ( | ) | ||
| Gain in equity method investment | ||||
| Balance, December 31, 2020 | ||||
| Return of equity | ( | ) | ||
| Gain in equity method investment | ||||
| Balance, June 30, 2021 | $ |
Summarized profit and loss information related to the equity accounted investment is as follows for the full year:
SUMMARY OF PROFIT AND LOSS INFORMATION RELATED TO EQUITY ACCOUNTED INVESTMENT
| 2020 | ||||
| Net sales | $ | |||
| Net income | $ | |||
During
the six months ended June 30, 2021, the Company received $
| 18 |
(b)
In fiscal 2018, ENP Investments acquired
a
It was determined that ENP Mentoda did not meet the definition of a business in accordance with FASB Codification Topic 805, Business Combinations (ASC 805), and the acquisition was accounted for as an asset acquisition. The following table summarizes the final purchase price allocation of the consideration paid to the respective fair values of the assets acquired and liabilities assumed in ENP Realty as of the acquisition date.
SCHEDULE OF FAIR VALUES OF ASSETS ACQUIRED AND LIABILITIES ASSUMPTION
| Investment eliminated upon consolidation | $ | |||
| Assets acquired: | ||||
| Cash | ||||
| Building | ||||
| Land | ||||
| Liabilities assumed: | ||||
| Accounts payable | ( | ) | ||
| Long term debt | ( | ) | ||
| Deferred income tax liability | ( | ) | ||
| Total identifiable net assets: | ||||
| Gain on acquisition of ENP Realty | $ |
The income tax expense arising from the deferred income tax liability was net against gain on acquisition of ENP Realty in the consolidated statements of operations and comprehensive income for the full year ended December 31, 2020.
A summary of the Company’s investment follows:
SCHEDULE OF EQUITY METHOD INVESTMENT
| Balance, December 31, 2019 | $ | |||
| Investment eliminated upon consolidation | ( | ) | ||
| Balance, December 31, 2020 and June 30, 2021 | $ |
Summarized profit and loss information related to the equity accounted investment is as follows for the full year:
SUMMARY OF PROFIT AND LOSS INFORMATION RELATED TO EQUITY ACCOUNTED INVESTMENT
| 2019 | ||||
| Net sales | $ | |||
| Net income | $ | |||
(c)
In December 2018 the Company invested $
(d)
In December 2018 the Company invested $
| 19 |
(e)
In January 2019, the Company invested $
SCHEDULE OF EQUITY METHOD INVESTMENT
| Balance, December 31, 2019 | $ | |||
| Additional payments | ||||
| Gain in equity method investment | ||||
| Return of equity | ( | ) | ||
| Balance, December 31, 2020 | ||||
| Gain in equity method investment | ||||
| Return of equity | ( | ) | ||
| Balance, June 30, 2021 | $ |
Further
to the original investment amount, the Company had placed $
SUMMARY OF PROFIT AND LOSS INFORMATION RELATED TO EQUITY ACCOUNTED INVESTMENT
| Six months ended June 30, 2021 | Six months ended June 30, 2020 | |||||||
| Net sales | $ | $ | ||||||
| Gross profit | ||||||||
| Net income | $ | |||||||
f)
In December 2020, the Company invested $
SCHEDULE OF EQUITY METHOD INVESTMENT
| Balance, January 1, 2020 | $ | |||
| Acquisition | ||||
| Balance, December 31, 2020 and March 31, 2021 | ||||
| Additional payment | ||||
| Balance, June 30, 2021 | $ |
11. SHORT-TERM LINE OF CREDIT
(a)
In September 2018, the Company signed a new
agreement with Harris Bank (“Harris”) to renew the expiring credit line. The revolving line of credit is for an aggregate
amount of up to the lesser of (i) $
(b)
In April, 2020, ENP Investments signed a new agreement with Midland to renew the expiring credit line. The revolving line of credit
is for an aggregate amount up to $
| 20 |
The
revolving line of credit contains customary affirmative and negative covenants, including the following: compliance with laws, provisions
of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance of operating accounts
at Midland, Midland’s access to collateral, formation or acquisition of subsidiaries, incurrence of indebtedness, dispositions
of assets, granting liens, changes in business, ownership or business locations, engaging in mergers and acquisitions, making investments
or distributions and affiliate transactions. NanoChem is a guarantor of
To secure the repayment of any amounts borrowed under the revolving line of credit, ENP Investments granted Midland a security interest in all inventory, equipment and fixtures and acknowledges a separate commercial security agreement from guarantor to Midland dated February 15, 2011.
