Item
8.
|
Financial Statements and Supplementary Data.
|
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
of
Flexible Solutions International, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheet of Flexible Solutions International, Inc. (the “Company”) as at December 31, 2019, the related consolidated
statements of income and comprehensive income, cash flows, and stockholders’ equity for the year then ended, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as at December 31, 2019, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides
a reasonable basis for our opinion.
We have served as the Company’s auditor
since 2019.
Vancouver,
Canada
|
“Morgan
& Company LLP”
|
|
|
March 30, 2020
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Flexible Solutions International Inc.
Opinion on the Consolidated Financial
Statements
We have audited the accompanying consolidated
balance sheets of Flexible Solutions International Inc.(the Company) as of December 31, 2018 and 2017, and the related consolidated
statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year
period ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements).
In our opinion, the consolidated financial
statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018
and 2017, and the results of its consolidated operations and its consolidated cash flows for each of the years in the two-year
period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our opinion.
Restatement of Previously Issued Consolidated
Financial Statements
As discussed in Note 22 to the Consolidated
Financial Statements, the Company restated its consolidated financial statements for the year ended December 31, 2018.
Chartered Professional Accountants
We have served as the Company’s auditor
since 2009. Vancouver, BC
May 16, 2019
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Balance Sheets
As
at December 31
(U.S.
Dollars)
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,634,670
|
|
|
$
|
7,857,936
|
|
Accounts receivable (see Note 5)
|
|
|
4,470,215
|
|
|
|
4,422,745
|
|
Inventories (see Note 6)
|
|
|
9,182,786
|
|
|
|
8,727,709
|
|
Prepaid expenses
|
|
|
218,638
|
|
|
|
200,306
|
|
Total current assets
|
|
|
17,506,309
|
|
|
|
21,208,696
|
|
Property, equipment and leaseholds, net (see Note 7)
|
|
|
4,005,676
|
|
|
|
2,563,261
|
|
Patents (see Note 8)
|
|
|
46,576
|
|
|
|
63,014
|
|
Right of use assets (Note 4)
|
|
|
789,205
|
|
|
|
-
|
|
Intangible assets (Note 9)
|
|
|
2,952,000
|
|
|
|
3,128,000
|
|
Long term deposits (see Note 10)
|
|
|
30,630
|
|
|
|
30,777
|
|
Investments (Note 11)
|
|
|
1,915,585
|
|
|
|
776,357
|
|
Goodwill (Note 9)
|
|
|
2,534,275
|
|
|
|
2,534,275
|
|
Restricted cash (Note 11e)
|
|
|
1,000,000
|
|
|
|
-
|
|
Deferred tax asset (Note 15)
|
|
|
1,600,161
|
|
|
|
891,735
|
|
Total Assets
|
|
$
|
32,380,417
|
|
|
$
|
31,196,115
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
636,260
|
|
|
$
|
860,798
|
|
Accrued liabilities
|
|
|
181,234
|
|
|
|
189,875
|
|
Deferred revenue
|
|
|
213,221
|
|
|
|
127,168
|
|
Income taxes payable
|
|
|
1,770,105
|
|
|
|
1,357,299
|
|
Short term line of credit (Note 12)
|
|
|
2,389,982
|
|
|
|
2,798,131
|
|
Current portion of lease liability
|
|
|
405,670
|
|
|
|
-
|
|
Current portion of long term debt (Note 13)
|
|
|
1,196,722
|
|
|
|
771,359
|
|
Total current liabilities
|
|
|
6,793,194
|
|
|
|
6,104,630
|
|
Lease liability
|
|
|
383,535
|
|
|
|
-
|
|
Convertible note payable(Note 14)
|
|
|
500,000
|
|
|
|
1,000,000
|
|
Deferred income tax liability (Note 15)
|
|
|
1,058,641
|
|
|
|
989,569
|
|
Long term debt (Note 13)
|
|
|
3,183,671
|
|
|
|
3,580,384
|
|
Total liabilities
|
|
|
11,919,041
|
|
|
|
11,674,583
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Capital stock (see Note 18)
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
12,215,545(2018: 11,699,657)
common shares
|
|
|
12,216
|
|
|
|
11,700
|
|
Capital in excess of par value
|
|
|
16,437,473
|
|
|
|
15,328,285
|
|
Other comprehensive loss
|
|
|
(994,610
|
)
|
|
|
(1,222,573
|
)
|
Accumulated earnings
|
|
|
2,456,148
|
|
|
|
2,941,889
|
|
Total stockholders’ equity – controlling interest
|
|
|
17,911,227
|
|
|
|
17,059,301
|
|
Non-controlling interests (Note 19)
|
|
|
2,550,149
|
|
|
|
2,462,231
|
|
Total Stockholders’ Equity
|
|
|
20,461,376
|
|
|
|
19,521,532
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
32,380,417
|
|
|
$
|
31,196,115
|
|
Subsequent
events (See Note 21)
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Income and Comprehensive Income
For
the Years Ended December 31
(U.S.
Dollars)
|
|
2019
|
|
|
2018
|
|
Sales
|
|
$
|
27,440,110
|
|
|
$
|
17,829,518
|
|
Cost of sales
|
|
|
18,819,572
|
|
|
|
12,192,684
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,620,538
|
|
|
|
5,636,834
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Wages
|
|
|
2,225,400
|
|
|
|
1,729,467
|
|
Administrative salaries and benefits
|
|
|
891,481
|
|
|
|
1,082,991
|
|
Advertising and promotion
|
|
|
159,690
|
|
|
|
68,492
|
|
Investor relations and transfer agent fee
|
|
|
90,296
|
|
|
|
132,694
|
|
Office and miscellaneous
|
|
|
257,780
|
|
|
|
247,424
|
|
Insurance
|
|
|
462,184
|
|
|
|
312,275
|
|
Interest expense
|
|
|
428,371
|
|
|
|
93,653
|
|
Lease expense
|
|
|
462,193
|
|
|
|
249,051
|
|
Consulting
|
|
|
273,815
|
|
|
|
186,847
|
|
Professional fees
|
|
|
444,735
|
|
|
|
282,654
|
|
Travel
|
|
|
318,844
|
|
|
|
137,902
|
|
Telecommunications
|
|
|
44,451
|
|
|
|
32,315
|
|
Shipping
|
|
|
18,750
|
|
|
|
19,790
|
|
Research
|
|
|
123,660
|
|
|
|
135,930
|
|
Commissions
|
|
|
76,302
|
|
|
|
46,993
|
|
Bad debt expense
|
|
|
231,696
|
|
|
|
-
|
|
Currency exchange
|
|
|
187,250
|
|
|
|
(445,443
|
)
|
Utilities
|
|
|
15,886
|
|
|
|
16,775
|
|
Total operating expenses
|
|
|
6,712,784
|
|
|
|
4,329,810
|
|
Operating income
|
|
|
1,907,754
|
|
|
|
1,307,024
|
|
Gain on involuntary disposition (net of tax) (Note 7)
|
|
|
-
|
|
|
|
1,714,261
|
|
Gain of sale of equipment
|
|
|
2,312
|
|
|
|
-
|
|
Gain (loss) on investment
|
|
|
323,824
|
|
|
|
(3,281
|
)
|
Interest income
|
|
|
80,731
|
|
|
|
36,843
|
|
Income before income tax
|
|
|
2,314,621
|
|
|
|
3,054,847
|
|
Income taxes (Note 15)
|
|
|
|
|
|
|
|
|
Deferred income tax recovery (expense)
|
|
|
602,421
|
|
|
|
(100,000
|
)
|
Income tax expense
|
|
|
(619,857
|
)
|
|
|
(533,130
|
)
|
Net income for the year including non-controlling interests
|
|
|
2,297,185
|
|
|
|
2,421,717
|
|
Net (income) loss income attributable to non-controlling interests
|
|
|
(384,793
|
)
|
|
|
68,551
|
|
Net income attributable to controlling interest
|
|
$
|
1,912,392
|
|
|
$
|
2,490,268
|
|
|
|
|
|
|
|
|
|
|
Income per share (basic and diluted) (Note 16)
|
|
$
|
0.16
|
|
|
$
|
0.21
|
|
Weighted average number of common shares (basic)
|
|
|
11,945,636
|
|
|
|
11,630,136
|
|
Weighted average number of common shares (diluted)
|
|
|
12,085,798
|
|
|
|
11,816,054
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,297,185
|
|
|
$
|
2,421,717
|
|
Unrealized gain (loss) on foreign currency transactions
|
|
|
227,963
|
|
|
|
(566,480
|
)
|
Total comprehensive income
|
|
|
2,525,148
|
|
|
|
1,855,237
|
|
Comprehensive (income) loss – non-controlling interest
|
|
|
(384,793
|
)
|
|
|
68,551
|
|
Comprehensive income attributable to Flexible Solutions International Inc.
