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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 September 30, 2023

 

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 registrant 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 Principal Executive Offices)   (Zip Code)

 

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

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   FSI   NYSE American

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 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 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   12,435,532   November 14, 2023

 

 

 

 
 

 

FORM 10-Q

 

Index

 

PART I. FINANCIAL INFORMATION 3
       
Item 1. Financial Statements. 3
       
  (a) Unaudited Condensed Interim Consolidated Balance Sheets at September 30, 2023 and December 31, 2022. 3
       
  (b) Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended September 30, 2023 and 2022. 4
       
  (c) Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income for the Nine Months Ended September 30, 2023 and 2022. 5
       
  (d) Unaudited Condensed Interim Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022. 6
       
  (e) Unaudited Condensed Interim Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022. 7
       
  (e) Notes to Unaudited Condensed Interim Consolidated Financial Statements for the Period Ended September 30, 2023. 9
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation. 26
       
Item 4. Controls and Procedures. 29
       
PART II. OTHER INFORMATION 30
       
Item 6. Exhibits. 30
       
SIGNATURES 31

 

1
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.

 

2
 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS

(U.S. Dollars)

 

   September 30,
2023
   December 31,
2022
 
   (Unaudited)     
Assets          
Current          
Cash and cash equivalents  $8,943,972   $6,115,099 
Term deposits   1,010,241    700,000 
Accounts receivable, net (Note 4)   6,914,321    9,449,857 
Inventories (Note 5)   9,440,152    14,419,430 
Prepaid expenses   1,940,601    310,297 
Total current assets   28,249,287    30,994,683 
Property, equipment and leaseholds, net (Note 6)   12,940,325    9,709,288 
Right of use assets (Note 3)   128,484    167,222 
Intangible assets (Note 8)   2,320,000    2,440,000 
Long term deposits (Note 9)   396,154    8,540 
Investments (Note 10)   6,251,818    5,458,895 
Goodwill (Note 8)   2,534,275    2,534,275 
Deferred tax asset   274,289    274,289 
Total Assets  $53,094,632   $51,587,192 
           
Liabilities          
Current          
Accounts payable  $2,048,419   $873,904 
Accrued liabilities   811,180    959,856 
Deferred revenue   18,220    387,763 
Income taxes payable   5,240,892    4,486,350 
Short term line of credit (Note 11)   -    2,818,591 
Current portion of lease liability (Note 3)   59,160    58,080 
Current portion of long term debt (Note 12)   830,760    717,612 
Total current liabilities   9,008,631    10,302,156 
Lease liability (Note 3)   69,324    109,142 
Deferred income tax liability   500,459    500,459 
Long term debt (Note 12)   7,029,461    5,436,465 
Total Liabilities   16,607,875    16,348,222 
           
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:          
12,435,532 (December 31, 2022: 12,426,260) common shares   12,436    12,426 
           
Capital in excess of par value   18,079,409    17,523,345 
Other comprehensive loss   (605,465)   (805,799)
Accumulated earnings   16,253,260    15,903,964 
Total stockholders’ equity – controlling interest   33,739,640    32,633,936 
Non-controlling interests (Note 15)   2,747,117    2,605,034 
Total Stockholders’ Equity   36,486,757    35,238,970 
Total Liabilities and Stockholders’ Equity  $53,094,632   $51,587,192 

 

— See Notes to Unaudited Condensed Interim Consolidated Financial Statements —

 

3
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(U.S. Dollars — Unaudited)

 

    2023    2022 
   Three Months Ended September 30, 
   2023   2022 
Sales  $8,720,621   $11,685,107 
Cost of sales   7,248,266    8,502,551 
Gross profit   1,472,355    3,182,556 
           
Operating Expenses          
Wages   545,255    587,935 
Administrative salaries and benefits   392,051    220,406 
Insurance   218,723    185,371 
Office and miscellaneous   181,349    111,832 
Interest expense   119,599    80,609 
Professional fees   97,057    131,602 
Travel   60,796    27,659 
Consulting   57,941    85,477 
Research   52,834    19,088 
Advertising and promotion   50,909    32,705 
Lease expense   28,775    30,284 
Investor relations and transfer agent fee   26,626    34,440 
Telecommunications   15,640    10,879 
Utilities   12,249    5,451 
Shipping   6,032    6,042 
Currency exchange   (6,808)   (20,983)
Commissions   -    529 
Total operating expenses   1,859,028    1,549,326 
           
