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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022

 

OR

 

TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number: 001-31540

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

(Exact Name of Issuer as Specified in Its Charter)

 

Alberta   71-1630889
(State or other jurisdiction of   (Employer
incorporation or organization)   Identification No.)

 

6001 54 Ave.    
Taber, Alberta, Canada   T1G 1X4
(Address of Issuer’s Principal Executive Offices)   (Zip Code)

 

Issuer’s telephone number: (403) 223-2995

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $0.001 par value   FSI   NYSE American

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.

 

Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

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

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

☐ Yes ☒ No

 

Class of Stock   No. Shares Outstanding   Date
Common   12,377,246   May 16, 2022

 

 

 

 
 

 

FORM 10-Q

 

Index

 

PART I. FINANCIAL INFORMATION 4
     
Item 1. Financial Statements. 4
     
  (a) Unaudited Interim Condensed Consolidated Balance Sheets at March 31, 2022 and December 31, 2021. 4
     
  (b) Unaudited Interim Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2022 and 2021. 5
     
  (c) Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021. 6
       
  (d) Unaudited Interim Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021. 7
       
  (d) Notes to Unaudited Interim Condensed Consolidated Financial Statements for the Three Months Ended March 31, 2022 and 2021. 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 24
     
Item 4 Controls and Procedures. 26
     
PART II. OTHER INFORMATION 26
     
Item 6. Exhibits. 26
     
SIGNATURES 27

 

2
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for the purposes of the federal and state securities laws, including, but not limited to: any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.

 

Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Except for our ongoing obligation to disclose material information as required by the federal securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.

 

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include but are not limited to:

 

  Increased competitive pressures from existing competitors and new entrants;
     
  Increases in interest rates or our cost of borrowing or a default under any material debt agreement;
     
  Deterioration in general or regional economic conditions;
     
  Adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
     
  International tariff treatment of products, both inputs and outputs;
     
  Loss of customers or sales weakness;
     
  Inability to achieve future sales levels or other operating results;
     
  The unavailability of funds for capital expenditures;
     
  Operational inefficiencies in distribution or other systems.
     
  New tariffs relating to raw materials imported from China; and
     
  Impact of COVID-19 virus

 

For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2021.

 

3
 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
(U.S. Dollars)

 

    March 31, 2022     December 31, 2021  
    (Unaudited)        
Assets                
Current                
Cash and cash equivalents   $ 5,371,608     $ 5,710,227  
Term deposits     1,025,347       1,025,347  
Accounts receivable (Note 4)     9,943,148       7,129,329  
Inventories (Note 5)     12,214,651       9,502,005  
Prepaid expenses     859,922       442,161  
Total current assets     29,414,676       23,809,069  
Property, equipment and leaseholds, net (Note 6)     4,920,019       4,931,713  
Patents (Note 7)     9,589       13,699  
Right of use assets (Note 3)     203,721       217,267  
Intangible assets (Note 8)     2,560,000       2,600,000  
Long term deposits (Note 9)     8,540       8,540  
Investments (Note 10)     5,453,274       5,424,010  
Goodwill (Note 8)     2,534,275       2,534,275  
Deferred tax asset     12,697       12,697  
Total Assets   $ 45,116,791     $ 39,551,270  
                 
Liabilities                
Current                
Accounts payable   $ 1,362,779     $ 1,283,486  
Accrued liabilities     1,318,503       457,062  
Deferred revenue     271,426       349,004  
Income taxes payable     5,273,842       4,561,396  
Short term line of credit (Note 11)     4,948,545       2,300,819  
Current portion of lease liability (Note 3)     57,045       77,715  
Current portion of long term debt (Note 12)     665,614       793,574  
Total current liabilities     13,897,754       9,823,056  
Lease liability (Note 3)     146,676       139,552  
Deferred income tax liability     310,162       310,162  
Long term debt (Note 12)     1,491,355       1,573,024  
Total Liabilities   $ 15,845,947       11,845,794  
                 
Stockholders’ Equity                
Capital stock (Note 14)                
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:                
12,377,746 (December 31, 2021: 12,355,246) common shares     12,378       12,355  
Capital in excess of par value     17,094,836       16,983,648  
Other comprehensive loss     (733,187 )     (775,730 )
Accumulated earnings     10,415,419       8,882,360  
Total stockholders’ equity – controlling interest     26,789,446       25,102,633  
Non-controlling interests (Note 15)     2,481,398       2,602,843  
Total Stockholders’ Equity     29,270,844       27,705,476  
Total Liabilities and Stockholders’ Equity   $ 45,116,791     $ 39,551,270  

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements —

 

4
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(U.S. Dollars — Unaudited)

 

    2022     2021  
    Three Months Ended March 31,  
    2022     2021  
             
Sales   $ 10,783,280     $ 7,624,697  
Cost of sales     6,971,379       4,916,776  
                 
Gross profit     3,811,901       2,707,921  
                 
Operating Expenses                
Wages     623,503       579,355  
Administrative salaries and benefits     233,585       222,490  
Insurance     185,360       124,458  
Consulting     76,274       72,961  
Interest expense     57,618       62,274  
Professional fees     50,581       53,689  
Travel     44,808       10,994  
Lease expense     42,225       66,028  
Advertising and promotion     40,029       34,770  
Investor relations and transfer agent fee     37,097       25,087  
Office and miscellaneous     35,970       42,119  
Research     17,696       18,275  
Currency exchange     11,533       8,300  
Telecommunications     9,456       9,991  
Utilities     7,618       2,722  
Shipping     3,994       4,355  
Commissions     3,424       4,768  
                 
Total operating expenses     1,480,771       1,342,636  
                 
Operating income     2,331,130       1,365,285  
PPP loan forgiveness     -       537,960  
Gain on investments     36,764       208,968  
Interest income     22,088       10,298  
Income before income tax     2,389,982       2,122,511  
                 
Income taxes                
Income tax expense - current     (712,446 )     (485,456 )
                 
Net income for the period including non-controlling interests     1,677,536       1,637,055  
Less: Net income attributable to non-controlling interests     (144,477 )     (186,484 )
Net income attributable to controlling interest   $ 1,533,059     $ 1,450,571  
                 