|
|
$
|
2,140,355
|
|
|
$
|
1,923,788
|
|
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Cash Flows
For
Years Ended December 31
(U.S.
Dollars)
|
|
2019
|
|
|
2018
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income for the year including non-controlling interests
|
|
$
|
2,297,185
|
|
|
$
|
2,421,717
|
|
Adjustments to reconcile net income to net cash:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
246,444
|
|
|
|
111,192
|
|
Depreciation and amortization
|
|
|
620,264
|
|
|
|
342,561
|
|
Lease right of use financing
|
|
|
376,675
|
|
|
|
-
|
|
(Gain) Loss on investment
|
|
|
(323,824
|
)
|
|
|
3,281
|
|
Bad debt expense
|
|
|
231,696
|
|
|
|
-
|
|
Deferred income tax (recovery) expense
|
|
|
(602,421
|
)
|
|
|
100,000
|
|
Gain on involuntary disposition
|
|
|
-
|
|
|
|
(1,714,261
|
)
|
Changes in non-cash working capital items:
|
|
|
|
|
|
|
|
|
(Increase) Decrease in accounts receivable
|
|
|
(319,843
|
)
|
|
|
(1,048,290
|
)
|
(Increase) Decrease in inventories
|
|
|
(478,343
|
)
|
|
|
(2,185,462
|
)
|
(Increase) Decrease in prepaid expenses
|
|
|
(18,332
|
)
|
|
|
53,275
|
|
Increase (Decrease) in accounts payable and accrued liabilities
|
|
|
(312,701
|
)
|
|
|
(351,508
|
)
|
Increase (Decrease) in taxes payable
|
|
|
567,097
|
|
|
|
243,276
|
|
Increase (Decrease) deferred revenue
|
|
|
86,053
|
|
|
|
(205,936
|
)
|
Cash provided (used in) by operating activities
|
|
|
2,369,950
|
|
|
|
(2,230,155
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Long term deposits
|
|
|
147
|
|
|
|
(1,246
|
)
|
Investment
|
|
|
(1,001,000
|
)
|
|
|
(700,000
|
)
|
Proceeds of equity investment distributions
|
|
|
165,542
|
|
|
|
27,813
|
|
Proceeds from insurance
|
|
|
-
|
|
|
|
2,407,325
|
|
Acquisition of EnP Investments LLC
|
|
|
-
|
|
|
|
(4,110,560
|
)
|
Net purchase of property, equipment and leaseholds
|
|
|
(1,831,319
|
)
|
|
|
(180,830
|
)
|
Cash used in investing activities
|
|
|
(2,666,630
|
)
|
|
|
(2,557,498
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
(Repayment of) draw from short term line of credit
|
|
|
(408,149
|
)
|
|
|
2,462,346
|
|
Loan repayments
|
|
|
(1,071,350
|
)
|
|
|
(307,266
|
)
|
Loan proceeds received
|
|
|
1,100,000
|
|
|
|
4,100,000
|
|
Lease financing costs
|
|
|
(376,675
|
)
|
|
|
-
|
|
Dividends paid
|
|
|
(2,398,133
|
)
|
|
|
-
|
|
Partnership distribution
|
|
|
(296,875
|
)
|
|
|
(229,135
|
)
|
Proceeds of issuance of common stock
|
|
|
363,260
|
|
|
|
102,360
|
|
Cash (used in) provided by financing activities
|
|
|
(3,087,922
|
)
|
|
|
6,128,305
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
161,336
|
|
|
|
(394,854
|
)
|
|
|
|
|
|
|
|
|
|
(Outflow) inflow of cash
|
|
|
(3,223,266
|
)
|
|
|
945,798
|
|
Cash and cash equivalents, beginning
|
|
|
7,857,936
|
|
|
|
6,912,138
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, ending
|
|
$
|
4,634,670
|
|
|
$
|
7,857,936
|
|
Cash, cash equivalents and restricted cash are comprised of:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,634,670
|
|
|
$
|
7,857,936
|
|
Restricted cash
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
$
|
4,634,670
|
|
|
$
|
7,857,936
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
207,501
|
|
|
$
|
288,653
|
|
Interest paid
|
|
|
429,789
|
|
|
|
94,775
|
|
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Stockholders’ Equity
For
the Years Ended December 31, 2019 and 2018
(U.S.