Operating income (loss)   (386,673)   1,633,230 
           
Gain (loss) on investment   97,254    (451)
Interest income   5,380    37,213 
Income (loss) before income tax   (284,039)   1,669,992 
           
Income taxes          
Income tax expense   (219,712)   (349,181)
Net income (loss) for the period including non-controlling interests   (503,751)   1,320,811 
Less: Net income attributable to non-controlling interests   (214,410)   (212,680)
Net income (loss) attributable to controlling interest  $(718,161)  $1,108,131 
Income (loss) per share (basic and diluted)  $(0.06)  $0.09 
           
Weighted average number of common shares (basic)   12,435,532    12,384,746 
Weighted average number of common shares (diluted)   12,496,748    12,417,026 
Other comprehensive income (loss):          
Net income (loss)   (503,751)   1,320,811 
Unrealized income (loss) on foreign currency translations   140,928    (70,167)
Total comprehensive income (loss)  $(362,823)  $1,250,644 
Comprehensive income – non-controlling interest   (214,410)   (212,680)
Comprehensive income (loss) attributable to Flexible Solutions International Inc.  $(577,233)  $1,037,964 

 

— See Notes to Unaudited Condensed Interim Consolidated Financial Statements —

 

4
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(U.S. Dollars — Unaudited)

 

    2023    2022 
   Nine Months Ended September 30, 
   2023   2022 
Sales  $28,899,429   $33,633,530 
Cost of sales   21,303,229    22,777,467 
Gross profit   7,596,200    10,856,063 
           
Operating Expenses          
Wages   2,004,568    1,890,727 
Administrative salaries and benefits   1,179,370    681,017 
Insurance   648,698    508,056 
Interest expense   369,967    190,366 
Office and miscellaneous   355,139    271,144 
Professional fees   239,356    597,505 
Consulting   190,171    248,168 
Travel   187,060    120,185 
Advertising and promotion   161,318    124,910 
Investor relations and transfer agent fee   149,511    100,317 
Research   90,169    63,345 
Lease expense   81,715    124,123 
Telecommunications   38,650    31,438 
Utilities   25,223    20,635 
Shipping   15,798    18,943 
Currency exchange   9,693    (9,351)
Commissions   2,985    61,459 
Total operating expenses   5,749,391    5,042,987 
           
Operating income   1,846,809    5,813,076 
Gain on acquisition of ENP Peru   -    335,051 
Gain on investment   423,957    213,865 
Interest income   58,565    69,354 
Income before income tax   2,329,331    6,431,346 
           
Income taxes          
Income tax expense   (873,861)   (1,604,429)
Net income for the period including non-controlling interests   1,455,470    4,826,917 
Less: Net income attributable to non-controlling interests   (479,397)   (523,272)
Net income attributable to controlling interest  $976,073   $4,303,645 
Income per share (basic)  $0.08   $0.35 
Income per share (diluted)  $0.08   $0.34 
Weighted average number of common shares (basic)   12,434,669    12,376,818 
Weighted average number of common shares (diluted)   12,517,064    12,479,769 
Other comprehensive income:          
Net income   1,455,470    4,826,917 
Unrealized gain (loss) on foreign currency translations   200,334    (29,531)
Total comprehensive income  $1,655,804   $4,797,386 
Comprehensive income – non-controlling interest   (479,397)   (523,272)
Comprehensive income attributable to Flexible Solutions International Inc.  $1,176,407   $4,274,114 

 

— See Notes to Unaudited Condensed Interim Consolidated Financial Statements —

 

5
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. Dollars — Unaudited)

 

    2023    2022 
   Nine Months Ended September 30, 
   2023   2022 
         
Operating activities          
Net income for the period including non-controlling interests  $1,455,470   $4,826,917 
Adjustments to reconcile net income to net cash:          
Stock based compensation   542,474    164,659 
Depreciation and amortization   1,215,171    811,877 
Lease right of use depreciation   38,738    37,748 
Lease right of use financing   4,822    6,687 
Gain on investment   (423,957)   (213,865)
Gain on ENP Peru   -    (335,051)
           