Short-term
borrowings outstanding under the revolving line as of June 30, 2021 were $nil (December 31, 2020 - $
(c)
In October 2020, the Company signed a new agreement with Midland to replace the expiring credit line at Harris. The revolving line
of credit is for an aggregate amount of up to the lesser of (i) $
The revolving line of credit contains customary affirmative and negative covenants, including the following: compliance with laws, provision of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance of operating accounts at Midland, Midland’s access to collateral, formation or acquisition of subsidiaries, incurrence of indebtedness, dispositions of assets, granting liens, changes in business, ownership or business locations, engaging in mergers and acquisitions, making investments or distributions and affiliate transactions. The covenants also require that the Company maintain a minimum ratio of qualifying financial assets to the sum of qualifying financial obligations. As of June 30, 2021, Company was in compliance with all loan covenants.
To secure the repayment of any amounts borrowed under the revolving line of credit, the Company granted Midland a security interest in substantially all of the assets of NanoChem, exclusive of intellectual property assets.
Short-term
borrowings outstanding under the revolving line as of June 30, 2021 were $
12. LONG TERM DEBT
(a)
In October 2018, NanoChem signed a $
(b)
In April 2019, NanoChem signed a loan for
$
(c)
In January 2018, ENP Investments signed a
$
| 21 |
(d)
In March 2016, ENP Investments signed a $
(e)
In April 2020, NanoChem received a
(f)
In April 2020, ENP Investments received a
(g)
In October 2020, NanoChem signed a $
The Company has committed to the following repayments:
SCHEDULE OF INTEREST LOAN REPAYMENT
| 2020 | ||||
| 2021 | $ | |||
| 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ |
(h)
In October 2020, NanoChem signed a loan for $
SCHEDULE OF INTEREST LOAN REPAYMENT
| 2020 | ||||
| 2021 | $ | |||
| 2022 | $ |
(i)
In January 2020, ENP Mendota refinanced its mortgage and signed a loan for $
| 22 |
As of June 30, 2021, Company was in compliance with all loan covenants.
SCHEDULE OF LOAN COVENANTS
| Continuity | June 30, 2021 | December 31, 2020 | ||||||
| Balance, January 1 | $ | $ | ||||||
| Plus: Proceeds from loans | ||||||||
| Plus: Loan acquired with acquisition of ENP Realty | ||||||||
| Less: Forgiveness on PPP loans | ( | ) | ||||||
| Less: Payments on loan | ( | ) | ( | ) | ||||
| Balance, end of period | $ | $ | ||||||
SCHEDULE OF OUTSTANDING BALANCE LOAN
| Outstanding balance at December 31, | June 30, 2021 | December 31, 2020 | ||||||
| a) Long term debt – Harris Bank | $ | $ | ||||||
| b) Long term debt – Harris Bank | ||||||||
| c) Long term debt – Midland States Bank | ||||||||
| d) Long term debt – Ford Credit | ||||||||
| e) Long term debt – PPP | ||||||||
| f) Long term debt - PPP | ||||||||
| g) Long term debt – Midland States Bank | ||||||||
| h) Long term debt – Midland States Bank | ||||||||
| i) Long term debt – Stock Yards Bank & Trust | ||||||||
| Long-term Debt | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| $ | $ | |||||||
13. CONVERTIBLE NOTE PAYABLE
In
October 2018, the Company issued a convertible note payable in the amount of $
In
June 2019, the holder opted to convert $
In
April 2020, the Company repaid the remaining principal balance of $
The Company has a stock option plan (“Plan”). The purpose of this Plan is to provide additional incentives to key employees, officers, directors and consultants of the Company and its subsidiaries in order to help attract and retain the best available personnel for positions of responsibility and otherwise promote the success of the Company’s business. It is intended that options issued under this Plan constitute non-qualified stock options. The general terms of awards under the option plan are that of the options granted will vest the year following the grant. The maximum term of options granted is years and the exercise price for all options are issued for not less than fair market value at the date of the grant.
| 23 |
SCHEDULE OF STOCK OPTION ACTIVITIES
| Number of shares | Exercise price per share |
Weighted average exercise price | |||||||||||
| Balance, December 31, 2019 | $ | – | |
$ | |||||||||
| Granted | $ | $ | |||||||||||
| Cancelled or expired | ( |
) | $ | – | $ | ||||||||
| Exercised | ( |
) | $ | – | $ | ||||||||
| Balance, December 31, 2020 | $ | – | $ | ||||||||||
| Cancelled or expired | ( |
) | $ | – | $ | ||||||||
| Exercised | ( |
) | $ | – | $ | ||||||||
| Balance, June 30, 2021 | $ | – | $ | ||||||||||
| Exercisable, June 30, 2021 | $ | – | $ | ||||||||||
The weighted average remaining contractual life of options outstanding is years.