Dollars)
|
|
Shares
|
|
|
Par
Value
|
|
|
Capital
in
Excess of
Par Value
|
|
|
Accumulated
Earnings(Deficiency)
|
|
|
Other
Comprehensive
Income (Loss)
|
|
|
Total
|
|
|
Non-
Controlling
Interests
|
|
|
Total
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2017
|
|
|
11,597,991
|
|
|
$
|
11,598
|
|
|
$
|
15,114,835
|
|
|
$
|
451,621
|
|
|
$
|
(656,093
|
)
|
|
$
|
14,921,961
|
|
|
$
|
—
|
|
|
$
|
14,921,961
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(566,480
|
)
|
|
|
(566,480
|
)
|
|
|
—
|
|
|
|
(566,480
|
)
|
Net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,490,268
|
|
|
|
—
|
|
|
|
2,490,268
|
|
|
|
(68,551
|
)
|
|
|
2,421,717
|
|
Common stock issued
|
|
|
101,666
|
|
|
|
102
|
|
|
|
102,258
|
|
|
|
—
|
|
|
|
—
|
|
|
|
102,360
|
|
|
|
—
|
|
|
|
102,360
|
|
Acquisition of EnP Investments
LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,759,917
|
|
|
|
2,759,917
|
|
Distributions to noncontrolling
interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(229,135
|
)
|
|
|
(229,135
|
)
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
111,192
|
|
|
|
—
|
|
|
|
—
|
|
|
|
111,192
|
|
|
|
—
|
|
|
|
111,192
|
|
Balance December 31,
2018
|
|
|
11,699,657
|
|
|
$
|
11,700
|
|
|
$
|
15,328,285
|
|
|
$
|
2,941,889
|
|
|
$
|
(1,222,573
|
)
|
|
$
|
17,059,301
|
|
|
$
|
2,462,231
|
|
|
$
|
19,521,532
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
227,963
|
|
|
|
227,963
|
|
|
|
—
|
|
|
|
227,963
|
|
Net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,912,392
|
|
|
|
—
|
|
|
|
1,912,392
|
|
|
|
384,793
|
|
|
|
2,297,185
|
|
Common stock issued
|
|
|
515,888
|
|
|
|
516
|
|
|
|
862,744
|
|
|
|
—
|
|
|
|
—
|
|
|
|
863,260
|
|
|
|
—
|
|
|
|
863,260
|
|
Dividends paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,398,133
|
)
|
|
|
—
|
|
|
|
(2,398,133
|
)
|
|
|
—
|
|
|
|
(2,398,133
|
)
|
Distributions to noncontrolling
interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(296,875
|
)
|
|
|
(296,875
|
)
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
246,444
|
|
|
|
—
|
|
|
|
—
|
|
|
|
246,444
|
|
|
|
—
|
|
|
|
246,444
|
|
Balance
December 31, 2019
|
|
|
12,215,545
|
|
|
$
|
12,216
|
|
|
$
|
16,437,473
|
|
|
$
|
2,456,148
|
|
|
$
|
(994,610
|
)
|
|
$
|
17,911,227
|
|
|
$
|
2,550,149
|
|
|
$
|
20,461,376
|
|
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(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. (“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,
and its 65% interest in EnP Investments, LLC (“ENP Investments”). All inter-company balances and transactions have
been eliminated. The Company was incorporated on May 12, 1998 in the State of Nevada and had no operations until June 30, 1998.
In 2019, the Company redomiciled into Alberta, Canada.
In
2018, NanoChem, a wholly-owned subsidiary of the Company, completed the purchase of a 65% interest in EnP Investments for
an aggregate purchase price of $5,110,560. An unrelated party owns the remaining 35% interest in EnP Investments, and EnP Investments
is consolidated into these financial statements. The outside investor’s units of ownership interests in EnP Investments
were included in non-controlling interests in these consolidated financial statements from the acquisition date onward.
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 in 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 slow down nitrogen loss from fields.
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.
(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. 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. Shipping and handling charges billed
to customers are included in revenue (2019 - $519,359; 2018 – $256,931). Shipping and handling costs incurred are included
in cost of goods sold (2019 - $1,061,961; 2018 – $713,039).
(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 and Intangible Assets.
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
|
Trailer
|
|
30%
Declining balance
|
Automobiles
|
|
Straight-line
over 5 years
|
Patents
|
|
Straight-line
over 17 years
|
Technology
|
|
Straight-line
over 10 years
|
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 their carrying amounts 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, 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 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.
(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 income 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 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 so 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.
(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.
(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 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 years ended December 31, 2019 and 2018.
(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, 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.
(n)
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.
|
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, 2019, 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 income and comprehensive income.
(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 $2,708,825 (61%) at December 31, 2019 (December 31, 2018 - $1,280,406 or 29%).
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 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.
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 income and comprehensive
income.
(s)
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 are evaluated 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.
Qualitative
assessments of goodwill and indefinite-lived intangible assets were performed in 2019 and 2018. Based on the results of 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.
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 “Property and Equipment” significant
accounting policy.
(t)
Adoption of new accounting principles
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASC 842 which requires lessees to recognize
a right-of-use (“ROU”) asset and lease liability on the balance sheet for virtually all leases. From a lessee
perspective, ASC 842 retains a dual model requiring leases to be classified as either operating or finance leases for the income
statement. Operating leases will result in straight-line expense, and financing leases will have a front-loaded expense pattern
with an interest expense component. On January 1, 2019, the Company adopted ASC 842 and all related amendments using the prospective
transition approach. The comparative information has not been restated and continues to be reported under the accounting standards
in effect for those periods. Adoption of the new standard resulted in the recording of lease ROU assets and lease liabilities
of approximately $819,079 as of January 1, 2019. In accordance with ASC 842, the Company determines if an arrangement is a lease
at inception based on whether there is an identified asset, whether the Company has the right to obtain substantially all of the
economic benefits from the use of the asset and whether the Company has the right to direct the use of the asset. Currently, the
Company only has operating leases and does not have any financing leases. Operating lease ROU assets and operating lease liabilities
are recognized based on the present value of the future minimum lease payments over the lease term. Lease expense for minimum
lease payments is recognized on a straight-line basis over the lease term. See Note 4, Leases, for further disclosures
and detail regarding the Company’s operating leases.
In
November 2016, the FASB issued ASU2016-18 “Statement of Cash Flows” (Topic230); Restricted Cash (ASU2016-18), which
defines new requirements for the presentation of restricted cash and restricted cash equivalents in the statement of cash flows.
The amendments in this ASU require retrospective application to each period presented. The Company adopted this guidance effective
January 1, 2018 retrospectively. This ASU requires entities to present the statement of cash flows in a manner such that it reconciles
beginning and ending totals of cash, cash equivalents, restricted cash or restricted cash equivalents. Also, when cash, cash equivalents,
restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position,
an entity should, for each period that a statement of financial position is presented, present on the face of the statement of
cash flows or disclose in the notes to the financial statements, the line items and amounts of cash, cash equivalents, and restricted
cash or restricted cash equivalents reported within the statement of financial position. The amounts, disaggregated by the line
item in which they appear within the statement of financial position, shall sum to the total amount of cash, cash equivalents,
and restricted cash or restricted cash equivalents at the end of the corresponding period shown in the statement of cash flows.
(u)
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
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.
Acquisition
Effective
October 1, 2018, the Company, through its NanoChem Solutions Inc. subsidiary, entered into an agreement to purchase 65% of EnP
Investments LLC.
Total
consideration paid of $5,110,560 was paid through a combination of $10,560 cash on hand, $4,100,000 in debt financing provided
by Harris Bank (see Note 13b) and a $1,000,000 convertible note payable. The convertible note is due on or before September 30,
2023 with 5% interest due per year. At the option of the holder, the Note may be converted to 400,000 shares of the Company’s
common stock. The Company has the option to extend the note to no later than September 30, 2028.