Changes in non-cash working capital items:          
(Increase) decrease in accounts receivable   2,535,536    (2,638,030)
(Increase) decrease in inventory   4,520,141    (4,780,381)
Increase in prepaid expenses   (1,630,304)   (50,749)
Increase (decrease) in accounts payable and accrued liabilities   1,484,976   (22,484)
Increase in income taxes payable   754,542    1,604,429 
Increase (decrease) in deferred revenue   (369,543)   (70,295)
           
Cash provided by (used in) operating activities   10,128,066    (658,538)
           
Investing activities          
Non-controlling interest of 317 Mendota   200,000    - 
Long term deposits   (387,614)   - 
Additional investment in Trio   (470,000)   - 
Proceeds of equity investment   101,034    108,750 
Net purchase of property, equipment and leaseholds   (4,326,208)   (647,232)
Acquisition of ENP Peru   -    (499,329)
           
Cash used in investing activities   (4,882,788)   (1,037,811)
           
Financing activities          
Repayment of short term line of credit   (2,818,591)   (276,079)
Repayment of long term debt   (542,148)   (2,117,928)
Loan proceeds received   2,248,292    2,194,000 
Dividends paid   (626,777)   - 
Lease payments   (43,560)   (44,435)
Distributions to non-controlling interests   (537,314)   (499,789)
Proceeds from issuance of common stock   13,600    74,020 
           
Cash used in financing activities   (2,306,498)   (670,211)
           
Effect of exchange rate changes on cash   200,334    (29,531)
           
Inflow (outflow) of cash   3,139,114    (2,396,091)
Cash and cash equivalents, beginning   6,815,099    6,735,574 
           
Cash and cash equivalents, ending  $9,954,213   $4,339,483 
           
Cash and cash equivalents consists of:          
Cash  $8,943,972   $4,339,483 
Term Deposits   1,010,241    - 
Cash resources  $9,954,213   $4,339,483 
           
Supplemental disclosure of cash flow information:          
Income taxes paid  $119,319   $- 
Interest paid  $369,967   $190,366 
Inventory additions in accounts payable  $1,252,540   $422,340 

 

— See Notes to Unaudited Condensed Interim Consolidated Financial Statements –

 

6
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
CONDENSED INTERIM Consolidated Statements of Stockholders’ Equity

(U.S. Dollars – Unaudited)

 

   Shares  

Par

Value

  

Capital in

Excess of

Par Value

  

Accumulated

Earnings

  

Other

Comprehensive

Income (Loss)

   Total  

Non-

Controlling Interests

  

Total

Stockholders’

Equity

 
                                 
Balance December 31, 2022   12,426,260   $12,426   $17,523,345   $15,903,964   $(805,799)  $32,633,936   $2,605,034   $35,238,970 
Translation adjustment                   (167,239)   (167,239)       (167,239)
Net income               884,369        884,369    80,125    964,494 
Common stock issued   9,272    10    13,590            13,600        13,600 
Stock-based compensation           185,298            185,298        185,298 
                                         
Balance March 31, 2023   12,435,532   $12,436   $17,722,233   $16,788,333   $(973,038)  $33,549,964   $2,685,159   $36,235,123 
Translation adjustment                   226,645    226,645        226,645 
Net income               809,865        809,865    184,862    994,727 
Dividends paid               (626,777)       (626,777)       (626,777)
Non-controlling interest of 317 Mendota LLC                           200,000    200,000 
Distributions to noncontrolling interests                           (387,696)   (387,696)
Stock-based compensation           181,228            181,228        181,228 
Balance June 30, 2023   12,435,532   $12,436   $17,903,461   $16,971,421   $(746,393)  $34,140,925   $2,682,325   $36,823,250 
Translation adjustment                   140,928    140,928        140,928 
Net income               (718,161)       (718,161)   214,410    (503,751)
Distributions to noncontrolling interests                           (149,618)   (149,618)
Stock-based compensation           175,948            175,948        175,948 
Balance September 30, 2023   12,435,532   $12,436   $18,079,409   $16,253,260   $(605,465)  $33,739,640   $2,747,117   $36,486,757 

 

