NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
For the Period Ended September 30, 2017
(U.S. Dollars -- Unaudited)
1.
Basis of Presentation
.
These
unaudited interim condensed consolidated interim financial
statements include the accounts of Flexible Solutions
International, Inc. (the “Company”, “we”,
or “our”), and its wholly-owned subsidiaries Flexible
Fermentation Ltd. (“Flexible Ltd.”), NanoChem Solutions
Inc. (“NanoChem”), Flexible Solutions Ltd., Flexible
Biomass LP, FS Biomass Inc. and Conserve H2O 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.
The
Company and its subsidiaries develop, manufacture and market
specialty chemicals which slow the evaporation of water. One of the
Company’s product
s
,
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 as additives for household laundry detergents, consumer
care products and pesticides.
These
unaudited condensed consolidated interim financial statements of
the Company have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial statements. These financial statements are
condensed and do not include all disclosures required for annual
financial statements. The organization and business of
the Company, accounting policies followed by the Company and other
information are contained in the notes to the Company’s
audited consolidated financial statements filed as part of the
Company’s December 31, 2016 Annual Report on Form
10-K. This quarterly report should be read in
conjunction with such annual report.
In the
opinion of the Company’s management, these unaudited interim
consolidated financial statements reflect all adjustments necessary
to present fairly the Company’s consolidated financial
position at September 30, 2017, the consolidated results of
operations for the three and nine months ended September 30, 2017
and 2016, and the consolidated statements of cash flows for the
nine months ended September 30, 2017 and 2016. The results of
operations for the three and nine months ended September 30, 2017
are not necessarily indicative of the results to be expected for
the entire fiscal year.
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 three major classes of inventory: finished goods, work
in progress and 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 three and nine months ended September
30, 2017 and 2016.
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 September 30, 2017, 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-payment by customers. Credit exposure is
minimized by dealing with only credit worthy counterparties.
Accounts receivable for the Company’s three primary customers
totaled $1,964,413 (67%) at September 30, 2017 (December 31, 2016 -
$2,032,646 or 67%).
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.
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.
(r)
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.
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 the Company’s 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 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. Adoption of this standard had no
effect on our consolidated financial statements.
In
March 2016, the FASB issued Accounting Standards Update No.
2016-09, Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). This standard was issued as part of the FASB's
Simplification Initiative that involve several aspects of the
accounting for share based payment transactions, including the
income tax consequences, classification of awards as either equity
or liabilities and classification on the statement of cash flows.
Some of the areas for simplification apply only to nonpublic
entities. For public business entities, ASU 2016-09 is effective
for annual periods beginning after December 15, 2016 and interim
periods within those annual periods. The method of adoption is
dependent on the specific aspect of accounting addressed in this
new guidance. Early adoption is permitted in any interim or annual
period. Adoption of this standard had no effect on our 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 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.
3. Accounts
Receivable.
|
|
|
|
|
Accounts
receivable
|
$
2,963,925
|
$
3,044,652
|
|
Allowances for
doubtful accounts
|
(40,544
)
|
(36,499
)
|
|
|
$
2,923,381
|
$
3,008,153
|
4. Inventory.
|
|
|
|
|
Completed
goods
|
$
1,761,747
|
$
1,646,465
|
|
Work in
progress
|
206,110
|
2,572
|
|
Raw
materials
|
2,450,743
|
2,137,056
|
|
|
$
4,418,600
|
$
3,786,093
|
5. Property, Plant & equipment.
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
$
3,164,847
|
$
2,376,064
|
$
788,783
|
|
Computer
hardware
|
40,904
|
39,236
|
1,668
|
|
Furniture and
fixtures
|
17,673
|
10,748
|
6,925
|
|
Office
equipment
|
435
|
32
|
403
|
|
Manufacturing
equipment
|
2,451,018
|
2,050,644
|
400,374
|
|
Trailer
|
9,613
|
1,082
|
8,531
|
|
Boat
|
34,400
|
13,347
|
21,053
|
|
Leasehold
improvements
|
85,432
|
28,235
|
57,197
|
|
Land
|
371,820
|
-
|
371,820
|
|
|
$
6,176,142
|
$
4,519,388
|
$
1,656,754
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Amount
of depreciation expense for 2017: $177,184 (2016:
$393,630).
In
fiscal 2005, the Company started the patent process for additional
WATER$AVR® products. Patents associated with these costs were
granted in 2006 and they have been amortized over their legal life
of 17 years.
|
|
|
|
|
|
Patents
|
$
212,426
|
$
128,864
|
$
83,562
|
|
|
|
|
|
|
Patents
|
$
197,448
|
$
101,558
|
$
95,890
|
Increase in 2017
cost was due to currency conversion. 2017 cost in Canadian dollars
- $265,102 (2016 - $265,102 in Canadian dollars).