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 Investments LLC as of the effective date. The Company finalized its estimates after
it was able to determine that it had obtained all necessary information that existed as of the acquisition date related to these
matters.
Cash paid
|
|
$
|
4,110,560
|
|
Convertible note
|
|
|
1,000,000
|
|
Total consideration
|
|
$
|
5,110,560
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Accounts receivable
|
|
$
|
1,071,078
|
|
Note receivable
|
|
|
60,000
|
|
Prepaid expenses
|
|
|
105,473
|
|
Inventory
|
|
|
1,867,137
|
|
Investments
|
|
|
84,943
|
|
Equipment
|
|
|
740,000
|
|
Intangible assets (Note 9)
|
|
|
3,168,000
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
(520,164
|
)
|
Loans payable
|
|
|
(292,706
|
)
|
Deferred income taxes
|
|
|
(989,569
|
)
|
Total identifiable net assets
|
|
|
5,294,192
|
|
Non-controlling interest
|
|
|
(2,759,917
|
)
|
Goodwill
|
|
$
|
2,534,275
|
|
In
connection with the 65% purchase of EnP Investments LLC, the Company incurred bank appraisal fees of $7,038 which was recorded
as general expenses during the year ended December 31, 2018. Goodwill of $2,534,275 is the excess of total consideration less
identifiable assets at fair value less debt assumed at fair value. Goodwill is attributable to EnP Investments LLC management,
assembled workforce, operating model and competitive presence in its market.
The
operating results of EnP Investments LLC have been included in the consolidated financial statements beginning October 1, 2018.
Unaudited
pro forma financial information
The
following unaudited pro forma combined financial information presents combined results of the Company and EnP Investments as if
the business combination had occurred on January 1, 2017.
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
23,152,539
|
|
|
$
|
23,119,226
|
|
Gross profit
|
|
|
8,428,317
|
|
|
|
12,466,963
|
|
Net income
|
|
$
|
4,470,245
|
|
|
$
|
3,253,679
|
|
The
pro forma financial information is not intended to represent or be indicative of the actual results of operations of the combined
entity that would have been reported had the business combination been completed on January 1, 2016, nor is it representative
of future operating results of the Company.
4.
Adoption of ASC 842, Leases
On
January 1, 2019, the Company adopted ASC 842 using the prospective transition approach, which applies the provisions of the new
guidance at the effective date without adjusting the comparative periods presented. The adoption of the lease standard did not
result in a cumulative-effect adjustment to opening equity. Results for reporting periods beginning after January 1, 2019 are
presented under ASC 842 while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s
historic accounting under ASC 840, “Leases,” (“ASC 840”).
The
Company leases office space. 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 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 5.5%.
Operating
lease costs during the full year ended December 31, 2019 were $400,936.
The
adoption of ASC 842 resulted in the recognition of ROU assets and lease liabilities of approximately $819,079 as of January 1,
2019. During the quarter ended June 30, 2019, the Company renewed a lease agreement and recorded a further ROU of $291,919. The
standard did not materially impact the Company’s consolidated statement of income or its consolidated statement of cash
flows for the full year ended December 31, 2019. See below for the Company’s updated lease policy and the required disclosures
under ASC 842. The Company is a lessee in five different leases that have various expiry dates within the next 4 years.
The
table below summarizes the remaining expected lease payments under the operating leases as of December 31, 2019.
Future Lease Payments
|
|
December 31,
2019
|
|
2020
|
|
$
|
405,670
|
|
2021
|
|
|
313,496
|
|
2022
|
|
|
93,155
|
|
2023
|
|
|
70,925
|
|
Thereafter
|
|
|
-
|
|
Less: imputed interest
|
|
|
(94,041
|
)
|
|
|
|
|
|
Present value of operating lease liabilities
|
|
$
|
789,205
|
|
Update
to Lease Policy
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. The Company’s operating leases are
included in ROU assets, lease liabilities-current portion and lease liability-long term 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.
5.
Accounts Receivable
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
4,740,867
|
|
|
$
|
4,459,833
|
|
Allowances for doubtful accounts
|
|
|
(270,652
|
)
|
|
|
(37,088
|
)
|
|
|
$
|
4,470,215
|
|
|
$
|
4,422,745
|
|
6.
Inventories
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Completed goods
|
|
$
|
3,818,876
|
|
|
$
|
3,770,071
|
|
Work in progress
|
|
|
416,950
|
|
|
|
150,333
|
|
Raw materials and supplies
|
|
|
4,946,960
|
|
|
|
4,807,305
|
|
|
|
$
|
9,182,786
|
|
|
$
|
8,727,709
|
|
7.
Property, Equipment and Leaseholds
|
|
2019
|
|
|
Accumulated
|
|
|
2019
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Buildings and improvements
|
|
$
|
3,614,057
|
|
|
$
|
2,619,914
|
|
|
$
|
994,143
|
|
Automobiles
|
|
|
163,397
|
|
|
|
94,789
|
|
|
|
68,608
|
|
Computer hardware
|
|
|
43,540
|
|
|
|
41,233
|
|
|
|
2,307
|
|
Furniture and fixtures
|
|
|
108,906
|
|
|
|
97,030
|
|
|
|
11,876
|
|
Office equipment
|
|
|
1,827
|
|
|
|
733
|
|
|
|
1,094
|
|
Manufacturing equipment
|
|
|
5,634,255
|
|
|
|
3,106,526
|
|
|
|
2,527,729
|
|
Trailer
|
|
|
9,236
|
|
|
|
5,389
|
|
|
|
3,847
|
|
Boat
|
|
|
34,400
|
|
|
|
21,719
|
|
|
|
12,681
|
|
Leasehold improvements
|
|
|
88,872
|
|
|
|
68,571
|
|
|
|
20,301
|
|
Technology
|
|
|
105,177
|
|
|
|
105,177
|
|
|
|
—
|
|
Land
|
|
|
363,090
|
|
|
|
—
|
|
|
|
363,090
|
|
|
|
$
|
10,166,757
|
|
|
$
|
6,161,081
|
|
|
$
|
4,005,676
|
|
|
|
2018
|
|
|
Accumulated
|
|
|
2018
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Buildings and improvements
|
|
$
|
3,516,710
|
|
|
$
|
2,523,148
|
|
|
$
|
993,562
|
|
Automobiles
|
|
|
193,397
|
|
|
|
74,753
|
|
|
|
118,644
|
|
Computer hardware
|
|
|
43,414
|
|
|
|
40,226
|
|
|
|
3,188
|
|
Furniture and fixtures
|
|
|
105,494
|
|
|
|
93,087
|
|
|
|
12,407
|
|
Office equipment
|
|
|
1,740
|
|
|
|
438
|
|
|
|
1,302
|
|
Manufacturing equipment
|
|
|
3,859,653
|
|
|
|
2,838,344
|
|
|
|
1,021,309
|
|
Trailer
|
|
|
8,793
|
|
|
|
3,561
|
|
|
|
5,232
|
|
Boat
|
|
|
34,400
|
|
|
|
18,548
|
|
|
|
15,852
|
|
Leasehold improvements
|
|
|
88,872
|
|
|
|
49,937
|
|
|
|
38,935
|
|
Technology
|
|
|
100,136
|
|
|
|
100,136
|
|
|
|
—
|
|
Land
|
|
|
352,830
|
|
|
|
—
|
|
|
|
352,830
|
|
|
|
$
|
8,305,439
|
|
|
$
|
5,742,178
|
|
|
$
|
2,563,261
|
|
Amount
of depreciation expense for 2019: $603,826 (2018: $326,123) and is included in cost of sales in the consolidated statements of
income and comprehensive income.