— See Notes to Unaudited Condensed Interim Consolidated Financial Statements—

 

7
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

CONDENSED INTERIM Consolidated Statements of Stockholders’ Equity

(U.S. Dollars – Unaudited)

 

   Shares   Capital
Stock
   Capital in Excess of Par Value   Accumulated Earnings   Other Comprehensive 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 
Translation adjustment                   (1,907)   (1,907)       (1,907)
Net income               1,662,455        1,662,455    166,115    1,828,570 
Common stock issued   7,000    7    17,073            17,080        17,080 
Distributions to noncontrolling interests                           (116,934)   (116,934)
Stock-based compensation           55,194            55,194        55,194 
Balance June 30, 2022   12,384,746   $12,385   $17,167,103   $12,077,874   $(735,094)  $28,522,268   $2,530,579   $31,052,847 
Translation adjustment                   (70,167)   (70,167)       (70,167)
Net income               1,108,131        1,108,131    212,680    1,320,811 
Distributions to non-controlling interests                           (116,933)   (116,933)
Stock-based compensation           55,194            55,194        55,194 
Balance September 30, 2022   12,384,746   $12,385   $17,222,297   $13,186,005   $(805,261)  $29,615,426   $2,626,326   $32,241,752 

 

— See Notes to Unaudited Condensed Interim Consolidated Financial Statements —

 

8
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the Period Ended September 30, 2023

(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., InnFlex Holdings Inc., ENP Peru Investments LLC (“ENP Peru”), its 100% controlling interest in 317 Mendota LLC (“317 Mendota”), and its 65% controlling 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 2022, NanoChem purchased an additional 50% in ENP Peru, increasing its share to 91.67%. ENP Investments owns the remaining 8.33%, of which the Company has a 65% interest. In 2023, NanoChem purchased the remaining 8.33% of shares to become sole owner. ENP Peru was previously accounted for under the equity method however, it is now consolidated into the financial statements from the date control was obtained.

 

In June 2023, the Company purchased an 80% interest in 317 Mendota, a newly incorporated company established to purchase a large manufacturing building. ENP Investments will occupy part of this building, freeing up more space in the building owned by ENP Peru for NanoChem. The Company intends to rent the remainder of the space to suitable tenants. The remaining 20% interest is held by unrelated parties.

 

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.

 

2. SIGNIFICANT ACCOUNTING POLICIES.

 

The condensed interim consolidated financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, 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 for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 31, 2023. 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.

 

9
 

 

(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) Term Deposits.

 

The deposits maintained by the Company with banks comprises term deposits. The Company has two term deposits, the first for $700,000 that matures in December 2023 and pays interest at a rate of 8.25%. If withdrawn before maturity, the greater of the loss of accrued interest or $150, plus 1% of the principal shall be levied. The second term deposit is for $300,000 and matures in February 2024. Paying 1.3% interest, it can be withdrawn by the Company at any point without prior notice or penalty.

 

(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. Cost is determined on a first-in, first-out basis or weighted average cost formula to inventories in different subsidiaries. Cost of sales includes all expenditures incurred in bringing the goods to the point of sale. Inventory costs and costs of sales include direct costs of the raw material, inbound freight charges, warehousing costs, handling costs (receiving and purchasing) and utilities and overhead expenses related to the Company’s manufacturing and processing facilities. Shipping and handling charges billed to customers are included in revenue (2023 - $381,740; 2022 - $341,918). Shipping and handling costs incurred are included in cost of goods sold (2023 - $771,772; 2022 - $783,917).

 

(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:

 

SCHEDULE OF METHOD OF DEPRECIATION

  Computer hardware   30% 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   Straight-line over 15 years
  Software   Straight-line over 3 years

 

10
 

 

(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.

 

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 free-on-board 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.

 

11
 

 

(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 related to the translation of subsidiaries’ functional currency into the reporting currency.

 

(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 (loss) per share have been excluded from the calculation of diluted weighted average shares outstanding for the three and nine months ended September 30, 2023 and 2022.

 

(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, valuation of assets acquired at fair value, 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.

 

12
 

 

  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 and lease liabilities for all periods presented approximate 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.

 

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. The Company is not aware of any contingencies at the date of these consolidated financial statements.

 

(p) Income Taxes.