Income per share (basic and diluted)   $ 0.12     $ 0.12  
Weighted average number of common shares (basic)     12,361,313       12,292,452  
Weighted average number of common shares (diluted)     12,543,674       12,518,331  
Other comprehensive income:                
Net income     1,677,536       1,637,055  
Unrealized gain on foreign currency translations     42,543       82,352  
Total comprehensive income     1,720,079       1,719,407  
Comprehensive income – non-controlling interest     (144,477 )     (186,484 )
Comprehensive income attributable to Flexible Solutions International Inc.   $ 1,575,602     $ 1,532,923  

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements —

 

5
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. Dollars — Unaudited)

 

    2022     2021  
    Three Months Ended March 31,  
    2022     2021  
             
Operating activities                
Net income for the period including non-controlling interests   $ 1,677,536     $ 1,637,055  
Adjustments to reconcile net income to net cash:                
Stock based compensation     54,271       39,589  
Depreciation and amortization     232,488       232,965  
Lease right of use financing     2,539       8,187  
Lease right of use amortization     13,546       74,884  
Gain on investments     (36,764 )     (208,968 )
PPP loan forgiveness     -       (537,960 )
                 
Changes in non-cash working capital items:                
Increase in accounts receivable     (2,813,819 )     (1,649,501 )
Increase in inventories     (2,712,646 )     (1,616,862 )
(Increase) Decrease in prepaid expenses     (417,761 )     59,204  
Increase (Decrease) in accounts payable and accrued liabilities     940,734       (872,823 )
Increase in taxes payable     712,446       513,323  
Decrease in deferred revenue     (77,578 )     (35,860 )
                 
Cash used in operating activities     (2,425,008 )     (2,356,767 )
                 
Investing activities                
Proceeds of equity investment distributions     7,500       12,500  
Net purchase of property, equipment and leaseholds     (176,684 )     (96,136 )
                 
Cash used in investing activities     (169,184 )     (83,636 )
                 
Financing activities                
Draw from short term line of credit     2,647,726       1,112,361  
Repayment of long term debt     (209,629 )     (208,857 )
Lease financing costs     (16,085 )     (83,070 )
Distributions to non-controlling interests     (265,922 )     (157,952 )
Proceeds from issuance of common stock     56,940       76,360  
                 
Cash provided by financing activities     2,213,030       738,842  
                 
Effect of exchange rate changes on cash     42,543       82,352  
                 
Outflow of cash     (338,619 )     (1,619,209 )
Cash and cash equivalents, beginning     6,735,574       4,472,776  
                 
Cash and cash equivalents, ending   $ 6,396,955     $ 2,853,567  
                 
Cash and cash equivalents are comprised of:                
Cash and cash equivalents   $ 5,371,608     $ 1,853,567  
Term deposits     1,025,347       1,000,000  
Cash, cash equivalents and restricted cash, ending   $ 6,396,955     $ 2,853,567  
                 
Supplemental disclosure of cash flow information:                
Income taxes paid   $ -     $ -  
Interest paid   $ 57,618     $ 62,274  

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements —

 

6
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF Stockholders’ Equity

(U.S. Dollars — Unaudited)

 

    Shares     Capital
Stock
    Capital in
Excess of
Par Value
    Accumulated
Earnings
    Other
Comprehensive
Income (Loss)
    Total     Non-
Controlling Interests
    Total
Stockholders’
Equity
 
                                                 
Balance December 31, 2021     12,355,246     $ 12,355     $ 16,983,648     $ 8,882,360     $ (775,730 )   $ 25,102,633     $ 2,602,843     $     27,705,476  
Translation adjustment                             42,543       42,543             42,543  
Net income                       1,533,059             1,533,059       144,477       1,677,536  
Common stock issued     22,500       23       56,917                   56,940             56,940  
Distributions to non-controlling interests                                         (265,922 )     (265,922 )
Stock-based compensation                 54,271                   54,271             54,271  
                                                                 
Balance March 31, 2022     12,377,746     $ 12,378     $ 17,094,836     $ 10,415,419     $ (733,187 )   $ 26,789,446     $ 2,481,398     $ 29,270,844  

 

    Shares     Capital
Stock
    Capital in
Excess of
Par Value
    Accumulated
Earnings
    Other
Comprehensive
Income (Loss)
    Total     Non-
Controlling Interests
    Total
Stockholders’
Equity
 
                                                 
Balance December 31, 2020     12,260,545     $ 12,261     $ 16,633,190     $ 5,433,198     $ (872,121 )   $ 21,206,528     $ 2,561,751     $    23,768,279  
Translation adjustment                             82,352       82,352             82,352  
Net income                       1,450,571             1,450,571       186,484       1,637,055  
Common stock issued     55,201       55       76,305                   76,360             76,360  
Distributions to non-controlling interests                                         (157,952 )     (157,952 )
Stock-based compensation                 39,589                   39,589             39,589  
                                                                 
Balance March 31, 2021     12,315,746     $ 12,316     $ 16,749,084     $ 6,883,769     $ (789,769 )   $ 22,855,400     $ 2,590,283     $ 25,445,683  

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements —

 

7
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022

(U.S. Dollars - Unaudited)

 

1. Basis of Presentation. 

  

These interim condensed consolidated financial statements (“consolidated financial statements”) include the accounts of Flexible Solutions International, Inc. (the “Company”), its wholly-owned subsidiaries Flexible Fermentation Ltd. , NanoChem Solutions Inc. (“NanoChem”), Flexible Solutions Ltd., Flexible Biomass LP, FS Biomass Inc., NCS Deferred Corp., Natural Chem SEZC Ltd., and InnFlex Holdings Inc. and its 65% interest in ENP Investments, LLC (“ENP Investments”) and ENP Mendota, LLC (“ENP Mendota”). All inter-company balances and transactions have been eliminated upon consolidation. 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 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 the financial statements. The outside investor’s ownership interest in ENP Investments is included in noncontrolling interests in these consolidated financial statements from the acquisition date onward. In 2020, ENP Investments increased its investment in ENP Realty from 24% to 100%, making ENP Realty a wholly-owned subsidiary of ENP Investments. In 2021, ENP Realty was renamed ENP Mendota and is consolidated into the financial statements.