In
February of 2017, the Company lost a net carrying value total of $2,196,722CAD ($1,659,404 USD) in building and manufacturing
equipment in a fire at the Taber, AB location. Insurance was in place. During the year ended December 31, 2018 the Company received
the final insurance proceeds of $3,132,666 CAD ($2,349,498 USD). During the year ended 2017, the Company received interim insurance
proceeds of $5,570,000 CAD ($4,207,578 USD).
8.
Patents
|
|
2019
Cost
|
|
|
Accumulated
Amortization
|
|
|
2019
Net
|
|
Patents
|
|
$
|
204,102
|
|
|
$
|
157,526
|
|
|
$
|
46,576
|
|
|
|
2018
Cost
|
|
|
Accumulated
Amortization
|
|
|
2018
Net
|
|
Patents
|
|
$
|
194,320
|
|
|
$
|
131,306
|
|
|
$
|
63,014
|
|
Increase
in 2019 cost was due to currency conversion. 2019 cost in Canadian dollars - $265,102 (2018 - $265,102 in Canadian dollars).
Amount
of amortization for 2019: $16,438 (2018: $16,438) and is included in cost of sales in the consolidated statements of income and
comprehensive income.
Estimated
amortization expense over the next five years is as follows:
2020
|
|
$
|
16,438
|
|
2021
|
|
|
16,438
|
|
2022
|
|
|
13,700
|
|
9.
Goodwill and Indefinite Lived Intangible Assets
Goodwill
|
|
|
|
|
Balance as of December 31, 2017
|
|
|
-
|
|
Additions
|
|
$
|
2,534,275
|
|
Impairment
|
|
|
-
|
|
Balance as of December 31, 2018 and 2019
|
|
$
|
2,534,275
|
|
|
|
|
|
|
Indefinite Lived Intangible Assets
|
|
|
|
|
Balance as of December 31, 2017
|
|
|
-
|
|
Additions
|
|
$
|
770,000
|
|
Impairment
|
|
|
-
|
|
Balance as of December 31, 2018 and 2019
|
|
$
|
770,000
|
|
Indefinite
lived intangible assets consist of trade secrets and trademarks related to the acquisition of EnP Investments LLC (note 3).
Definite Life Intangible Assets
|
|
|
|
|
Balance as of December 31, 2017
|
|
|
-
|
|
Additions
|
|
$
|
2,398,000
|
|
Amortization
|
|
|
(40,000
|
)
|
Balance as of December 31, 2018
|
|
|
2,358,000
|
|
Amortization
|
|
|
(176,000
|
)
|
Balances as of December 31, 2019
|
|
$
|
2,182,000
|
|
Definite
life intangible assets consists of customer relationships related to the acquisition of EnP Investments LLC (Note 3). Customer
relationships are amortized over their estimated useful life of 15 years.
Estimated
amortization expense over the next five years is as follows:
2020
|
|
$
|
176,000
|
|
2021
|
|
|
176,000
|
|
2022
|
|
|
176,000
|
|
2023
|
|
|
176,000
|
|
2024
|
|
|
176,000
|
|
10.
Long Term Deposits
The
Company has security deposits that are long term in nature which consist of damage deposits held by landlords and security deposits
held by various vendors.
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Long term deposits
|
|
$
|
30,630
|
|
|
$
|
30,777
|
|
11.
Investments
(a)
The Company has a 50% ownership interest
in ENP Peru Investments LLC (“ENP Peru”), which was acquired in fiscal 2016. ENP Peru is located in Illinois and leases
warehouse space. The Company accounts for this investment using the equity method of accounting. A summary of the Company’s
investment follows:
Balance, December 31, 2017
|
|
$
|
13,414
|
|
Acquisition of additional units
|
|
|
25,000
|
|
Loss in equity method investment
|
|
|
(26,306
|
)
|
Balance, December 31, 2018
|
|
|
12,108
|
|
Return of equity
|
|
|
(6,250
|
)
|
Gain in equity method investment
|
|
|
5,529
|
|
Balance, December 31, 2019
|
|
$
|
11,387
|
|
Summarized
profit and loss information related to the equity accounted investment is as follows:
|
|
2019
|
|
|
|
|
|
Net sales
|
|
$
|
285,635
|
|
Net income
|
|
$
|
11,058
|
|
(b)
The Company has a 24% ownership interest
in ENP Realty LLC (“ENP Realty”), which was acquired in fiscal 2018. ENP Realty is located in Illinois and leases
warehouse space. The Company accounts for this investment using the equity method of accounting. A summary of the Company’s
investment follows:
Balance, January 1, 2018
|
|
$
|
-
|
|
Acquisition
|
|
|
56,590
|
|
Gain in equity method investment
|
|
|
7,659
|
|
Balance, December 31, 2018
|
|
|
64,249
|
|
Return of equity
|
|
|
(9,292
|
)
|
Gain in equity method investment
|
|
|
8,208
|
|
Balance, December 31, 2019
|
|
$
|
63,165
|
|
Summarized
profit and loss information related to the equity accounted investment is as follows:
|
|
2019
|
|
|
|
|
|
Net sales
|
|
$
|
75,870
|
|
Net income
|
|
$
|
34,200
|
|
(c)
In December 2018 the Company invested
$200,000 in Applied Holding Corp. (“Applied”). Applied is a captive insurance company and the Company received a promissory
note for its investment which becomes due in 2021 but may be extended with notice for a maximum of two years.
(d)
In December 2018 the Company invested
$500,000 in Trio Opportunity Corp. (“Trio”), a privately held entity. Trio is a real estate investment vehicle and
the Company received 50,000 non-voting Class B shares at $10.00/share. In accordance with ASC 321-10-35, the Company has elected
to account for this investment at cost. A summary of the Company’s investment follows:
Balance, January 1, 2018
|
|
$
|
-
|
|
Acquisition
|
|
|
500,000
|
|
Impairment
|
|
|
-
|
|
Balance, December 31, 2018 and 2019
|
|
$
|
500,000
|
|
e)
In January 2019, the Company invested $1,001,000 in a Florida based LLC that is engaged in international sales
of fertilizer additives. The Company accounts for this investment using the equity method of accounting. According to the operating
agreement, the Company has a 50% interest in the profit and loss of the LLC but does not have control. A
summary of the Company’s investment follows:
Balance, January 1, 2019
|
|
$
|
-
|
|
Acquisition
|
|
|
1,001,000
|
|
Gain in equity method investment
|
|
|
290,033
|
|
Return on investment
|
|
|
(150,000
|
)
|
Balance, December 31, 2019
|
|
$
|
1,141,033
|
|
Further
to the original investment amount, the Company has placed $1,000,000 in trust, to be released upon the LLC reaching a milestone
related to earnings before interest, taxes and depreciation (“EBITDA”) targets. This amount is accounted for as restricted
cash on the balance sheet. Further payments of $1,000,000 and $500,000 may become due should other subsequent milestones be reached.