 

Income taxes are computed by multiplying the Company’s taxable net income by the Company’s effective tax rates. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss carry-forwards, if any. Deferred income 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 income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred income tax assets if it is considered more likely than not that some portion, or all, of the deferred income tax assets will not be realized.

 

In accordance with FASB Codification Topic 740, Income taxes (ASC 740) under the liability method, it is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At June 30, 2023, 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.

 

13
 

 

(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 $14,020,837 (49%) for the nine months ended September 30, 2023 (2022 - $19,050,848 or 57%) and $5,811,847 (67%) for the three months ended September 30, 2023 (2022 - $7,452,860 or 64%). Accounts receivable for the Company’s three primary customers totaled $4,688,642 (68%) at September 30, 2023 (December 31, 2022 - $6,124,424 or 65%).

 

The credit risk on cash is limited because the Company limits its exposure to credit loss by placing its cash 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, accounts receivable, and accounts payable and accrued liabilities. The Company has not hedged its exposure to currency fluctuations.

 

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

 

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

 

(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 operations and comprehensive income (loss).

 

(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 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.

 

14
 

 

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. 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.

 

In accordance with FASB Codification Topic 350, Intangibles – Goodwill and Other (ASC 350), qualitative assessments of goodwill and indefinite-lived intangible assets were performed at December 31, 2022. 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 amounts. Accordingly, no further impairment testing was completed and no impairment charges related to goodwill or indefinite-lived intangibles were recognized during the three or nine months ended September 30, 2023.

 

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.

 

(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-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. 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 nine months ended September 30, 2023 and the year ended December 31, 2022:

 

SUMMARY OF RIGHT-OF-USE ASSET AND LEASE LIABILITY

   September 30, 2023   December 31, 2022 
Right of Use Assets          
Balance, January 1  $167,222   $217,267 
Depreciation   (38,738)   (50,045)
Balance, end of period  $128,484   $167,222 
           
Lease Liability          
Balance, January 1  $167,222   $217,267 
Lease interest expense   4,812    8,566 
Payments   (43,550)   (58,611)
Balance, end of period  $128,484   $167,222 
           
Short-term portion  $59,160   $58,080 
Long-term portion   69,324    109,142 
Total  $128,484   $167,222 

 

15
 

 

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

SCHEDULE OF UNDISCOUNTED RENT PAYMENTS

     
2023  $14,520 
2024   59,520 
2025   61,020 
Total  $135,060 
Impact of discounting   (6,576)
Lease liability, September 30, 2023  $128,484 

 

4. ACCOUNTS RECEIVABLE.

 

SCHEDULE OF ACCOUNTS RECEIVABLE

   September 30, 2023   December 31, 2022 
         
Accounts receivable  $7,203,680   $9,739,150 
Allowances for doubtful accounts   (289,359)   (289,293)
Total accounts receivable  $6,914,321   $9,449,857 

 

5. INVENTORIES.

 

SCHEDULE OF INVENTORY

   September 30, 2023   December 31, 2022 
         
Completed goods  $2,539,460   $3,806,646 
Raw materials and supplies   6,900,692    10,612,784 
Total inventory  $9,440,152   $14,419,430 

 

6. PROPERTY, EQUIPMENT & LEASEHOLDS.

 

SCHEDULE OF PROPERTY, EQUIPMENT AND LEASEHOLDS

   September 30,   Accumulated   September 30, 
   2023 Cost   Depreciation   2023 Net 
Buildings and improvements  $12,180,004   $3,729,894   $8,450,110 
Automobiles   196,255    132,847    63,408 
Computer hardware   43,436    42,840    596 
Manufacturing equipment   9,498,662    5,533,484    3,965,178 
Boat   34,400    29,331    5,069 
Office equipment   134,119    119,730    14,389 
Trailer   8,873    7,890    983 
Leasehold Improvements   88,872    88,872     
Land   440,592        440,592 
Technology   101,038    101,038     
   $22,726,251   $9,785,926   $12,940,325 

 

16
 

 