 

The Company and its subsidiaries develop, manufacture and market specialty chemicals which slow the evaporation of water. One product, HEATSAVR®, is marketed for use in swimming pools and spas where its use, by slowing the evaporation of water, allows the water to retain a higher temperature for a longer period of time and thereby reduces the energy required to maintain the desired temperature of the water in the pool. Another product, WATERSAVR®, is marketed for water conservation in irrigation canals, aquaculture, and reservoirs where its use slows water loss due to evaporation. In addition to the water conservation products, the Company also manufactures and markets water-soluble chemicals utilizing thermal polyaspartate biopolymers (hereinafter referred to as “TPAs”), which are beta-proteins manufactured from the common biological amino acid, L-aspartic. TPAs can be formulated to prevent corrosion and scaling in water piping within the petroleum, chemical, utility and mining industries. TPAs are also used as proteins to enhance fertilizers in improving crop yields and can be used as additives for household laundry detergents, consumer care products and pesticides. The TPA division also manufactures two nitrogen conservation products for agriculture that slows nitrogen loss from fields.

 

The outbreak of the novel strain of coronavirus, specifically identified as “COVID-19”, has resulted in a widespread health crisis that has affected economies and financial markets around the world resulting in an economic downturn. This outbreak may also cause staff shortages, reduced customer demand, increased government regulations or interventions, all of which may negatively impact the business, financial condition or results of operations of the Company. The duration and impact of the COVID-19 outbreak is unknown at this time and it is not possible to reliably estimate the length and severity of these developments.

 

2. Significant Accounting Policies.

 

The consolidated financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in the United States (“GAAP”), applied on a basis consistent for all periods. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set of financial statements. These consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2021, filed with the Securities and Exchange Commission on May 13, 2022. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.

 

(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.

 

8
 

 

(b) Term Deposits

 

The deposits maintained by the Company with banks comprises term deposits, which can be withdrawn by the Company at any point without prior notice or penalty on the principal.

 

(c) Inventories and Cost of Sales

 

The Company has three major classes of inventory: completed goods, work in progress and raw materials and supplies. In all classes, inventories are stated at the lower of cost and net realizable value. The Company applies the first-in, first-out or weighted average cost formulae to inventories in different subsidiaries. Cost of sales includes all expenditures incurred in bringing the goods to the point of sale. Inventory costs and costs of sales include direct costs of the raw material, inbound freight charges, warehousing costs, handling costs (receiving and purchasing) and utilities and overhead expenses related to the Company’s manufacturing and processing facilities. Shipping and handling charges billed to customers are included in revenue (2022 - $123,894; 2021 – $131,348). Shipping and handling costs incurred are included in cost of goods sold (2022 - $268,032; 2021 – $263,089).

 

(d) 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.

 

(e) 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
Customer relationships – ENP Investments   Straight-line over 15 years
Software – ENP Investments   Straight-line over 3 years

 

(f) 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.

 

(g) 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.

 

9
 

 

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.

 

(h) Revenue Recognition

 

The Company generates revenue primarily from energy and water conservation products and biodegradable polymers, as further discussed in Note 16.

 

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.

 

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.

 

(i) 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.

 

j) 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.

 

(k) 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.

 

10
 

 

(l) 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 months ended March 31, 2022 and 2021.

 

(m) 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, valuation allowances for deferred income tax assets, determination of useful lives of property, equipment and leaseholds and intangible assets, recoverability of accounts receivable, recoverability of investments, discount rates for right of use assets and the valuation of inventory.

 

(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, term deposits, accounts receivable, accounts payable, accrued liabilities and the short term line of credit for all periods presented approximate their respective carrying amounts due to the short term nature of these financial instruments.

 

The fair value of the long term debt for all periods presented approximates their respective carrying amounts due to these financial instruments being at market rates.

 

(o) Contingencies

 

Certain conditions may exist as of the date the consolidated financial statements are issued which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

11
 

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Legal fees associated with loss contingencies are expensed as incurred.

 

(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.

 

In accordance with 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 March 31, 2022, the Company believes it has appropriately accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be affected. Interest and penalties associated with the Company’s tax positions are recorded as interest expense in the consolidated statements of operations and comprehensive income.

 

(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. Revenue for the Company’s three primary customers totaled $6,235,661 (58%) for the three months ended March 31, 2022 (2021 - $3,120,819 or 41%). Accounts receivable for the Company’s three primary customers totaled $6,367,303 (64%) at March 31, 2022 (December 31, 2021 - $4,940,995 or 69%).

 

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.

 

The Company is exposed to interest rate risk to the extent that the fair value or future cash flows for financial liabilities will fluctuate as a result of changes in market interest rates. The Company is exposed to interest rate risk on its long-term debt.

 

12
 

 

In order to manage its exposure to interest rate risk, the Company is closely monitoring fluctuations in market interest risks and will refinance its long-term debt where possible to obtain more favourable rates.

 

(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 initially 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 other income (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 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 2021 and 2020. Based on the results of the assessment, it was determined that it is more likely than not the reporting unit, customer lists and trademarks had a fair value in excess of their carrying value. Accordingly, no further impairment testing was completed and no impairment charges related to goodwill or indefinite-lived intangibles were recognized during the three months ended March 31, 2022.

 

Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company reviews for impairment indicators of finite-lived intangibles and other long-lived assets as described in the “Impairment of Long Lived Assets” significant accounting policy.

 

13
 

 

(t) Recent Accounting Pronouncements

 

The Company has implemented all applicable new accounting pronouncements that are in effect. Those pronouncements did not have any material impact on the consolidated financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

3. Leases

 

Accounting and reporting guidance for leases requires that leases be evaluated and classified as either operating or finance leases by the lessee and as either operating, sales-type or direct financing leases by the lessor. For leases with terms greater than 12 months, the Company records the related right-of-use (“ROU”) asset and lease obligation at the present value of lease payments over the term. Leases may include fixed rental escalation clauses, renewal options and / or termination options that are factored into the determination of lease payments when appropriate. The Company’s operating leases are included in ROU assets, lease liabilities-current portion and lease liability-less current portion in the accompanying consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. The Company’s leases do not usually provide a readily determinable implicit rate; therefore, an estimate of the Company’s incremental borrowing rate is used to discount the lease payments based on information available at the lease commencement date. The discount rate used was 5.5%.