Summarized profit and loss information related to the equity accounted investment is as follows:
|
|
2019
|
|
|
|
|
|
Net sales
|
|
$
|
8,991,883
|
|
Gross profit
|
|
|
3,323,828
|
|
Net income
|
|
$
|
580,066
|
|
12.
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) $2,500,000, or (ii) 80% of eligible domestic accounts receivable and certain foreign
accounts receivable plus 60% of inventory. The loan has an annual interest rate of 4.75% at December 31, 2019 (December 31, 2018
– 5.75%).
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 Harris, Harris’ 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, 2019, 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 Harris 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, 2019 were $1,641,085 (December 31, 2018 - $1,700,000).
(b)
In June 2019, EnP Investments, LLC signed a new agreement with Midland States Bank (“Midland”) to renew the expiring
credit line. The revolving line of credit is for an aggregate amount of up to $2,500,000. The interest rate of this loan is subject
to change from time to time based on changes in an independent index which is the 1 month LIBOR as published in the Wall Street
Journal (the “Index”). Interest on the unpaid principal balance of this loan will be calculated using a rate of 4.060
percentage points over the Index. Under no circumstances will the interest rate of this loan be less than 4.750% per annum or
more than the maximum rate allowed by applicable law. The interest rate at December 31, 2019 is 6.075% (December 31, 2018 –
6.5296%).
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 of 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 Solutions Inc. is a guarantor of 65%
of all the principal and other loan costs not to exceed $1,625,000. As of December 31, 2019, EnP Investments , LLC was in compliance
with all loan covenants.
To
secure the repayment of any amounts borrowed under the revolving line of Credit, EnP Investments, LLC 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 December 31, 2019 were $748,897 (December 31, 2018 – $1,098,131).
13.
Long Term Debt
(a)
In September 2014, NanoChem Solutions
Inc. signed a $1,005,967 promissory note with Harris Bank with a rate of prime plus 0.5% (September 30, 2019 – 5.75%; December
31, 2018 – 5.75%) to be repaid over 5 years with equal monthly installments plus interest. Loan proceeds were used to retire
the previously issued and outstanding debt obligations. The final payment was made in September 2019 (balance owing December 31,
2018 - $150,895). Interest expense for the year ended December 31, 2019 was $3,294 (2018 - $13,123).
(b)
In October 2018, NanoChem Solutions
Inc. signed a $4,100,000 term loan with Harris Bank with a rate of prime (December 31, 2018 – 5.5%; December 31, 2017 -
nil) to be repaid over 7 years with equal monthly installments plus interest along two payments consisting of 25% prior year cash
flow recapture, capped at $300,000, due May 31, 2019 and 2020. The money was used to purchase a 65% interest in EnP Investments
LLC. Interest expense for the year ended December 31, 2019 was $191,738 (December 31, 2018 - $36,661). The balance owing at December
31, 2019 was $3,116,667 (2018 - $4,002,381).
The
Company has committed to the following repayments:
2020
|
|
$
|
885,714
|
|
2021
|
|
$
|
585,714
|
|
2022
|
|
$
|
585,714
|
|
2023
|
|
$
|
585,714
|
|
2024
|
|
$
|
473,811
|
|
(c)
In April 2019, NanoChem Solutions Inc. signed a loan for $1,100,000 with Harris Bank with a rate of prime plus 0.5%
(December 31, 2019 – 5.25%) for the purchase of new manufacturing equipment. The Company pays interest monthly until February
2020, when equal monthly installments of the principal and interest are due until January 2024. Interest expense for the year
ended December 31, 2019 was $36,333 (2018 – nil). The balance owing at December 31, 2019 was $1,100,000.
2020
|
|
$
|
252,083
|
|
2021
|
|
$
|
275,000
|
|
2022
|
|
$
|
275,000
|
|
2023
|
|
$
|
275,000
|
|
2024
|
|
$
|
22,917
|
|
(d)
In January, 2018, EnP Investments,
LLC signed a $200,000 promissory note with Midland States Bank with a rate of 5.250% to be repaid over 7 years with equal monthly
installments plus interest. This money was used to purchase production equipment. Interest expense for the year ended December
31, 2019 was $8,734 (December 31, 2018 - $2,415). The principal balance owing at December 31, 2019 is $152,241 (2018 - $177,794).
The
Company has committed to the following repayments:
2020
|
|
$
|
25,562
|
|
2021
|
|
$
|
25,562
|
|
2022
|
|
$
|
25,562
|
|
2023
|
|
$
|
25,562
|
|
2024
|
|
$
|
25,562
|
|
(e)
In March, 2016, EnP Investments, LLC
signed a $45,941 promissory note with Ford Motor Credit Company with a rate of 0.00% interest to be repaid over 5 years with equal
monthly installments. The balance owing at December 31, 2019 is $11,485 (December 31, 2018 - $20,673).
The
Company has committed to the following repayments:
2020
|
|
$
|
9,188
|
|
2021
|
|
$
|
2,297
|
|
As
of December 31, 2019, Company was in compliance with all loan covenants.
Continuity
|
|
2019
|
|
|
2018
|
|
Balance, January 1
|
|
$
|
4,351,743
|
|
|
$
|
352,089
|
|
Plus: Proceeds from loans
|
|
|
1,100,000
|
|
|
|
4,100,000
|
|
Plus: Acquisition of ENP (see Note 3)
|
|
|
-
|
|
|
|
206,921
|
|
Less: Payments on loan
|
|
|
(1,071,350
|
)
|
|
|
(307,267
|
)
|
Balance, December 31
|
|
$
|
4,380,393
|
|
|
$
|
4,351,743
|
|
Outstanding balance at December 31,
|
|
2019
|
|
|
2018
|
|
a) Long term debt – Harris Bank
|
|
$
|
-
|
|
|
$
|
150,895
|
|
b) Long term debt – Harris Bank
|
|
|
3,116,667
|
|
|
|
4,002,381
|
|
c) Long term debt – Harris Bank
|
|
|
1,100,000
|
|
|
|
-
|
|
c) Long term debt – Midland States Bank
|
|
|
152,241
|
|
|
|
177,794
|
|
d) Long term debt – Ford Credit
|
|
|
11,485
|
|
|
|
20,673
|
|
Long-term Debt
|
|
|
4,380,393
|
|
|
|
4,351,743
|
|
Less: current portion
|
|
|
(1,196,722
|
)
|
|
|
(771,359
|
)
|
|
|
$
|
3,183,671
|
|
|
$
|
3,580,384
|
|
14.