SCHEDULE OF STOCK OPTION FAIR VALUE ASSUMPTIONS
| 2020 | ||||
| Expected life – years | ||||
| Interest rate | % | |||
| Volatility | % | |||
| Weighted average fair value of options granted | $ | |||
The
Company did not grant any options during the six months ended June 30, 2021 or 2020. Options granted in previous quarters resulted in
expenses in the amount of $
As of June 30, 2021, there was approximately of compensation expense related to non-vested awards. This expense is expected to be recognized over a weighted average period of 9 months.
The aggregate intrinsic value of vested options outstanding at June 30, 2021 is (2020 – $nil).
15. CAPITAL STOCK.
During the six months ended June 30, 2021, shares were issued upon the exercise of employee stock options (2020 – ) and shares were issued upon the exercise of consultant stock options (2020 – ).
On March 19, 2020, the Company suspended its annual dividend until further notice due to the uncertainty surrounding the COVID-19 virus.
16. NON-CONTROLLING INTERESTS
ENP
Investments is a limited liability corporation (LLC) that manufactures and distributes golf, turf
and ornamental agriculture products in Mendota, Illinois. The Company owns a
ENP Investments makes cash distributions to its equity owners based on formulas defined within its Ownership Interest Purchase Agreement dated October 1, 2018. Distributions are defined in the Ownership Interest Purchase Agreement as cash on hand to the extent it exceeds current and anticipated long-term and short-term needs, including, without limitation, needs for operating expenses, debt service, acquisitions, reserves, and mandatory distributions, if any.
| 24 |
From the effective date of acquisition onward, the minimum distributions requirements under the Ownership Interest Purchase Agreement were satisfied. The total distribution from the effective date of acquisition onward was .
SCHEDULE OF DISTRIBUTIONS
| Balance, December 31, 2019 | $ | |||
| Distribution | ( | ) | ||
| Non-controlling interest share of income | ||||
| Balance, December 31, 2020 | ||||
| Balance, December 31, 2020 | ||||
| Distribution | ( | ) | ||
| Non-controlling interest share of income | ||||
| Balance, June 30, 2021 | $ |
17. SEGMENTED, SIGNIFICANT CUSTOMER INFORMATION AND ECONOMIC DEPENDENCY.
The
Company operates in
(a) Energy and water conservation products (as shown under the column heading “EWCP” below), which consists of a (i) liquid swimming pool blankets which saves energy and water by inhibiting evaporation from the pool surface, and (ii) food-safe powdered form of the active ingredient within the liquid blankets and which are designed to be used in still or slow moving drinking water sources.
(b) Biodegradable polymers (“BCPA’s”), also known as TPA’s, used by the petroleum, chemical, utility and mining industries to prevent corrosion and scaling in water piping. This product can also be used in detergents to increase biodegradability and in agriculture to increase crop yields by enhancing fertilizer uptake.
The accounting policies of the segments are the same as those described in Note 2, Significant Accounting Policies. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses.
The Company’s reportable segments are strategic business units that offer different, but synergistic products and services. They are managed separately because each business requires different technology and marketing strategies.
SCHEDULE OF REPORTABLE SEGMENTS
| Three months ended June 30, 2021: | ||||||||||||
| EWCP | TPA | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Interest expense | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Income tax expense | ||||||||||||
| Segment profit (loss) | ( | ) | ||||||||||
| Segment assets | ||||||||||||
| Expenditures for segment assets | ( | ) | ( | ) | ||||||||
| Three months ended June 30, 2020: | ||||||||||||
| EWCP | TPA | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Interest expense | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Income tax expense | ||||||||||||
| Segment profit (loss) | ( | ) | ||||||||||
| Segment assets | ||||||||||||
| Expenditures for segment assets | ( | ) | ( | ) | ||||||||
| 25 |
| Six months ended June 30, 2021: | ||||||||||||
| EWCP | TPA | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Interest expense | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Income tax expense | ||||||||||||
| Segment profit (loss) | ( | ) | ||||||||||
| Segment assets | ||||||||||||
| Expenditures for segment assets | ( | ) | ( | ) | ||||||||
| Six months ended June 30, 2020: | ||||||||||||
| EWCP | TPA | Total | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| Interest expense | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Income tax expense | ||||||||||||
| Segment profit (loss) | ( | ) | ||||||||||
| Segment assets | ||||||||||||
| Expenditures for segment assets | ( | ) | ( | ) | ||||||||
The sales generated in the United States and Canada are as follows:
SCHEDULE OF REVENUE GENERATED IN UNITED STATES AND CANADA
| Six
months ended June 30, 2021 | Six
months ended June 30, 2020 | |||||||
| Canada | $ | $ | ||||||
| United States and abroad | ||||||||
| Total | $ | $ | ||||||
The Company’s long-lived assets (property, equipment, intangibles, goodwill, leaseholds, patents and right of use assets) are located in Canada and the United States as follows:
