NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
(U.S. Dollars)
1.
Basis of Presentation
.
These
consolidated financial statements include the accounts of Flexible
Solutions International, Inc. (the “Company”), and its
wholly-owned subsidiaries Flexible Fermentation Ltd.
(“Flexible Ltd.”), NanoChem Solutions Inc.
(“NanoChem”), Flexible Solutions Ltd., Flexible Biomass
LP, FS Biomass Inc., NCS Deferred Corp., Conserve H2O Ltd. and
Natural Chem SEZC Ltd. All inter-company balances and transactions
have been eliminated. The Company was incorporated May 12, 1998 in
the State of Nevada and had no operations until June 30,
1998.
Flexible Solutions
International, Inc. 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.
2.
Significant Accounting Policies.
These
consolidated financial statements have been prepared 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.
(b)
Inventories and Cost of Sales
The
Company has four major classes of inventory: finished goods, work
in progress, raw materials and supplies. In all classes, inventory
is valued at the lower of cost or market. Cost is determined on a
first-in, first-out basis. 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.
(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 and Leaseholds
.
The
following assets are recorded at cost and depreciated using the
methods and annual rates shown below:
Computer
hardware
|
|
30%
Declining balance
|
Furniture
and fixtures
|
|
20%
Declining balance
|
Manufacturing
equipment
|
|
20%
Declining balance
|
Office
equipment
|
|
20%
Declining balance
|
Boat
|
|
20%
Declining balance
|
Building
and improvements
|
|
10%
Declining balance
|
Technology
|
|
20%
Declining balance
|
Leasehold
improvements
|
|
Straight-line
over lease term
|
Property and
equipment are written down to net realizable value when management
determines there has been a change in circumstances which indicates
its carrying amount may not be recoverable. No write-downs have
been necessary to date.
(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 and equipment, 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 is less than its carrying value, an
impairment measurement is indicated. 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.
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 (loss) in the
condensed interim consolidated statements of operations and
comprehensive income (loss).
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
.
Revenue
from product sales is recognized at the time the product is shipped
since title and risk of loss is transferred to the purchaser upon
delivery to the carrier. Shipments are made F.O.B. shipping point.
The Company recognizes revenue when there is persuasive evidence of
an arrangement, delivery to the carrier has occurred, the fee is
fixed or determinable, collectability is reasonably assured and
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-Merton 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.
(j)
Comprehensive Income
(Loss)
.
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 (loss) is primarily comprised of unrealized foreign exchange
gains and losses.
(k)
Income
Per Share
.
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 are
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 years ended December 31, 2016 and
2015.
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 asset impairment analysis,
share-based payments and warrants, valuation allowances for
deferred income tax assets, determination of useful lives of
property, plant and equipment, and the valuation of
inventory.
(m)
Financial
Instruments
.
The fair market
value of the Company’s financial instruments comprising cash
and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, and short term line of credit were estimated
to approximate their carrying values due to immediate or short-term
maturity of these financial instruments. The Company maintains cash
balances at financial institutions which at times exceed federally
insured amounts. The Company has not experienced any material
losses in such accounts.
The Company is
exposed to foreign exchange and interest rate risk to the extent
that market value rate fluctuations materially differ from
financial assets and liabilities, subject to fixed long-term
rates.
(n)
Fair
Value of Financial Instruments
In August 2009, an update was
made to
Fair Value
Measurements and Disclosures — “Measuring
Liabilities at Fair Value.”
This update permits entities to
measure the fair value of liabilities, in circumstances in which a
quoted price in an active market for an identical liability is not
available, using a valuation technique that uses a quoted price of
an identical liability when traded as an asset, quoted prices for
similar liabilities or similar liabilities when traded as assets or
the income or market approach that is consistent with the
principles of
Fair Value
Measurements and Disclosures
. Effective upon issuance, the
Company has adopted this guidance with no material impact to the
Company’s consolidated financial
statements
.
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.
The
fair values of cash and cash equivalents, accounts receivable,
accounts payable and 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
(o)
Contingencies
Certain
conditions may exist as of the date the 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 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.
(p)
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 December 31, 2016, 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 condensed interim consolidated
statements of operations and comprehensive income
(loss).