 

The table below summarizes the right-of-use asset and lease liability for the period ended March 31, 2022:

 

    March 31, 2022     December 31, 2021  
Right of Use Assets                
Balance, January 1   $ 217,267     $ 483,113  
Depreciation     (13,546 )     (265,846 )
Balance, end of period   $ 203,721     $ 217,267  
                 
Lease Liability                
Balance, January 1   $ 217,267     $ 483,113  
Lease interest expense     2,539       22,057  
Payments     (16,085 )     (287,903 )
Balance, end of period   $ 203,721     $ 217,267  
                 
Short-term portion   $ 57,045     $ 77,715  
Long-term portion     146,676       139,552  
Total   $ 203,721     $ 217,267  

 

Undiscounted rent payments for the next four years are as follows:

 

         
2022   $ 42,525  
2023     58,080  
2024     59,520  
2025     61,020  
Total   $ 221,145  
Impact of discounting     (17,424 )
Lease liability, March 31, 2022   $ 203,721  

 

4. Accounts Receivable

ACCOUNTS RECEIVABLE

 

    March 31, 2022     December 31, 2021  
             
Accounts receivable   $ 10,217,709     $ 7,403,308  
Allowances for doubtful accounts     (274,561 )     (273,979 )
Total accounts receivable   $ 9,943,148     $ 7,129,329  

 

14
 

 

5. Inventories

 

 

    March 31, 2022     December 31, 2021  
             
Completed goods   $ 3,816,366     $ 3,417,829  
Raw materials and supplies     8,398,285       6,084,176  
 Total inventory    $ 12,214,651     $ 9,502,005  

 

6. Property, equipment & leaseholds

PROPERTY, EQUIPMENT & LEASEHOLDS

 

    March 31, 2022     Accumulated     March 31, 2022  
    Cost     Depreciation     Net  
Buildings and improvements   $ 4,870,778     $ 3,018,920     $ 1,851,858  
Automobiles     196,255       80,207       116,048  
Computer hardware     43,644       42,571       1,073  
Furniture and fixtures     130,714       108,421       22,293  
Office equipment     1,899       1,208       691  
Manufacturing equipment     6,999,195       4,314,689       2,684,506  
Trailer     9,601       7,788       1,813  
Boat     34,400       26,690       7,710  
Leasehold improvements     88,872       88,872        
Technology     109,370       109,370        
Land     234,027             234,027  
    $ 12,718,755     $ 7,798,736     $ 4,920,019  

 

    December 31, 2021     Accumulated     December 31, 2021  
    Cost     Depreciation     Net  
Buildings and improvements   $ 4,823,708     $ 2,983,589     $ 1,840,119  
Automobiles     196,255       71,258       124,997  
Computer hardware     43,605       42,456       1,149  
Furniture and fixtures     130,658       106,101       24,557  
Office equipment     1,872       1,155       717  
Manufacturing equipment     6,867,799       4,171,699       2,696,100  
Trailer     9,463       7,532       1,931  
Boat     34,400       26,284       8,116  
Leasehold improvements     88,872       88,872        
Technology     107,759       107,759        
Land     234,027             234,027  
    $ 12,538,418     $ 7,606,705     $ 4,931,713  

 

Amount of depreciation expense for the three months ended March 31, 2022: $188,378 (2021: $184,855) and is included in cost of sales in the unaudited interim condensed consolidated statements of income and comprehensive income.

 

15
 

 

7. Patents

 

In fiscal 2005, the Company started the patent process for additional WATER$AVR® products. Patents associated with these costs were granted in 2006 and they have been amortized over their legal life of 17 years.

 

   

March 31, 2022

Cost

    Accumulated
Amortization
   

March 31, 2022

Net

 
Patents   $ 212,161     $ 202,572     $ 9,589  

 

   

December 31,

2021 Cost

    Accumulated
Amortization
   

December 31,

2021 Net

 
Patents   $ 208,079     $ 194,380     $ 13,699  

 

The increase in the carrying amount of patents is primarily due to foreign currency translation effects. The 2022 cost in Canadian dollars - $265,102 (December 31, 2021 - $265,102 in Canadian dollars).

 

Amount of amortization for 2022 - $4,110 (2021 - $4,110) and is included in cost of sales in the consolidated statements of income and comprehensive income.

 

Estimated amortization expense over this year is as follows:

 

2022     13,699  

 

8. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill        
Balance as of December 31, 2020   $ 2,534,275  
Additions     -  
Impairment     -  
Amortization     (176,000 )
Balance as of December 31, 2021 and March 31, 2022   $ 2,534,275  
Indefinite Lived Intangible Assets        
Balance as of December 31, 2020   $ 770,000  
Additions     -  
Impairment     -  
Amortization     (40,000 )
Balance as of December 31, 2021 and March 31, 2022   $ 770,000  

 

Goodwill relates to the acquisition of ENP Investments. Indefinite lived intangible assets consist of trade secrets and trademarks related to the acquisition of ENP Investments.

 

Definite Life Intangible Assets      
Balance as of December 31, 2020   $ 2,006,000  
Amortization     (176,000 )
Balance as of December 31, 2021     1,830,000  
Amortization     (40,000 )
Balance as of March 31, 2022   $ 1,790,000  

 

Definite life intangible assets consist of customer relationships and software related to the acquisition of ENP Investments. Customer relationships and software are amortized over their estimated useful life of 15 years and 3 years, respectively.

 

Estimated amortization expense over the next five years is as follows:

 

2022   $ 160,000  
2023     160,000  
2024     160,000  
2025     160,000  
2026     160,000  

 

16
 

 

9. Long Term Deposits

The Company has reclassified certain security deposits to better reflect their long term nature. Long term deposits consist of damage deposits held by landlords and security deposits held by various vendors.