   December 31,   Accumulated   December 31, 
   2022 Cost   Depreciation   2022 Net 
Buildings and improvements  $8,775,629   $3,310,920   $5,464,709 
Automobiles   196,255    107,055    89,200 
Computer hardware   43,432    42,663    769 
Office equipment   133,280    112,782    20,498 
Manufacturing equipment   8,634,063    4,891,736    3,742,327 
Trailers   8,857    7,592    1,265 
Boat   34,400    27,907    6,493 
Leasehold improvements   88,872    88,872     
Technology   100,860    100,860     
Land   384,027        384,027 
   $18,399,675   $8,690,387   $9,709,288 

 

The amount of depreciation expense for nine months ended September 30, 2023 was $1,095,171 (2022: $679,548) and is included in cost of sales in the unaudited condensed interim consolidated statements of operations and comprehensive income.

 

7. PATENTS.

 

SCHEDULE OF PATENTS

   September 30, 2023 Cost   Accumulated
Amortization
   September 30, 2023 Net 
Patents  $196,069   $196,069   $- 

 

   December 31, 2022 Cost   Accumulated
Amortization
   December 31, 2022 Net 
Patents  $195,725   $195,725   $- 

 

The amount of amortization for the nine months ended September 30, 2023 was $nil (2022 - $12,329) and is included in cost of sales in the unaudited condensed interim consolidated statements of operations and comprehensive income. The movement in cost relates solely to foreign exchange differences.

 

8. GOODWILL AND INTANGIBLE ASSETS

 

SCHEDULE OF GOODWILL AND INDEFINITE LIVED INTANGIBLE ASSETS

Goodwill    
Balance as of December 31, 2021  $2,534,275 
Additions   - 
Impairment   - 
Balance as of December 31, 2022 and September 30, 2023  $2,534,275 
      
Indefinite Lived Intangible Assets     
Balance as of December 31, 2021  $770,000 
Additions   - 
Impairment   - 
Balance as of December 31, 2022 and September 30, 2023  $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, 2021  $1,830,000 
Amortization   (160,000)
Balance as of December 31, 2022   1,670,000 
Amortization   (120,000)
Balance as of September 30, 2023  $1,550,000 

 

17
 

 

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:

 

SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE

2023  $160,000 
2024   160,000 
2025   160,000 
2026   160,000 
2027   160,000 

 

9. LONG TERM DEPOSITS

 

Long term deposits consist of damage deposits held by landlords and security deposits held by various vendors.

 

SCHEDULE OF LONG TERM DEPOSITS

   September 30, 2023   December 31, 2022 
           
Long term deposits  $396,154   $8,540 

 

10. INVESTMENTS

 

(a)         The Company previously held a 50% ownership interest in ENP Peru, split between NanoChem (41.67%) and ENP Investments (8.33%), which was acquired in fiscal 2016. ENP Peru is located in Illinois and leases warehouse space. In June 2022, NanoChem acquired an additional 50% ownership interest at a cost of $506,659 paid through a new $259,000 mortgage and cash on hand. The 35% non-controlling interest of the 8.33% owned by ENP Investments is included in non-controlling interest in these unaudited condensed interim consolidated financial statements. The Company’s investment in ENP Peru was previously accounted for using the equity method, however, it is now consolidated into the unaudited condensed interim consolidated financial statements from the date control was obtained. In June 2023, NanoChem purchased the remaining 8.33% of ENP Peru from ENP Investments to become full owner.

 

It was determined that ENP Peru did not meet the definition of a business in accordance with FASB Codification Topic 805, Business Combinations (ASC 805), and the acquisition was accounted for as an asset acquisition. The following table summarizes the final purchase price allocation of the consideration paid to the respective fair values of the assets acquired and liabilities assumed in ENP Peru as of the acquisition date. The gain on acquisition of ENP Peru represents a gain on remeasurement of the Company’s equity method investment immediately prior to the acquisition date.

 

SCHEDULE OF FAIR VALUES OF THE ASSETS ACQUIRED AND LIABILITIES ASSUMED

      
Purchase consideration  $506,659 
      
Assets acquired:     
Cash   7,330 
Building   3,750,000 
Land   150,000 
Liabilities assumed:     
Deferred tax liability   (174,582)
Long term debt   (2,849,500)
Total identifiable net assets:   883,248 
Excess of assets acquired over consideration   376,589 
Less investment eliminated upon consolidation   (41,538)
Gain on acquisition of ENP Peru  $335,051 

 

18
 

 

A summary of the Company’s investment follows:

 

SCHEDULE OF EQUITY METHOD INVESTMENT

Balance, December 31, 2021  $22,642 
Return of equity   (8,750)
Gain in equity method investment   27,646 
Investment eliminated upon consolidation   (41,538)
Balance, December 31, 2022 and September 30, 2023  $- 

 

(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. 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. 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. See subsequent events.