SCHEDULE OF LONG-LIVED ASSETS ARE LOCATED IN CANADA AND UNITED STATES
| June 30, 2021 | December 31, 2020 | |||||||
| Canada | $ | $ | ||||||
| United States | ||||||||
| Total | $ | $ | ||||||
Three
primary customers accounted for $
18. COMPARATIVE FIGURES.
Certain of the comparative figures have been reclassified to conform with the current period’s presentation.
19. SUBSEQUENT EVENTS
In July 2021, the Company issued shares upon exercise of employee and consultant stock options.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company manufactures and markets biodegradable polymers which are used in the oil, gas and agriculture industries. The Company also develops, manufactures and markets specialty chemicals that slow the evaporation of water.
Results of Operations
The Company has two product lines:
The first is a chemical (“EWCP”) used in swimming pools and spas. The product forms a thin, transparent layer on the water’s surface. The transparent layer slows the evaporation of water, allowing the water to retain a higher temperature for a longer period of time thereby reducing the energy required to maintain the desired temperature of the water. A modified version of EWCP can also be used in reservoirs, potable water storage tanks, livestock watering pods, canals, and irrigation ditches for the purpose of reducing evaporation.
The second product, biodegradable polymers (“TPAs”), is used by the petroleum, chemical, utility and mining industries to prevent corrosion and scaling in water piping. TPAs can also be used to increase biodegradability in detergents and in the agriculture industry to increase crop yields by enhancing fertilizer uptake.
The third product line is nitrogen conservation products used for the agriculture industry. These products decrease the loss of nitrogen fertilizer after initial application and allows less fertilizer to be used. These products are made and sold by our TPA division.
Material changes in the Company’s Statement of Operations for the six and three months ended June 30, 2021 compared to the same period in the prior year are discussed below:
Six Months ended June 30, 2021
| Item | Increase (I) or Decrease (D) | Reason | ||
| Sales | ||||
| EWCP products | D | Decreased customer orders. | ||
| TPA products | I | Increased customer orders. | ||
| Advertising and promotion | D | The COVID virus prevented trade shows from occurring. | ||
| Interest expense | D | Decreased debt resulted in decreased interest expense. | ||
| Lease expense | D | The purchase of ENP Realty by ENP Investments reduced lease expense. | ||
| Travel | D | Travel decreased due to COVID-19. | ||
| Currency exchange | I | Currency exchange increased as a result of movements in the US / Canadian dollar exchange rate and its effects on US dollar cash balances and US dollar payables held by the Company’s Canadian subsidiaries. |
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Three months ended June 30, 2021
| Item | Increase (I) or Decrease (D) | Reason | ||
| Sales | ||||
| EWCP products | I | Increased customer orders. | ||
| TPA products | I | Increased customer orders. | ||
| Advertising and promotion | D | The COVID virus prevented trade shows from occurring. | ||
| Interest expense | D | Decreased debt resulted in decreased interest expense. | ||
| Lease expense | D | The purchase of ENP Realty by ENP Investments reduced lease expense. | ||
| Travel | I | Travel decreased in 2020 due to COVID-19. | ||
| Currency exchange | I | Currency exchange increased as a result of movements in the US / Canadian dollar exchange rate and its effects on US dollar cash balances and US dollar payables held by the Company’s Canadian subsidiaries. |
Three customers accounted for 44% of our sales during the three months ended June 30, 2021 (2020 –45%) and 43% of our sales during the six months ended June 30, 2021 (2020 – 45%). The amount of revenue (all from the sale of TPA products) attributable to each customer is shown below.