 

      March 31, 2022       December 31, 2021  
                 
Long term deposits   $ 8,540     $  8,540  

 

10. Investments

 

(a) The Company has a 50% ownership interest in ENP Peru Investments LLC (“ENP Peru”). 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, 2020   $ 3,822  
Return of equity     (3,822 )
Gain in equity method investment     22,642  
Balance, December 31, 2021     22,642  
Return of equity     (7,500 )
Balance, March 31, 2022   $ 15,142  

 

Summarized profit and loss information related to the equity accounted investment is as follows for the full year:

 

    2021  
       
Net sales   $ 322,079  
Net income   $ 45,285  

 

(b) In December 2018 the Company invested $200,000 in Applied Holding Corp. (“Applied”). Applied is a captive insurance company and the Company received a non-convertible promissory note for its investment which becomes due in 2021 but may be extended with notice for a maximum of two years. In accordance with FASB Codification Topic 323, Investments – Equity Method and Joint Ventures (ASC 323), the Company has elected to account for this investment at cost. During the year ended December 31, 2021, the Company entered an agreement with Applied to extend the maturity date of this promissory note to December 6, 2023.

 

(c) 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 FASB Codification Topic 321, Investments – Equity Securities (ASC 321), the Company has elected to account for this investment at cost.

 

(d) 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 Florida based LLC but does not have control. A summary of the Company’s investment follows:

 

Balance, December 31, 2020   $ 3,572,345  
Gain in equity method investment     454,023  
Return of equity     (325,000 )
Balance, December 31, 2021     3,701,368  
Gain in equity method investment     36,764  
Balance, March 31, 2022   $ 3,738,132  

 

17
 

 

Further to the original investment amount, the Company had placed $1,000,000 in trust, which was released during the year ended December 31, 2020 upon the Florida based LLC reaching a milestone related to earnings before interest, taxes and depreciation (“EBITDA”) targets. The additional payments of $2,518,684 made during the year ended December 31, 2020 related to contingent consideration which was dependent on the Florida based LLC meeting certain performance millstones during the year. Summarized profit and loss information related to the equity accounted investment is as follows:

 SUMMARY OF PROFIT AND LOSS INFORMATION RELATED TO EQUITY ACCOUNTED INVESTMENT

    Three months
ended
March 31, 2022
    Three months
ended
March 31, 2021
 
             
Net sales   $ 2,201,518     $ 2,332,304  
Gross profit     512,884       860,676  
Net income     73,528       400,580  

 

During the three months ended March 31, 2022, the Company had sales of $1,672,200 (2021 - $1,434,684) to the Florida Based LLC, of which $1,419,306 is included within Accounts Receivable as at March 31, 2022 (December 31, 2021 -2020 - $2,202,345).

 

(e) In December 2020, the Company invested $500,000 in Lygos Inc. (“Lygo’s”), a privately held entity, under a Simple Agreement for Future Equity agreement. Both companies intend to work together in pursuit of sustainable aspartic acid through synthetic biology (Note 18). In 2021, a second investment of $500,000 was in order to continue development of the aspartic acid microbe strain. The Company has elected to account for this investment at cost. A summary of the Company’s investment follows:

 

Balance, December 31, 2020   $ 500,000  
Additional payment     500,000  
Balance, December 31, 2021 and March 31, 2022   $ 1,000,000  

 

11. Short-Term Line of Credit

(a) In March 2022, ENP Investments signed a new agreement with Midland to renew the credit line. The revolving line of credit is for an aggregate amount up to $4,000,000. 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 1.000 percentage points over the Index. Under no circumstances will the interest rate of this loan be less than 4.25% per annum or more than the maximum rate allowed by applicable law. The interest rate at March 31, 2022 is 4.50% (December 31, 2021 - 4.25%).

 

The revolving line of credit contains customary affirmative and negative covenants, including the following: compliance with laws, provisions of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance of operating accounts at Midland, Midland’s access to collateral, formation or acquisition of subsidiaries, incurrence of indebtedness, dispositions of assets, granting liens, changes in business, ownership or business locations, engaging in mergers and acquisitions, making investments or distributions and affiliate transactions. NanoChem is a guarantor of 65% of all the principal and other loan costs not to exceed $2,600,000. As of March 31, 2022, ENP Investments was in compliance with all loan covenants.

 

To secure the repayment of any amounts borrowed under the revolving line of credit, ENP Investments granted Midland a security interest in all inventory, equipment and fixtures and acknowledges a separate commercial security agreement from guarantor to Midland dated February 15, 2011.

 

Short-term borrowings outstanding under the revolving line as of March 31, 2022 were $3,459,391 (December 31, 2021 - $811,665).

 

18
 

 

(b) In October 2021, the Company signed a new agreement with Midland to replace the expiring credit line at Harris. The revolving line of credit is for an aggregate amount of up to the lesser of (i) $3,500,000, or (ii) 80% of eligible domestic accounts receivable and certain foreign accounts receivable plus 50% of inventory. Interest on the unpaid principal balance of this loan will be calculated using a rate of 0.500 percentage points over the Index. Under no circumstances will the interest rate of this loan be less than 4.50% per annum or more than the maximum rate allowed by applicable law. The interest rate at March 31, 2022 is 4.50% (December 31, 2021 - 4.50%).

 

The revolving line of credit contains customary affirmative and negative covenants, including the following: compliance with laws, provision of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance of operating accounts at Midland, Midland’s access to collateral, formation or acquisition of subsidiaries, incurrence of indebtedness, dispositions of assets, granting liens, changes in business, ownership or business locations, engaging in mergers and acquisitions, making investments or distributions and affiliate transactions. The covenants also require that the Company maintain a minimum ratio of qualifying financial assets to the sum of qualifying financial obligations. As of March 31, 2022, Company was in compliance with all loan covenants.

 

To secure the repayment of any amounts borrowed under the revolving line of credit, the Company granted Midland a security interest in substantially all of the assets of NanoChem, exclusive of intellectual property assets.

 

Short-term borrowings outstanding under the revolving line as of March 31, 2022 were $1,489,154 (December 31, 2021 - $1,489,154).

 

12. Long Term Debt

(a) In January 2018, ENP Investments signed a $200,000 promissory note with Midland 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 and interest for the three months ended March 31, 2021 was $1,510. In May 2021, ENP Investments paid the loan in full with cash on hand.