Amount
of amortization for 2017 - $12,329 (2016 - $11,556)
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
|
$
26,833
|
$
26,163
|
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 Illinois and leases warehouse space. We account
for this investment using the equity method of accounting. A
summary of our investment is as follows:
|
Balance, January 1,
2016
|
-
|
|
Capital
contributions
|
$
150,066
|
|
Return of
equity
|
(12,500
)
|
|
Loss in equity
method investment
|
(15,086
)
|
|
Balance, December
31, 2016
|
$
122,480
|
|
Return of
equity
|
(18,750
)
|
|
Balance, September
30, 2017
|
$
103,730
|
9.
Short-Term Line of Credit.
In May
2017, 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
4.75%.
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 September 30, 2017, 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 September 30,
2017 were $250,000 (December 31, 2016 - $250,000).
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 September 30, 2017 was $402,387 (December 31, 2016 -
US$553,282).
The
Company has committed to the following repayments:
|
2017
|
$
50,299
|
|
2018
|
$
201,193
|
|
2019
|
$
150,895
|
As of
September 30, 2017, Company was in compliance with all loan
covenants.
|
|
|
|
|
Continuity
|
|
|
Balance, beginning of period
|
$
553,282
|
$
754,475
|
|
Plus:
Proceeds from loans
|
--
|
-
|
|
Less:
Payments on loan
|
150,895
|
201,193
|
|
Balance,
end of period
|
$
402,387
|
$
553,282
|
|
Outstanding
balance at:
|
|
|
|
Long term debt
– Harris
|
402,387
|
553,282
|
|
Long term
debt
|
$
402,387
|
$
553,282
|
|
Less: current
portion
|
(201,193
)
|
(201,193
)
|
|
Balance
|
$
201,194
|
$
352,089
|
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 its 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 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 year ended December 31, 2016 and the nine month
period ended September 30, 2017:
|
|
|
|
Weighted average
exercise price
|
|
|
|
|
|
|
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
|
|
Cancelled or
expired
|
(92,000
)
|
$
1.00 - 2.22
|
$
1.97
|
|
Exercised
|
(50,000
)
|
$
0.75 – 1.21
|
$
1.11
|
|
Balance, September
30, 2017
|
671,000
|
$
0.75 – 1.42
|
$
1.09
|
|
Exercisable,
September 30, 2017
|
508,000
|
$
0.75 – 1.21
|
$
0.98
|
The
fair value of each option grant is calculated using the following
weighted average assumptions:
|
|
|
|
|
|
|
Expected life -
years
|
3.0
|
|
Interest
rate
|
1.37
%
|
|
Volatility
|
75.64
%
|
|
Dividend
yield
|
--
%
|
|
Weighted average
fair value of options granted
|
$
0.7073
|
The
Company did not grant any options during the nine months ended
September 30, 2017. Vesting of options granted in previous years
resulted in expenses in the amount of $16,975 for consultants and
$51,775 for employees during the nine months ended September 30,
2017.
The
Company did not grant any options during the nine months ended
September 30, 2016. Vesting of options granted in previous years
resulted in expenses in the amount of $8,910 for consultants and
$23,013 for employees during the nine months ended September 30,
2016.
As of
September 30, 2017, there was approximately $23,058 of compensation
expense related to non-vested awards. This expense is expected to
be recognized over a weighted average period of 0.25
years.
The
aggregate intrinsic value of vested options outstanding at
September 30, 2017 is $373,770.
During
the nine months ended September 30, 2017, the Company issued the
following shares upon the exercise of employee stock
options:
|
|
|
|
March 10,
2017
|
3,000
|
|
June 6,
2017
|
5,000
|
|
June 15,
2017
|
20,000
|
|
July 7,
2017
|
10,000
|
|
September 5,
2017
|
12,000
|
During
the nine months ended September 30, 2016, the Company issued the
following shares upon the exercise of employee and consultant stock
options:
|
|
|
|
August 11,
2016
|
9,000
|
|
September 22,
2016
|
15,000
|
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.
13.
Segmented, Significant Customer Information and Economic
Dependency
.
The
Company operates in two segments:
(a)
Development and marketing of two lines of 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)
Manufacture of 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.