(q)
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-performance by counterparties to the financial
instruments. Credit exposure is minimized by dealing with only
credit worthy counterparties. Accounts receivable for the
Company’s three primary customers totaled $2,032,646 (67%) at
December 31, 2016 (December 31, 2015 - $1,298,821 or
66%).
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 is not exposed to significant interest rate risk to the
extent that the long term debt maintained from the foreign
government agencies is subject to a fixed rate of
interest.
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. The Company
has not hedged its exposure to currency fluctuations.
(r)
Equity
Method Investment
We
account for investments using the equity method of accounting if
the investment provides us the ability to exercise significant
influence, but not control, over the investee. Significant
influence is generally deemed to exist if the Company's ownership
interest in the voting stock of the investee ranges between 20% and
50%, although other factors, such as representation on the
investee's board of directors, are considered in determining
whether the equity method of accounting is appropriate. Under the
equity method of accounting, the investment is recorded at cost in
the consolidated balance sheets under other assets and adjusted for
dividends received and our share of the investee's earnings or
losses together with other-than-temporary impairments which are
recorded through interest and other loss, net in the consolidated
statements of operations and comprehensive income
(loss).
(s)
Adoption
of new accounting principles
In June
2014, the FASB issued ASU No. 2014-12, “Compensation –
Stock Compensation”, an update to its accounting guidance
related to share-based compensation. The guidance requires that a
performance target that affects vesting, and that could be achieved
after the requisite service period, be treated as a performance
condition, and therefore not be reflected in determining the fair
value of the award at the grant date. The guidance is effective for
annual and interim periods beginning after December 15, 2015.
Adoption of this guidance did not have any effect on the
Company’s consolidated financial statements.
In
February 2015, the FASB issued ASU No. 2015-02, "Consolidation:
Amendments to the Consolidation Analysis." This update improves
targeted areas of the consolidation guidance and reduces the number
of consolidation models. This update is effective for annual and
interim periods in fiscal years beginning after December 15, 2015.
Adoption of this guidance did not have any effect on the
Company’s consolidated financial statements.
(t)
Accounting
Pronouncements Not Yet Adopted
In January
2017, the FASB issued ASU 2017-04, Simplifying the Test for
Goodwill Impairment. The standard eliminates step two in the
current two-step impairment test under ASC 350. Under the new
standard, a goodwill impairment will be recorded for any excess of
a reporting unit's carrying value over its fair value. A
prospective transition approach is required. The standard is
effective for annual and interim reporting periods beginning after
December 15, 2019 with early adoption permitted for annual and
interim goodwill impairment testing dates after January 1, 2017. We
do not expect the standard to have a material impact on our
consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, Leases. The standard
will require lessees to recognize most leases on their balance
sheet and makes selected changes to lessor accounting. The standard
is effective for annual and interim reporting periods beginning
after December 15, 2018. A modified retrospective transition
approach is required, with certain practical expedients available.
We are currently evaluating the impact the adoption of this
standard will have on our consolidated financial
statements.
In July
2015, the FASB issued ASU 2015-11, Simplifying the Measurement of
Inventory. The standard will require inventory to be measured at
the lower of cost or net realizable value. The guidance will not
apply to inventories for which cost is determined using the
last-in, first-out method or the retail inventory method. The
standard is effective for annual and interim reporting periods
beginning after December 15, 2016. We do not expect the adoption of
this standard to have a material impact on our consolidated
financial statements.
In May
2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers, which has been updated through several revisions and
clarifications since its original issuance. The standard will
require revenue recognized to represent the transfer of promised
goods or services to customers at an amount that reflects the
consideration which a company expects to receive in exchange for
those goods or services. The standard also requires new, expanded
disclosures regarding revenue recognition. The standard will be
effective January 1, 2018 with early adoption permissible beginning
January 1, 2017. We are currently evaluating the transition method
we will elect and the effect on our consolidated financial
statements.
|
|
|
|
|
|
Accounts
receivable
|
$
3,044,652
|
$
1,990,283
|
Allowances for
doubtful accounts
|
(36,499
)
|
(35,406
)
|
|
$
3,008,153
|
$
1,954,877
|
4. Inventories
|
|
|
|
|
|
Completed
goods
|
$
1,646,465
|
$
1,162,571
|
Work in
progress
|
2,572
|
10,466
|
Raw
materials
|
2,137,056
|
2,102,439
|
|
$
3,786,093
|
$
3,275,476
|
5.