 

(b) In April 2020, NanoChem received a two year loan of $322,000 through the Paycheck Protection Program with a rate of 1%. In March, 2021, the loan was forgiven by the SBA and has been recorded as Other Income of the condensed interim consolidated statements of operations and comprehensive income for the three month period ended March 31, 2021.

 

(c) In April 2020, ENP Investments received a two year loan of $215,960 through the Paycheck Protection Program with a rate of 1%. In March, 2021, the loan was forgiven by the SBA and has been recorded as Other Income of the condensed interim consolidated statements of operations and comprehensive income for the three month period ended March 31, 2021.

 

(d) In October 2020, NanoChem signed a $1,980,947 term loan with Midland with a rate of 3.85% to be repaid over 5 years with equal monthly payments including interest. The money was used to retire the debt at Harris related to the loan to purchase a 65% interest in ENP Investments. Interest expense for the three months ended March 31, 2022 was $15,130 (2021 - $18,606). The balance owing at March 31, 2022 is $1,459,983 (December 31, 2021 - $1,554,044).

 

The Company has committed to the following repayments:

 

2022   $ 382,705  
2023   $ 397,414  
2024   $ 413,516  
2025   $ 360,409  

 

(e) In October 2020, NanoChem signed a loan for $894,253 with Midland with an interest rate 3.85% to be repaid over two years with equal monthly payments including interest. The funds were used to replace the loan at Harris for the purchase of new manufacturing equipment. Interest expense for the three months ended March 31, 2022 was $3,417 (2021 - $7,739) The balance owing at March 31, 2022 is $268,708 (December 31, 2021 - $381,674).

 

19
 

 

The Company has committed to the following repayments:

 

2022   $ 381,674  

 

(f) In January 2020, ENP Realty refinanced its mortgage and signed a loan for $450,000 with Stock Yards Bank & Trust to be repaid over 10 years with monthly installments plus interest. Interest for the first five years is at 4.35% and it will be adjusted for the last five years to the Cincinnati Federal Home Bank Loan 5 year fixed index plus 2.5%. Interest expense for the three months ended March 31, 2022 was $4,677 (2021 - $4,766). The balance owing at March 31, 2022 is $428,278 (December 31, 2021 - $430,779).

 

The Company has committed to the following repayments:

         
2023   $ 29,749  
2024   $ 29,749  
2025   $ 29,749  

 

As of March 31, 2022, Company was in compliance with all loan covenants.

 

Continuity   March 31, 2022     December 31, 2021  
Balance, January 1   $ 2,366,598     $ 3,847,638  
Less: Forgiveness on PPP loans     -       (537,960 )
Less: Payments on loan     (206,629 )     (943,080 )
Balance, end of period   $ 2,156,969     $ 2,366,598  

 

Outstanding balance   March 31, 2022     December 31, 2021  
a) Long term debt – Midland States Bank   $ -       -  
b) Long term debt – PPP     -       -  
c) Long term debt – PPP     -       -  
d) Long term debt – Midland States Bank     1,459,983       1,554,044  
e) Long term debt – Midland States Bank     268,708       381,674  
f) Long term debt – Stock Yards Bank & Trust     428,278       430,880  
Long-term Debt     2,156,969       2,366,598  
Less: current portion     (665,614 )     (793,574 )
    $ 1,491,355     $ 1,573,024  

 

13. 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.

 

20
 

 

The following table summarizes the Company’s stock option activities for the year ended December 31, 2021 and the three-month period ended March 31, 2022:

 

    Number of
shares
    Exercise price
per share
    Weighted
average exercise
price
 
                   
Balance, December 31, 2020     749,000     $ 0.754.13     $ 2.42  
Granted     170,000     $ 3.61     $ 3.61  
Cancelled or expired     (34,799 )   $ 1.423.46     $ 2.30  
Exercised     (94,701 )   $ 0.753.46     $ 1.58  
Balance, December 31, 2021     789,500     $ 1.424.13     $ 2.78  
Granted     5,000     $ 3.61     $ 3.61  
Cancelled or expired     (3,000 )   $ 3.61     $ 3.61  
Exercised     (22,500 )   $ 2.443.46     $ 2.53  
Balance, March 31, 2022     769,000     $ 1.424.13     $ 2.82  
Exercisable, March 31, 2022     539,000     $ 1.424.13     $ 2.69  

 

The weighted average remaining contractual life of options outstanding is 3.6 years.

 

The fair value of each option grant is calculated using the following weighted average assumptions:

    2022     2021  
Expected life – years     3.0       3.0  
Interest rate     1.76 %     1.23 %
Volatility     69.66 %     63.28 %
Weighted average fair value of options granted   $ 1.46     $ 1.54  

 

During the three months ended March 31, 2022 and 2021, the Company did not grant any new options to consultants. Options granted in previous quarters resulted in expenses in the amount of $15,794 for consultants (2021 - $13,065). During the three months ended March 31, 2022, employees were granted 5,000 (2021 – nil) stock options, which resulted in expenses of $1,825 (2021 – $nil). Options granted in previous quarters resulted in additional expenses in the amount of $36,652 for employees during the three months ended March 31, 2022 (2021 - $26,524). There were 22,500 employee and nil consultant stock options exercised during the three months ended March 31, 2022 (2021 – 32,000 employee; 23,201 consultant).

 

As of March 31, 2022, there was approximately $129,991 of compensation expense related to non-vested awards. This expense is expected to be recognized over a weighted average period of 1 year.

 

The aggregate intrinsic value of vested options outstanding at March 31, 2022 is $578,660 (2021– $nil).

 

14. Capital Stock.

During the three months ended March 31, 2022, 22,500 shares were issued upon the exercise of employee stock options (2021 – 32,000).

 

15. Non-Controlling Interests

ENP Investments is a limited liability corporation (LLC) that manufactures and distributes golf, turf and ornamental agriculture products in Mendota, Illinois. The Company owns a 65% interest in ENP Investments through its wholly-owned subsidiary NanoChem. An unrelated party owns the remaining 35% interest in ENP Investments. As of December 31, 2020, ENP Realty is a wholly owned subsidiary of ENP Investments. ENP Realty leases warehouse space. For financial reporting purposes, the assets, liabilities and earnings of both of the LLC’s 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. ENP Investments is allocated to the BCPA segment.