Convertible Note Payable
In
October 2018, the Company issued a convertible note payable in the amount of $1,000,000 in connection with the acquisition of
EnP Investments LLC. The convertible note is due on or before September 30, 2023 with 5% interest due per year. At the option
of the holder, the Note may be converted to 400,000 shares in the Company’s common stock. The Company has the option to
extend the note to no later than September 30, 2028.
In
June 2019, the holder opted to convert $500,000 of the convertible note payable into 200,000 shares of the Company’s
common stock.
15.
Income Taxes
The
provision for income tax expense (benefit) is comprised of the following:
|
|
2019
|
|
|
2018
|
|
Current tax, federal
|
|
$
|
391,476
|
|
|
$
|
221,758
|
|
Current tax, state
|
|
|
177,096
|
|
|
|
82,806
|
|
Current tax, foreign
|
|
|
51,285
|
|
|
|
112,449
|
|
Current tax, total
|
|
|
619,857
|
|
|
|
417,013
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax, federal
|
|
|
(293,796
|
)
|
|
|
-
|
|
Deferred income tax, state
|
|
|
(132,908
|
)
|
|
|
-
|
|
Deferred income tax, foreign
|
|
|
(175,717
|
)
|
|
|
759,493
|
|
Deferred income tax, total
|
|
|
(602,421
|
)
|
|
|
759,493
|
|
Total
|
|
$
|
17,436
|
|
|
$
|
1,176,506
|
|
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.
|
|
2019
|
|
|
2018
|
|
Income (loss) before tax, net of tax from gain on involuntary disposition
|
|
|
2,314,621
|
|
|
|
3,054,847
|
|
Tax from gain on involuntary disposition
|
|
|
-
|
|
|
|
693,063
|
|
Income (loss) before taxes
|
|
|
2,314,621
|
|
|
|
3,747,910
|
|
US statutory tax rates
|
|
|
30.50
|
%
|
|
|
28.51
|
%
|
Expected income tax (recovery)
|
|
|
705,960
|
|
|
|
1,068,342
|
|
Non-deductible items
|
|
|
(41,419
|
)
|
|
|
354,548
|
|
Change in estimates and other
|
|
|
27,893
|
|
|
|
183,529
|
|
Change in enacted tax rate
|
|
|
(263,686
|
)
|
|
|
-
|
|
Foreign tax rate difference
|
|
|
(400,593
|
)
|
|
|
(393,794
|
)
|
Change in valuation allowance
|
|
|
(10,719
|
)
|
|
|
(36,119
|
)
|
Total income taxes (recovery)
|
|
|
17,436
|
|
|
|
1,176,506
|
|
|
|
|
|
|
|
|
|
|
Current income tax expenses (recovery)
|
|
|
619,857
|
|
|
|
417,013
|
|
Deferred tax expenses (recovery)
|
|
|
(602,421
|
)
|
|
|
759,493
|
|
Total income taxes (recovery)
|
|
|
17,436
|
|
|
|
1,176,506
|
|
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, 2019 and 2018 are comprised of the following:
Canada
|
|
2019
|
|
|
2018
|
|
Non capital loss carryforwards
|
|
|
769,112
|
|
|
|
556,462
|
|
Patents
|
|
|
63,998
|
|
|
|
63,998
|
|
Fixed assets
|
|
|
(350
|
)
|
|
|
(350
|
)
|
Financial instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
|
832,760
|
|
|
|
620,110
|
|
Valuation Allowance
|
|
|
-
|
|
|
|
-
|
|
Net Deferred tax asset (liability)
|
|
|
832,760
|
|
|
|
620,110
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
Non capital loss carryforwards
|
|
|
152,299
|
|
|
|
-
|
|
Fixed Assets
|
|
|
264,952
|
|
|
|
247,665
|
|
Intangible assets
|
|
|
(1,058,641
|
)
|
|
|
(989,569
|
)
|
Stock-Based Compensation
|
|
|
185,866
|
|
|
|
173,739
|
|
|
|
|
(455,524
|
)
|
|
|
(568,165
|
)
|
Deferred tax asset not recognized
|
|
|
164,284
|
|
|
|
153,565
|
|
Net Deferred tax asset
|
|
|
(291,240
|
)
|
|
|
(414,600
|
)
|
The
Company has non-operating loss carryforwards of approximately $3,347,903 (2018 - $2,060,971) 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
|
|
Loss
|
|
2032
|
|
|
401,480
|
|
2037
|
|
|
1,659,491
|
|
2039
|
|
|
1,286,932
|
|
Total
|
|
|
3,347,903
|
|
As
at December 31, 2019, 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,
2019 and 2018, 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.
16.
Income Per Share
The
Company presents both basic and diluted income per share on the face of its consolidated statements of income. Basic
and diluted income per share are calculated as follows:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling interest
|
|
$
|
1,912,392
|
|
|
$
|
2,490,268
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,945,636
|
|
|
|
11,485,580
|
|
Diluted
|
|
|
12,085,798
|
|
|
|
11,816,054
|
|
Net income (loss) per common share attributable to controlling interest:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.16
|
|
|
$
|
0.21
|
|
Certain
stock options whose terms and conditions are described in Note 17, “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.
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive options
|
|
|
172,000
|
|
|
|
261,000
|
|
There
were no preferred shares issued and outstanding during the years ended December 31, 2019 or 2018.
17.
Stock Options.
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 100% of the options granted will vest the year following the grant. The maximum term of options granted is 5 years and
the exercise price for all options are issued for not less than fair market value at the date of the grant.
The
following table summarizes the Company’s stock option activities for the years ended December 31, 2019 and 2018:
|
|
Number of shares
|
|
|
Exercise price
per share
|
|
|
Weighted average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
713,000
|
|
|
|
$0.75 – 1.70
|
|
|
$
|
1.21
|
|
Granted
|
|
|
110,000
|
|
|
|
$1.48 – 1.75
|
|
|
$
|
1.74
|
|
Cancelled or expired
|
|
|
(61,334
|
)
|
|
|
$1.00 – 1.70
|
|
|
$
|
1.09
|
|
Exercised
|
|
|
(101,666
|
)
|
|
|
$0.75 – 1.42
|
|
|
$
|
1.01
|
|
Balance, December 31, 2018
|
|
|
660,000
|
|
|
|
$0.75 – 1.75
|
|
|
$
|
1.35
|
|
Granted
|
|
|
347,000
|
|
|
|
$2.44 – 4.13
|
|
|
$
|
2.99
|
|
Cancelled or expired
|
|
|
(56,112
|
)
|
|
|
$0.75 – 3.46
|
|
|
$
|
1.41
|
|
Exercised
|
|
|
(315,888
|
)
|
|
|
$0.75 – 1.70
|
|
|
$
|
1.15
|
|
Balance, December 31, 2019
|
|
|
635,000
|
|
|
|
$0.75 – 4.13
|
|
|
$
|
2.31
|
|
Exercisable, December 31, 2019
|
|
|
372,000
|
|
|
|
$0.75 – 4.13
|
|
|
$
|
2.39
|
|
The
weighted-average remaining contractual life of outstanding options is 3.67 years.