Nine
months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
606,476
|
$
12,048,984
|
$
12,655,460
|
|
Interest
revenue
|
183
|
140
|
323
|
|
Interest
expense
|
54
|
35,644
|
35,698
|
|
Depreciation and
amortization
|
44,302
|
145,211
|
189,513
|
|
Segment profit
(loss)
|
1,980,968
|
1,266,398
|
3,247,366
|
|
Segment
assets
|
354,851
|
1,385,465
|
1,740,316
|
|
Expenditures for
segment assets
|
(50,470
)
|
(7,406
)
|
(57,876
)
|
Nine
months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
750,415
|
$
11,412,437
|
$
12,162,852
|
|
Interest
revenue
|
1
|
2,160
|
2,161
|
|
Interest
expense
|
59
|
33,817
|
33,876
|
|
Depreciation and
amortization
|
244,644
|
160,542
|
405,186
|
|
Segment profit
(loss)
|
(492,829
)
|
1,881,824
|
1,388,995
|
|
Segment
assets
|
2,097,841
|
1,614,891
|
3,712,732
|
|
Expenditures for
segment assets
|
(6,130
)
|
(95,632
)
|
(101,762
)
|
The
sales generated in the United States and Canada are as
follows:
|
|
Nine Months
Ended
September 30,
2017
|
Nine Months
Ended
September 30,
2016
|
|
Canada
|
$
265,175
|
$
361,683
|
|
United States and
abroad
|
12,390,285
|
11,801,169
|
|
Total
|
$
12,655,460
|
$
12,162,852
|
The
Company’s property, equipment, leasehold and patents are
located in Canada and the United States as follows:
|
|
|
|
|
Canada
|
$
354,851
|
$
1,966,564
|
|
United
States
|
1,385,465
|
1,523,270
|
|
Total
|
$
1,740,316
|
$
3,489,834
|
Three
customers accounted for $7,527,184 (59%) of sales during the nine
months ended September 30, 2017 (2016 - $7,154,393 or 59%). Three
customers accounted for $1,964,413 of accounts receivable (67%) at
September 30, 2017 (December 31, 2016 – $2,032,646 or
67%).
The
Company is committed to minimum rental payments for property and
premises aggregating approximately $777,775 over the term of two
leases, the last expiring on October 31, 2021.
Commitments in the
next five years are as follows:
|
2017
|
$
49,855
|
|
2018
|
$
201,840
|
|
2019
|
$
205,580
|
|
2020
|
$
209,400
|
|
2021
|
$
111,100
|
In
October 2017, the Company paid outright for a 3,000 sq. ft.
building and 1 acre of land in Taber, AB Canada. Purchased for
$275,000CAD ($219,560USD), the building will be used for
manufacturing and office space.
16.
Comparative Figures
.
Certain
of the comparative figures have been reclassified to conform with
the current period’s presentation.
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
The
Company develops, manufactures and markets specialty chemicals that
slow the evaporation of water. The Company also manufactures and
markets biodegradable polymers which are used in the oil, gas and
agriculture industries.
Results of Operations
The
Company has two product lines:
Energy
and Water Conservation products - The Company’s
HEAT$AVR® product is 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 and thereby reducing the energy required to
maintain the desired temperature of the water.
WATER$AVR®, a modified version of HEAT$AVR®, can be used
in reservoirs, potable water storage tanks, livestock watering
ponds, canals, and irrigation ditches.
BCPA
products - The Company’s second class of products,
TPA’s (i.e. thermal polyaspartate biopolymers), are
biodegradable polymers used by the petroleum, chemical, utility and
mining industries to prevent corrosion and scaling in water piping.
TPA’s can also be used in detergents to increase
biodegradability and in agriculture to increase crop yields by
enhancing fertilizer uptake.
Material changes in
the Company’s Statement of Operations for the three and nine
months ended September 30, 2017 are discussed below:
Nine Months ended September 30, 2017
|
Item
|
|
Increase (I)
or
Decrease
(D)
|
|
Reason
|
|
Sales
EWCP
products
|
|
D
|
|
Loss of Taber, AB manufacturing facility to fire.
|
|
BPCA
products
|
|
I
|
|
Increased
sales across all market verticals due to increased success in sales
activity.
|
|
Gross
Profit, as a %
of
sales
|
|
D
|
|
Temporary
increase in costs after loss of the EWCP manufacturing plant to
fire along with increased aspartic acid costs
|
|
Wages
|
|
I
|
|
Increased
wages to retain employees.
|
|
Administrative
salaries
and
benefits
|
|
I
|
|
Increased
wages to retain employees.
|
|
Rent
|
|
I
|
|
Additional
storage and capacity space for BCPS products.
|
|
Professional
fess
|
|
I
|
|
Increased legal
fees related to IP and general legal representation along with
increased accounting costs.
|
|
|
|
|
|
|
|
Commissions
|
|
D
|
|
Uncommissionable
sales increased against commissionable sales.
|
Three months ended September 30, 2017
|
Item
|
|
Increase (I) or
Decrease (D)
|
|
Reason
|
|
Sales
BPCA
products
|
|
I
|
|
Increased
sales across all market verticals due to increased success in sales
activity.