Property, Equipment and Leaseholds
|
|
|
|
|
|
|
|
Buildings
|
$
4,762,094
|
$
2,967,370
|
$
1,794,724
|
Computer
hardware
|
89,480
|
85,784
|
3,696
|
Furniture and
fixtures
|
32,439
|
23,142
|
9,297
|
Office
equipment
|
17,745
|
16,788
|
957
|
Manufacturing
equipment
|
5,236,404
|
4,102,635
|
1,133,769
|
Trailer
|
12,859
|
12,250
|
609
|
Boat
|
34,400
|
9,632
|
24,768
|
Leasehold
improvements
|
85,432
|
15,419
|
70,013
|
Technology
|
101,748
|
101,748
|
—
|
Land
|
356,111
|
—
|
356,111
|
|
$
10,728,712
|
$
7,334,768
|
$
3,393,944
|
|
|
|
|
|
|
|
|
Buildings
|
$
4,766,282
|
$
2,774,306
|
$
1,991,976
|
Computer
hardware
|
88,026
|
82,811
|
5,215
|
Furniture and
fixtures
|
29,147
|
20,774
|
8,373
|
Office
equipment
|
17,214
|
16,054
|
1,160
|
Manufacturing
equipment
|
5,074,079
|
3,770,819
|
1,303,260
|
Trailer
|
12,474
|
11,630
|
844
|
Boat
|
34,400
|
3,440
|
30,960
|
Leasehold
improvements
|
29,604
|
—
|
29,604
|
Technology
|
98,701
|
78,961
|
19,740
|
Land
|
399,977
|
—
|
399,977
|
|
$
10,549,904
|
$
6,758,795
|
$
3,791,109
|
Amount
of depreciation expense for 2016: $524,463 (2015: $562,471) and is
included in cost of sales in the consolidated statements of
operations and comprehensive income (loss).
|
|
|
|
|
$
197,448
|
$
101,558
|
$
95,890
|
|
|
|
|
|
$
191,698
|
$
91,075
|
$
100,623
|
Increase in 2016
cost was due to currency conversion. 2016 cost in Canadian dollars
- $265,102 (2015 - $265,102 in Canadian dollars).
Amount
of amortization for 2016: $15,616 (2015: $15,867) and is included
in cost of sales in the consolidated statements of operations and
comprehensive income (loss).
Estimated
amortization expense over the next five years is as
follows:
2017
|
$
16,438
|
2018
|
16,438
|
2019
|
16,438
|
2020
|
16,438
|
2021
|
16,438
|
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.
|
|
|
|
|
|
Long term
deposits
|
$
26,163
|
$
10,169
|
8.
Equity Method Investment
The
Company has a 42% ownership interest in ENP Peru Investments LLC
(“ENP Peru”), which we acquired in fiscal 2016. ENP
Peru is located in the state of Illinois and leases warehouse
space. We account for this investment using the equity method of
accounting. A summary of our investment is as follows:
|
|
January 1, 2016
Balance
|
-
|
Capital
contributions
|
$
150,066
|
Return of
equity
|
(12,500
)
|
Loss in equity
method investment
|
(15,086
)
|
December 31, 2016
Balance
|
$
122,480
|
9.
Short-Term Line of Credit
In May
2016, the Company signed a new agreement with Harris Bank
(“the Bank”) to renew the expiring credit line. The
revolving line of credit is for an aggregate amount of up to the
lesser of (i) $3,000,000, or (ii) 75% of eligible domestic accounts
receivable and certain foreign accounts receivable plus 40% of
inventory. The loan has an annual interest rate of
4.0%.
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 the Bank, the Bank’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 December 31, 2016, 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 the Bank a security interest in
substantially all of the assets of NanoChem Solutions Inc.,
exclusive of intellectual property assets.