The
fair value of each option grant is calculated using the following weighted average assumptions:
|
|
2019
|
|
|
2018
|
|
Expected life – years
|
|
|
3.0
|
|
|
|
3.0
|
|
Interest rate
|
|
|
1.69 – 1.93
|
%
|
|
|
2.8 – 2.96
|
%
|
Volatility
|
|
|
43.89 – 57.24
|
%
|
|
|
47.77 – 51.85
|
%
|
Weighted average fair value of options granted
|
|
$
|
0.7892 – 1.6399
|
|
|
$
|
0.4759 – 0.6313
|
|
During
the year ended December 31, 2019, the Company granted 95,000 (2018 – 100,000) stock options to consultants and has applied
ASC 718 using the Black-Scholes option-pricing model, which resulted in additional expenses of $67,338 (2018 - $5,747). Options
granted in other years resulted in additional expenses of $21,411 (2018 – $26,701). During the year ended December 31, 2019,
employees were granted 252 ,000 (2018 – 10,000) stock options, which resulted in additional expenses of $157,695 (2018 –
$5,150). Options granted in other years resulted in additional expenses in the amount of $nil for employees during the year ended
December 31, 2019 (2018 - $73,594). There were 220,000 employee and 95,888 consultant stock options exercised during the year
ended December 31, 2019 (2018 – 60,000 employee; 41,666 consultant).
As
of December 31, 2019, there was approximately $145,196 of compensation expense related to non-vested awards. This expense is expected
to be recognized over a weighted average period of 1.5 years.
The
aggregate intrinsic value of vested options outstanding at December 31, 2019 is $67,720 (2018 – $43,190).
18.
Capital Stock.
During
the year ended December 31, 2019, 220,000 shares were issued upon the exercise of employee stock options (2018 – 60,000)
and 95,888 shares were issued upon the exercise of consultant stock options (2018 – 41,666).
In
June 2019, the holder of the Company’s convertible note opted to convert $500,000 of the convertible note payable into 200,000
shares of the Company’s common stock.
In
February 2019, the Company announced the payment of a special dividend to the existing stockholders of the Company as of March
6, 2019 in the amount of $0.05 per share.
In
March 2019, the Company announced the payment of annual dividends of $0.15 per share, to be paid in two tranches. Shareholders
of record on March 31, 2019 received $0.075 per share on April 15, 2019 and shareholders of record on September 30, 2019 received
$0.075 per share on October 15, 2019.
19.
Non-Controlling Interests
EnP
Investments is a limited liability corporation (LLC) that manufactures and distributes golf,
turf and ornamental agriculture products in Mendota, IL. The Company owns a 65% interest in EnP Investments
through its wholly-owned subsidiary NanoChem. An unrelated party owns the remaining 35% interest in EnP Investments. For financial
reporting purposes, the assets, liabilities and earnings of the LLC are consolidated into these financial statements. The unrelated
third party’s ownership interest in the LLC is recorded in non-controlling interests in these consolidated
financial statements. The non-controlling interest represents the non-controlling unitholder’s interest in
the earnings and equity of EnP Investments. Effective October 1, 2018, the Company paid $4,110,560 in cash and issued a $1,000,000
convertible note (see Note 3) to acquire EnP Investments. EnP Investments is allocated to the BCPA segment.
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.
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 $526,110.
Balance, January 1, 2018
|
|
$
|
-
|
|
Acquisition
|
|
|
2,759,917
|
|
Distribution
|
|
|
(229,135
|
)
|
Non-controlling interest share of loss
|
|
|
(68,551
|
)
|
Balance, December 31, 2018
|
|
|
2,462,231
|
|
Distribution
|
|
|
(296,875
|
)
|
Non-controlling interest share of income
|
|
|
384,793
|
|
Balance, December 31, 2019
|
|
$
|
2,550,149
|
|
20.
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”), 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.
Year
ended December 31, 2019:
|
|
EWCP
|
|
|
BCPA
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
388,385
|
|
|
$
|
27,051,725
|
|
|
$
|
27,440,110
|
|
Interest expense
|
|
|
904
|
|
|
|
427,467
|
|
|
|
428,371
|
|
Depreciation
|
|
|
46,492
|
|
|
|
573,772
|
|
|
|
620,264
|
|
Income tax expense
|
|
|
-
|
|
|
|
619,857
|
|
|
|
619,857
|
|
Segment profit
|
|
|
(657,078
|
)
|
|
|
2,569,470
|
|
|
|
1,912,392
|
|
Segment assets
|
|
|
480,243
|
|
|
|
9,847,489
|
|
|
|
10,327,732
|
|
Expenditures for segment assets
|
|
|
-
|
|
|
|
1,831,519
|
|
|
|
1,831,519
|
|
Year
ended December 31, 2018:
|
|
EWCP
|
|
|
BCPA
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
314,544
|
|
|
$
|
17,514,974
|
|
|
$
|
17,829,518
|
|
Interest expense
|
|
|
-
|
|
|
|
93,653
|
|
|
|
93,653
|
|
Depreciation
|
|
|
50,920
|
|
|
|
291,641
|
|
|
|
342,561
|
|
Income tax expense
|
|
|
-
|
|
|
|
533,130
|
|
|
|
533,130
|
|
Segment profit
|
|
|
1,579,464
|
|
|
|
910,804
|
|
|
|
2,490,268
|
|
Segment assets
|
|
|
505,124
|
|
|
|
7,783,426
|
|
|
|
8,288,550
|
|
Expenditures for segment assets
|
|
|
15,032
|
|
|
|
165,798
|
|
|
|
180,830
|
|
Sales
by territory are shown below:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
1,125,566
|
|
|
$
|
364,847
|
|
United States and abroad
|
|
|
26,314,544
|
|
|
|
17,464,671
|
|
Total
|
|
$
|
27,440,110
|
|
|
$
|
17,829,518
|
|
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:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
480,243
|
|
|
$
|
505,124
|
|
United States
|
|
|
9,847,489
|
|
|
|
7,783,426
|
|
Total
|
|
$
|
10,327,732
|
|
|
$
|
8,288,550
|
|
Three
customers accounted for $12,814,506 (47%) of sales made in 2019 (2018 - $6,880,598 or 39%).
21.
Subsequent Events.
In
January 2020, the Company issued 15,000 shares of common stock as a result of the exercise of employee stock options and
10,000 shares of common stock as a result of the exercise of consultant stock options.
Since
December 31, 2019, 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 operations of the Company. The duration and impact
of the COVlD-19 outbreak is unknown at this time and it is not possible to reliably estimate the length and severity of these
developments. On March 18, 2020, the Company suspended its
dividends until further notice due to the uncertainty surrounding the COVID-19 virus.