|
|
Gross
Profit, as a %
of
sales
|
|
D
|
|
Temporary
increase in costs after loss of the EWCP manufacturing plant to
fire along with increased aspartic acid costs.
|
|
Wages
|
|
I
|
|
Increased
wages to retain employees.
|
|
Administrative
salaries
and
benefits
|
|
I
|
|
Increased wages to retain employees
.
|
|
Rent
|
|
I
|
|
Additional
storage and capacity space for BCPS products.
|
|
Professional
fess
|
|
D
|
|
Reduced
litigation resulted in reduced professional fees.
|
|
Research
|
|
I
|
|
Increase
costs associated with regulatory compliance.
|
Three
customers accounting for 57% of our sales during the three months
ended September 30, 2017 (2016 – 68%) and 59% of our sales
during the nine months ended September 30, 2017 (2016 - 59%). The
amount of revenue attributable to each customer is shown
below.
|
|
Three
months ended September 30,
|
Nine
months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
$
1,213,179
|
$
821,469
|
$
4,263,172
|
$
3,286,124
|
|
B
|
$
648,720
|
$
1,124,557
|
$
2,094,490
|
$
2,955,115
|
|
C
|
$
-
|
$
-
|
$
1,169,522
|
$
913,154
|
|
D
|
$
-
|
$
173,015
|
$
-
|
$
-
|
|
E
|
$
307,434
|
$
-
|
$
-
|
$
-
|
Customers with
balances greater than 10% of our receivables as of September 30,
2017 and 2016 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
Company
A
|
1,436,247
|
667,894
|
|
Company
A
|
317,544
|
642,425
|
In
2007, we began construction of a plant in Taber, AB, Canada. The
plant came on line during 2012 and we began depreciating the plant
and related equipment effective January 2012.
In
February 2014, we suspended production of aspartic acid at our
Taber plant. The suspension was due to the fact that since
construction of the plant began in 2008, economic conditions in
Alberta and worldwide have changed significantly. In particular,
plant operating costs have risen and the price of aspartic acid
derived from oil was less than forecast. On February 11, 2017, the
Taber plant was destroyed in a fire. The building and contents with
a carrying value of $1,936,886 are a total loss. Insurance was in
place.
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 BCPA
product;
●
activity in the oil
and gas industry, as we sell our BCPA product to oil and gas
companies; and
● drought
conditions, since we also sell our BCPA product to
farmers.
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 nine months
ended September 30, 2017 and 2016 are shown below:
|
|
|
|
|
|
|
|
|
Cash provided by
(used by) operations
|
39,386
|
2,183,364
|
|
Long term
deposits
|
-
|
(350
)
|
|
Investment
|
18,750
|
-
|
|
Insurance proceeds
from fire loss
|
3,419,610
|
-
|
|
Sales (purchases)
of equipment
|
(57,876
)
|
(101,762
)
|
|
Advances from
(repayments of) short term line of credit
|
-
|
50,000
|
|
Repayment of
loans
|
(150,895
)
|
(150,895
)
|
|
Repurchase of
common stock
|
-
|
(1,575,000
)
|
|
Proceeds from
issuance of common stock
|
55,580
|
26,080
|
|
Changes in exchange
rates
|
522,943
|
(7,937
)
|
The
Company has sufficient cash resources to meets its future
commitments and cash flow requirements for the coming year. As of
September 30, 2017, working capital was $12,075,396 (December 31,
2016 - $7,150,606) and the Company has no substantial commitments
that require significant outlays of cash over the coming fiscal
year.
The
Company is committed to minimum rental payments for property and
premises aggregating approximately $777,775 over the term of two
leases, the last expiring on October 31, 2021.
Commitments in the
next five years are as follows:
|
2017
|
$
49,855
|
|
2018
|
$
201,840
|
|
2019
|
$
205,580
|
|
2020
|
$
209,400
|
|
2021
|
$
111,100
|
Other
than as disclosed above, the Company does not anticipate any
capital requirements for the twelve months ending September 30,
2018.
Other
than as disclosed in Item 2 of this report, the Company does not
know of any trends, demands, commitments, events or uncertainties
that will result in, or that are reasonable likely to result in,
its liquidity increasing or decreasing in any material
way.
Other
than as disclosed in Item 2 of this report, the Company does not
know of any significant changes in its expected sources and uses of
cash.
The
Company does not have any commitments or arrangements from any
person to provide it with any equity capital.
See
Note 2 to the financial statements included as part of this report
for a description of the Company’s 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 September
30, 2017. 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 are effective as of September
30, 2017.
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 months
ended September 30, 2017. 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 September
30, 2017 that materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.