Short-term
borrowings outstanding under the Revolving Line as of December 31,
2016 were $250,000 (December 31, 2015 - $200,000).
In
September 2014, NanoChem Solutions Inc. signed a $1,005,967
promissory note with
Harris
Bank with a rate of prime plus 0.5% to be repaid over 5 years with
equal monthly installments plus interest. This money was used to
retire the previously issued and outstanding debt obligations. The
balance owing at December 31, 2016 was $553,282 (December 31, 2015
- $754,475).
The
Company has committed to the following repayments:
2017
|
$
201,193
|
2018
|
$
201,193
|
2019
|
$
150,896
|
As of
December 31, 2016, Company was in compliance with all loan
covenants.
|
|
|
Continuity
|
|
|
Balance,
beginning of period
|
$
754,475
|
$
1,112,689
|
Less:
Payments on loan
|
201,193
|
337,631
|
Effect
of exchange rate
|
-
|
(20,583
)
|
Balance,
end of period
|
$
553,282
|
$
754,475
|
Outstanding
balance at:
|
|
|
Long term debt
– Harris
|
553,282
|
754,475
|
Long term
debt
|
$
553,282
|
$
754,475
|
Less: current
portion
|
(201,193
)
|
(201,193
)
|
Balance
|
$
352,089
|
$
553,282
|
The
provision for income tax expense (benefit) is comprised of the
following:
|
|
|
Current tax,
federal
|
$
787,539
|
$
613,691
|
Current tax,
state
|
194,594
|
151,637
|
Current tax,
foreign
|
-
|
-
|
Current tax,
total
|
982,133
|
765,328
|
|
|
|
Deferred income
tax, federal
|
41,343
|
77,365
|
Deferred income
tax, state
|
10,215
|
19,116
|
Deferred income
tax, foreign
|
252,235
|
(58,324
)
|
Deferred income
tax, total
|
303,793
|
38,157
|
Total
|
$
3,191,056
|
$
803,485
|
The
following table reconciles the income tax benefit at the U.S.
Federal statutory rate to income tax benefit at the Company's
effective tax rates.
|
|
|
Income
(loss) before taxes
|
3,079,260
|
2,308,181
|
US
statutory tax rates
|
39.12
%
|
39.12
%
|
Expected
income tax (recovery)
|
1,207,840
|
902,845
|
Non-deductible
items
|
(139,975
)
|
39,872
|
Change
in estimates
|
228,495
|
12,336
|
Change
in enacted tax rate
|
4,437
|
(158,840
)
|
Option
expired during the year
|
8,418
|
35,685
|
Foreign
tax rate difference
|
(46,498
)
|
(40,393
)
|
Change
in valuation allowance
|
22,878
|
11,977
|
Total
income taxes (recovery)
|
1,285,595
|
803,483
|
|
|
|
Current
income tax expenses (recovery)
|
982,133
|
765,328
|
Deferred
tax expenses (recovery)
|
303,792
|
38,156
|
Total
income taxes (recovery)
|
1,285,925
|
803,484
|
Deferred taxes
reflect the tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes. Deferred tax assets (liabilities) at December 31, 2016
and 2015 are comprised of the following:
Canada
|
|
|
Non
capital loss carryforwards
|
830,476
|
1,068,935
|
Patents
|
45,351
|
36,070
|
Fixed
assets
|
848,843
|
809,404
|
Financial
instruments
|
-
|
-
|
|
1,724,670
|
1,914,409
|
Valuation
Allowance
|
-
|
-
|
Net
Deferred tax asset (liability)
|
1,724.670
|
1,914,409
|
|
|
|
USA
|
|
|
|
2016
|
2015
|
Fixed
Assets
|
322,634
|
353,907
|
Stock-Based
Compensation
|
209,242
|
206,648
|
|
531,876
|
560,556
|
Deferred
tax asset not recognized
|
229,547
|
206,669
|
Net
Deferred tax asset
|
302,329
|
353,886
|
The
Company has non-operating loss carryforwards of approximately
$3,075,838 (2015 - $3,959,018) which may be carried forward to
apply against future year income tax for Canadian income tax
purposes, subject to the final determination by taxation
authorities, expiring in the following years:
Expiry
|
|
2030
|
656,645
|
2031
|
805,757
|
2032
|
927,780
|
2033
|
683,283
|
2034
|
-
|
2035
|
-
|
2036
|
-
|
2037
|
2,372
|
Total
|
3,075,838
|
As at
December 31, 2016, the Company has no net operating losses
carryforward available for US tax purposes.