 

21
 

 

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 $2,082,947.

 

Balance, December 31, 2020   $ 2,561,751  
Distribution     (804,003 )
Non-controlling interest share of income     845,095  
Balance, December 31, 2021     2,602,843  
Distribution     (265,922 )
Non-controlling interest share of income     144,477  
Balance, March 31, 2022   $ 2,481,398  

 

During the three months ended March 31, 2022, the Company had sales of $1,605,736 (2021 - $998,336) to the party that holds 35% interest in ENP Investments, of which $3,560,534 is included within Accounts Receivable as of March 31, 2022 (December 31, 2021 – $2,215,119).

 

16. 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 blankets which saves energy and water by inhibiting evaporation from the pool surface, and (ii) food-safe powdered form of the active ingredient within the liquid blankets and which are designed to be used in still or slow moving drinking water sources.

 

(b) Biodegradable polymers (“BCPA’s”), also known as TPA’s, used by the petroleum, chemical, utility and mining industries to prevent corrosion and scaling in water piping. This product can also be used in detergents to increase biodegradability and in agriculture to increase crop yields by enhancing fertilizer uptake.

 

The accounting policies of the segments are the same as those described in Note 2, Significant Accounting Policies. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses.

 

The Company’s reportable segments are strategic business units that offer different, but synergistic products and services. They are managed separately because each business requires different technology and marketing strategies.

 

Three months ended March 31, 2022:                  
                   
    EWCP     TPA     Total  
Revenue   $ 47,253     $ 10,736,027     $ 10,783,280  
Interest expense     -       57,618       57,618  
Depreciation and amortization     9,244       223,244       232,488  
Income tax expense     -       712,446       712,446  
Segment profit (loss)     (124,175 )     1,657,234       1,533,059  
Segment assets     1,879,593       43,237,198       45,116,791  
Expenditures for segment assets     -       (176,684 )     (176,684 )

 

Three months ended March 31, 2021:                  
                   
    EWCP     TPA     Total  
Revenue   $ 71,351     $ 7,553,346     $ 7,624,697  
Interest expense     -       62,274       62,274  
Depreciation and amortization     9,977       222,988       232,965  
Income tax expense     -       485,456       485,456  
Segment profit (loss)     (219,256 )     1,669,827       1,450,571  
Segment assets     2,360,199       34,299,895       36,660,094  
Expenditures for segment assets     -       (96,136 )     (96,136 )

 

22
 

 

The sales generated in the United States and Canada are as follows:

 

    Three months
ended
March 31, 2022
    Three months
ended
March 31, 2021
 
Canada   $ 177,899     $ 107,253  
United States and abroad     10,605,381       7,517,444  
Total   $ 10,783,280     $ 7,624,697  

 

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:

 

    March 31, 2022     December 31, 2021  
Canada   $ 185,036     $ 191,752  
United States     10,042,568       10,105,202  
Total   $ 10,227,604     $ 10,296,954  

 

Three primary customers accounted for $6,235,661 (58%) of sales during the three-month period ended March 31, 2022 (2021 - $3,120,819 or 41%).

 

17. Comparative Figures.

 

Certain of the comparative figures have been reclassified to conform with the current period’s presentation.

 

18. Subsequent Events

 

On April 17, 2022, the Company entered into an Agreement and Plan of Merger with Lygos (Note 10 (e)). Pursuant to the Merger Agreement, Lygos will become a wholly owned subsidiary of the Company.

 

At the effective time of the Merger (i) each outstanding share of Lygos capital stock will be converted into the right to receive a number of common shares of the Company equal to the Exchange Ratio; and (ii) each Lygos option that is outstanding and unexercised immediately prior to the closing of the Merger Agreement (whether vested or unvested) will automatically be assumed by the Company and converted into an option to acquire a number of the Company’s common shares at an adjusted exercise price per share. The number of shares to be acquired upon the exercise of the options will be determined by multiplying the number of Lygos shares issuable upon the exercise of the options by the Exchange Ratio.

 

The “Exchange Ratio” will equal the total number of the Company’s common shares on a fully diluted basis outstanding as of the end of the last trading day before the closing of the Merger Agreement multiplied by two and then divided by the total number of shares of Lygos capital stock on fully diluted basis outstanding as of the same time.

 

The closing of the Merger Agreement is subject to satisfaction or waiver of certain conditions including, among other things, the required approvals by the shareholders of the Company and Lygos.

 

In connection with the transactions contemplated by the Merger Agreement, and contingent upon the closing of the Merger (the actual date of closing, the “Closing Date”), the Company and Mr. O’Brien entered into an Employment Agreement. Under the terms of the Employment Agreement, Mr. O’Brien will be employed as the Company’s Head-Flexible Solutions Division and will receive an annual base salary of $500,000, which will be increased each year during the Term (as defined below) based on annual increases in the Consumer Price Index. Also immediately after the Closing Date, the Company will purchase 1,000,000 shares of the Company’s common stock owned by Mr. O’Brien at a price of $7.50 per share. Additionally, on the Closing Date, Mr. O’Brien will receive an option to purchase 500,000 shares of the Company’s common stock. The Option will vest and become exercisable on the twelve-month anniversary of the grant date; provided, however, the vesting will accelerate upon Mr. O’Brien’s termination of employment for any reason. While Mr. O’Brien’s Option will be granted with an exercise price equal to the fair market value per share on the date of grant, in the event the Company grants any options during the twelve-month period following the Option grant with an exercise price that is lower than the exercise price set for the Option, the Company will reprice the Option down to such lower exercise price; provided, however, the exercise price per share will in no event be lower than the fair market value per share on the date the Option is granted or, if applicable, the date the Option is subsequently repriced. Moreover, on each of the 20- and 30-month anniversaries of the Closing Date, the Company will issue Mr. O’Brien 1,000,000 shares of the Company’s common stock as a fully vested stock grant, regardless of his employment status at such time. The term of the Employment Agreement will begin on the Closing Date of the Merger and continue for a period of five years (the “Term”) or until earlier terminated by either the Company or Mr. O’Brien as provided in the Employment Agreement.