| Three
months ended June 30, | Six
months ended June 30, | |||||||||||||||
| Customer | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Company A | $ | 96,752 | * | $ | 985,942 | $ | 455,280 | * | $ | 1,971,883 | ||||||
| Company B | $ | 1,292,419 | $ | 825,414 | $ | 2,290,755 | $ | 1,741,234 | ||||||||
| Company C | $ | 1,661,570 | $ | 1,629,623 | $ | 3,096,253 | $ | 3,472,318 | ||||||||
| Company D | $ | 796,348 | $ | 223,495 | * | $ | 1,484,148 | $ | 893,658 | * | ||||||
| *not a primary customer in that period | ||||||||||||||||
Customers with balances greater than 10% of our receivables as of June 30, 2021 and 2020 are shown below:
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Company A | $ | (130,031 | )* | $ | 1,307,363 | |||
| Company C | $ | 1,178,405 | $ | 1,124,014 | ||||
| Company E | $ | 207,597 | * | $ | 627,759 | |||
| *less than 10% | ||||||||
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Other factors that will most significantly affect future operating results will be:
| ● | the sale price of crude oil which is used in the manufacture of aspartic acid we import from China. Aspartic acid is a key ingredient in our TPA products. If tariffs are maintained or expanded and if relief is not available, some customers may experience price increases; | |
| ● | activity in the oil and gas industry, as we sell our TPA products to oil and gas companies; | |
| ● | drought conditions, since we also sell our TPA products to farmers; and | |
| ● | the impact of the COVID-19 virus. |
Other than the foregoing we do not know of any trends, events or uncertainties that have had, or are reasonably expected to have, a material impact on our revenues or expenses.
Capital Resources and Liquidity
The Company’s sources and (uses) of cash for the six months ended June 30, 2021 and 2020 are shown below:
| 2021 | 2020 | |||||||
| Cash provided by (used in) operations | 4,065,194 | 3,145,459 | ||||||
| Long term deposits | - | 22,077 | ||||||
| Purchase of investments | (500,000 | ) | (1,000,000 | ) | ||||
| Proceeds of equity investment distributions | 119,999 | 366,563 | ||||||
| Purchase of equipment | (451,728 | ) | (561,136 | ) | ||||
| Repayments of short term line of credit | (626,919 | ) | (749,600 | ) | ||||
| Repayments of loans | (530,311 | ) | (187,313 | ) | ||||
| Lease financing costs | (166,140 | ) | (202,158 | ) | ||||
| Repayment of convertible note | - | (500,000 | ) | |||||
| Distributions to non-controlling interest | (309,666 | ) | (197,239 | ) | ||||
| Proceeds from issuance of common stock | 76,360 | 24,750 | ||||||
| Changes in exchange rates | 119,945 | 23,979 | ||||||
The Company has sufficient cash resources to meets its future commitments and cash flow requirements for the coming year. As of June 30, 2021, working capital was $12,553,538 (December 31, 2020 - $11,146,211) and the Company has no substantial commitments that require significant outlays of cash over the coming fiscal year.
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We are committed to minimum rental payments for property and premises aggregating approximately $632,340 over the term of four leases, the last expiring on December 31, 2025.
Commitments for rent in the next five years are as follows:
| 2021 | $ | 334,620 | ||
| 2022 | $ | 78,240 | ||
| 2023 | $ | 77,100 | ||
| 2024 | $ | 70,440 | ||
| 2025 | $ | 71,940 |
Other than as disclosed above, we do not anticipate any material capital requirements for the twelve months ending December 31, 2021.
Other than as disclosed above, we do not know of any trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, our liquidity increasing or decreasing in any material way.
Other than as disclosed above, we do not know of any significant changes in our expected sources and uses of cash.
We do not have any commitments or arrangements from any person to provide us with any equity capital.
See Note 2 to the consolidated financial statements included as part of this report for a description of our significant accounting policies.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the direction and with the participation of our management, including our Principal Executive and Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2021. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated and communicated to our management, including our principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching desired disclosure control objectives. Based on the evaluation, our Principal Executive and Financial Officer concluded that these disclosure controls and procedures were effective as of June 30, 2021.
Changes in Internal Control over Financial Reporting
Our management, with the participation of our Principal Executive and Financial Officer, evaluated whether any change in our internal control over financial reporting occurred during the three and six months ended June 30, 2021. Based on that evaluation, it was concluded that there has been no change in our internal control over financial reporting during the three months ended June 30, 2021 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 6. Exhibits.
| * | Filed with this report. |
| (1) | Incorporated by reference to the registrant’s Registration Statement on Form 10-SB (SEC File. No. 000-29649) filed February 22, 2000. |
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
August 13, 2021
| Flexible Solutions International, Inc. | ||
| By: | /s/ Daniel B. O’Brien | |
| Name: | Daniel B. O’Brien | |
| Title: | President and Principal Executive Officer | |
| By: | /s/ Daniel B. O’Brien | |
| Name: | Daniel B. O’Brien | |
| Title: | Principal Financial and Accounting Officer | |
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