Accounting for Uncertainty for Income Tax
Effective January
1, 2009, the Company adopted the interpretation for accounting for
uncertainty in income taxes which was an interpretation of the
accounting standard accounting for income taxes. This
interpretation created a single model to address accounting for
uncertainty in tax positions. This interpretation clarifies the
accounting for income taxes, by prescribing a minimum recognition
threshold a tax position is required to meet before being
recognized in the financial statements.
As at December 31, 2016 and 2015, the Company’s consolidated
balance sheets did not reflect a liability for uncertain tax
positions, nor any accrued penalties or interest associated with
income tax uncertainties. The Company has no income tax
examinations in progress.
We
present both basic and diluted income per share on the face of our
consolidated statements of operations. Basic and diluted income per
share are calculated as follows:
|
|
|
|
|
|
Net income
(loss)
|
$
1,793,334
|
$
1,504,696
|
Weighted average
common shares outstanding:
|
|
|
Basic
|
11,464,270
|
13,173,827
|
Diluted
|
11,635,136
|
13,307,021
|
Net income (loss)
per common share:
|
|
|
Basic
and Diluted
|
$
0.16
|
$
0.11
|
Certain
stock options whose terms and conditions are described in Note 12,
“Stock Options” could potentially dilute basic EPS in
the future, but were not included in the computation of diluted EPS
because to do so would have been anti-dilutive. Those anti-dilutive
options are as follows.
There
were no preferred shares issued and outstanding during the years
ended December 31, 2016 or 2015.
The Company adopted
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 100% of the options granted will vest the
year following the grant.
The maximum term of options granted is 5
years.
The
Company may issue stock options and stock bonuses for shares of its
common stock to provide incentives to directors, key employees and
other persons who contribute to the success of the Company. The
exercise price of all incentive options are issued for not less
than fair market value at the date of grant.
The
following table summarizes the Company’s stock option
activity for the years ended December 31, 2016 and
2015:
|
|
|
Weighted
average
exercise
price
|
|
|
|
|
Balance, December
31, 2014
|
1,126,000
|
$
1.21 - $2.45
|
$
1.54
|
Granted
|
317,000
|
$
0.75 – 1.05
|
$
0.89
|
Cancelled or
expired
|
(245,000
)
|
$
1.05 – 2.22
|
$
1.72
|
Exercised
|
8,000
|
$
1.00
|
$
1.00
|
Balance, December
31, 2015
|
1,190,000
|
$
0.75 - $2.45
|
$
1.34
|
Granted
|
168,000
|
$
1.42
|
$
1.42
|
Cancelled or
expired
|
(515,000
)
|
$
0.75 – 2.45
|
$
1.61
|
Exercised
|
(30,000
)
|
$
1.00 – 1.21
|
$
1.09
|
Balance, December
31, 2016
|
813,000
|
$
0.75 – 2.22
|
$
1.19
|
Exercisable,
December 31, 2016
|
647,000
|
$
0.75 – 2.22
|
$
1.13
|
The
weighted-average remaining contractual life of outstanding options
is 2.8 years. The aggregate intrinsic value of options outstanding
at December 31, 2016 is nil (2015 - $418,330).
The
fair value of each option grant is calculated using the following
weighted average assumptions:
|
|
|
|
|
|
Expected life
– years
|
3.0
|
3.0
|
Interest
rate
|
1.37
%
|
0.78 – 1.16
%
|
Volatility
|
75.64
%
|
57-77
%
|
Dividend
yield
|
--
%
|
--
%
|
Weighted average
fair value of options granted
|
$
0.7073
|
$
0.36-0.37
|
During
the year ended December 31, 2016, the Company granted 40,000 (2015
– 100,000) stock options to consultants and has applied ASC
718 using the Black-Scholes option-pricing model, which resulted in
additional expenses of $5,658 (2015 - $26,533). Options granted in
other years resulted in additional expenses of $11,879 (2015
– $3,348). During the year ended December 31, 2016, employees
were granted 128,000 (2015 – 217,000) stock options, which
resulted in additional expenses of $17,824 (2015 – $47,788).