 

23
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

The Company manufactures and markets biodegradable polymers which are used in the oil, gas and agriculture industries. The Company also develops, manufactures and markets specialty chemicals that slow the evaporation of water.

 

Results of Operations

 

The Company has two product lines:

 

The first is a chemical (“EWCP”) used in swimming pools and spas. The product forms a thin, transparent layer on the water’s surface. The transparent layer slows the evaporation of water, allowing the water to retain a higher temperature for a longer period of time thereby reducing the energy required to maintain the desired temperature of the water. A modified version of EWCP can also be used in reservoirs, potable water storage tanks, livestock watering pods, canals, and irrigation ditches for the purpose of reducing evaporation.

 

The second product, biodegradable polymers (“TPAs”), is used by the petroleum, chemical, utility and mining industries to prevent corrosion and scaling in water piping. TPAs can also be used to increase biodegradability in detergents and in the agriculture industry to increase crop yields by enhancing fertilizer uptake.

 

The third product line is nitrogen conservation products used for the agriculture industry. These products decrease the loss of nitrogen fertilizer after initial application and allows less fertilizer to be used. These products are made and sold by the Company’s TPA division.

 

Material changes in the Company’s Statement of Operations for the three months ended March 31, 2022 compared to the same period in the prior year are discussed below:

 

Item   Increase (I) or Decrease (D)   Reason
         
Sales        
         
EWCP products   D   Decreased customer orders.
         
TPA products   I   Increased customer orders along with increase in pricing.
         
Insurance   I   Increase in assets and in sales resulted in higher insurance costs.
         
Interest expense   D   Decreased debt resulted in decreased interest expense.
         
Lease expense   D   The purchase of ENP Realty by ENP Investments reduced lease expense.
         
Travel   I   Travel has resumed as COVID-19 has become an endemic.
         
Currency exchange   I   Currency exchange increased as a result of movements in the US / Canadian dollar exchange rate and its effects on US dollar cash balances and US dollar payables held by the Company’s Canadian subsidiaries.

 

24
 

 

Three primary customers accounted for 58% of the Company’s sales during the three months ended March 31, 2022 (2021 - 41%). The amount of revenue (all from the sale of TPA products) attributable to each customer is shown below.

 

    Three Months Ended March 31,  
    2022     2021  
             
Company A   $ 1,605,736     $ 998,336  
Company B   $ 1,672,200     $ 1,434,684  
Company C   $ 2,957,725     $ 687,800  

 

Customers with balances greater than 10% of our receivables as of March 31, 2022 and 2021 are shown below:

 

    March 31,  
    2022     2021  
             
Company A   $ 3,560,534     $ 2,577,497  
Company B   $ 1,419,306     $ 1,138,276  
Company C   $ 1,387,463     $ 419,007 *

 

*less than 10%

 

The factors that will most significantly affect future operating results will be:

 

  the sale price of crude oil which is used in the manufacture of aspartic acid we import from China. Aspartic acid is a key ingredient in our TPA product;
  activity in the oil and gas industry, as we sell our TPA product to oil and gas companies;
  drought conditions, since we also sell our TPA product to farmers, and
  the impact of the COVID-19 virus.

 

Other than the foregoing we do not know of any trends, events or uncertainties that have had, or are reasonably expected to have, a material impact on our revenues or expenses.

 

Capital Resources and Liquidity

 

The Company’s sources and (uses) of cash for the three months ended March 31, 2022 and 2021 are shown below:

 

    2022     2021  
             
Cash used by operations     (2,425,008 )     (2,356,767 )
Proceeds of equity investment distributions     7,500       12,500  
Acquisition of equipment     (176,684 )     (96,136 )
Borrowings from line of credit     2,647,726       1,112,361  
Repayment of loans     (209,629 )     (208,857 )
Lease financing costs     (16,085 )     (83,070 )
Partnership distributions     (265,922 )     (157,952 )
Proceeds from sale of common stock     56,940       76,360  
Changes in exchange rates     42,543       82,352  

 

The Company has sufficient cash resources to meets its future commitments and cash flow requirements for the coming year. As of March 31, 2022, working capital was $15,516,922 (December 31, 2021 - $13,986,013).

 

We are committed to minimum rental payments for property and premises aggregating approximately $297,720 over the term of two leases, the last expiring on December 31, 2025.

 

25
 

 

Commitments for rent in the next five years are as follows:

 

2022   $ 78,240  
2023   $ 77,100  
2024   $ 70,440  
2025   $ 71,940  

 

Other than as disclosed above, we do not anticipate any material capital requirements for the twelve months ending December 31, 2022.

 

Other than as disclosed above, we do not know of any trends, demands, commitments, events or uncertainties that will result in, or that are reasonable likely to result in, our liquidity increasing or decreasing in any material way.

 

Other than as disclosed above, we do not know of any significant changes in our expected sources and uses of cash.

 

We do not have any commitments or arrangements from any person to provide us with any equity capital.

 

See Note 2 to the consolidated financial statements included as part of this report for a description of our significant accounting policies.

 

Item 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the direction and with the participation of our management, including our Principal Executive and Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2022. 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 March 31, 2022.

 

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 March 31, 2022. 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 March 31, 2022 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II

 

Item 6. Exhibits.

 

Number   Description
3.1   Articles of Continuance (Articles of Incorporation)
3.2   Bylaws (1)
31.1   Certification of Principal Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*
31.2   Certification of Principal Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*
32.1   Certification of Principal Executive and Financial Officer Pursuant to 18 U.S.C. §1350 and §906 of the Sarbanes-Oxley Act of 2002.*
101.INS   Inline XBRL Instance Document
     
101.SCH   Inline XBRL Taxonomy Extension Schema Document
     
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
     
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* Filed with this report.

 

(1) Incorporated by reference to the Company’s 8-K report filed on April 12, 2022.

 

26
 

 

SIGNATURES

 

In accordance with the requirements the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

May 16, 2022

 

  Flexible Solutions International, Inc.
   
  By: /s/ Daniel B. O’Brien
  Name: Daniel B. O’Brien
  Title: President and Principal Executive Officer
     
  By: /s/ Daniel B. O’Brien
  Name: Daniel B. O’Brien
  Title: Principal Financial and Accounting Officer

 

27

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