Options granted in other years resulted in additional expenses in
the amount of $30,957 for employees during the year ended December
31, 2016 (2015 - $4,591). There were 30,000 employee stock options
exercised during the year ended December 31, 2016 (2015 –
8,000).
As of
December 31, 2016, there was approximately $93,929 of compensation
expense related to non-vested awards. This expense is expected to
be recognized over a weighted average period of 1
year.
On
January 6, 2016, the Company repurchased 1,750,000 shares of its
common stock at $0.90 per share for a total purchase price of
$1,575,000. The shares were returned to treasury and
cancelled.
The
Company issued 30,000 shares upon the exercise of employee stock
options during the year ended December 31, 2016.
During
the year ended December 31, 2015, the Company issued 8,000 shares
upon the exercise of employee stock options.
15.
Segmented,
Significant Customer Information and Economic
Dependency
.
The
Company operates in two segments:
(a)
Energy and water conservation products (as shown under the column
heading “EWCP” below), which consists of a (i) liquid
swimming pool blanket 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 blanket and which is
designed to be used in still or slow moving drinking water
sources.
(b)
Biodegradable polymers (“BCPA’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.
Year
ended December 31, 2016:
|
|
|
|
|
|
|
|
Sales
|
$
785,660
|
$
15,460,354
|
$
16,246,014
|
Interest
expense
|
59
|
41,640
|
41,699
|
Depreciation
|
325,696
|
214,383
|
540,079
|
Income tax expense
(recovery)
|
-
|
982,133
|
982,133
|
Segment profit
(loss)
|
(417,770
)
|
2,211,104
|
1,793,334
|
Segment
assets
|
1,966,564
|
1,523,270
|
3,489,834
|
Expenditures
for
segment
assets
|
6,352
|
107,918
|
114,270
|
Year
ended December 31, 2015:
|
|
|
|
|
|
|
|
Sales
|
$
687,828
|
$
15,210,719
|
$
15,898,547
|
Interest
expense
|
1
|
55,769
|
55,770
|
Depreciation
|
384,909
|
193,429
|
578,338
|
Income tax expense
(recovery)
|
-
|
765,328
|
765,328
|
Segment profit
(loss)
|
(1,054,344
)
|
2,559,040
|
1,504,696
|
Segment
assets
|
2,211,931
|
1,679,801
|
3,891,732
|
Expenditures
for
segment
assets
|
(244,358
)
|
303,388
|
59,030
|
Sales
by territory are shown below:
|
|
|
|
|
|
Canada
|
$
453,480
|
$
404,880
|
United States and
abroad
|
15,792,534
|
15,493,667
|
Total
|
$
16,246,014
|
$
15,898,547
|
The
Company’s long-lived assets (property, equipment, leaseholds
and patents) are located in Canada and the United States as
follows:
|
|
|
|
|
|
Canada
|
$
1,966,564
|
$
2,211,348
|
United
States
|
1,523,270
|
1,680,384
|
Total
|
$
3,489,834
|
$
3,891,732
|
Three
customers accounted for $10,148,042 (63%) of sales made in 2016
(2015 - $10,421,165 or 66%).
The
Company is committed to minimum rental payments for property and
premises aggregating approximately $934,854 over the term of three
leases, the last expiring on October 31, 2021.
Commitments in the
next five year are as follows:
2017
|
$
206,934
|
2018
|
$
201,840
|
2019
|
$
205,580
|
2020
|
$
209,400
|
2021
|
$
111,100
|
On
February 11, 2017, a fire started in our Taber, AB Canada plant
where all our swimming pool products are manufactured. The building
and
contents with a
carrying value of $2,511,646 are a total loss.
Insurance was
in place.
In
March 2017, the Company issued 3,000 shares on the exercise of
employee stock options.