 

(c)        In December 2018 the Company invested $500,000 in Trio Opportunity Corp. (“Trio”), a privately held entity and a further $470,000 was invested in April 2023. Trio is a real estate investment vehicle and the Company received 97,000 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 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:

 

SCHEDULE OF EQUITY METHOD INVESTMENT

Balance, December 31, 2021  $3,701,368 
Gain in equity method investment   307,527 
Return of equity   (250,000)
Balance, December 31, 2022  $3,758,895 
Gain in equity method investment   422,923 
Return of equity   (100,000)
Balance, September 30, 2023  $4,081,818 

 

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

   Nine months
ended
September 30,
2023
   Nine months
ended
September 30,
2022
 
         
Net sales  $11,915,398   $11,101,350 
Gross profit   3,514,142    2,519,331 
Net income   845,846   $359,938 

 

During the nine months ended September 30, 2023, the Company had sales of $7,116,232 (2022 - $7,931,549) to the Florida based LLC, of which $2,274,958 is included within Accounts Receivable as at September 30, 2023 (December 31, 2022 - $2,423,285).

 

e)        In December 2020, the Company invested $500,000 in Lygos Inc. (“Lygos”), a privately held entity, under a Simple Agreement for Future Equity (“SAFE”) agreement. Lygos is a company developing a sustainable aspartic acid microbe strain. In 2021, the Company made a second SAFE investment of $500,000 for a total of $1,000,000. In accordance with ASC 321, the Company has elected to account for this investment at cost.

 

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11. SHORT-TERM LINE OF CREDIT.

 

(a)        In June 2023, ENP Investments signed a new agreement with Stock Yards Bank and Trust (“Stock Yards”). Increasing the limit by $500,000, the revolving line of credit is for an aggregate amount of up to the lesser of (i) $4,500,000, or (ii) 50-80% of eligible domestic accounts receivable plus 50% of inventory, capped at $2,000,000. Interest on the unpaid principal balance of this loan will be calculated using the greater of prime or 8.25%. The interest rate at September 30, 2023 is 8.5% (December 31, 2022 - 7.5%).

 

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 Stock Yards, Stock Yard’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 $2,925,000. The non-controlling interest is the guarantor of the remaining 35% of all the principal and other loan costs not to exceed $1,575,000. As of September 30, 2023, ENP Investments was in compliance with all loan covenants.

 

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

 

Short-term borrowings outstanding under the revolving line as of September 30, 2023 were $nil (December 31, 2022 - $2,477,794).

 

(b)        In June 2023, the Company signed a new agreement with Stock Yards Bank and Trust (“Stock Yards”). The revolving line of credit is for an aggregate amount of up to the lesser of (i) $4,000,000, or (ii) 80% of eligible domestic accounts receivable and certain foreign accounts receivable plus 50% of inventory, capped at $2,000,000. Interest on the unpaid principal balance of this loan will be calculated using the greater of prime or 8.25%. The interest rate at September 30, 2023 was 8.5% (December 31, 2022 - 7.5%).

 

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 Stock Yards, Stock Yards access to collateral, formation or acquisition of subsidiaries, incurrence of indebtedness, dispositions of assets, granting liens, changes in business, ownership or business locations, engaging in mergers and acquisitions, making investments or distributions and affiliate transactions. The covenants also require that the Company maintain a minimum ratio of qualifying financial assets to the sum of qualifying financial obligations. As of September 30, 2023, the 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 Stock Yards 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 September 30, 2023 were $nil (December 31, 2022 - $340,797).

 

12. LONG TERM DEBT.

 

(a)        In October 2020, NanoChem signed a loan for $1,980,947 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. In June 2022, the loan was paid in full with funds from Stock Yards. Interest expense for the nine months ended September 30, 2023 was $nil (2022 - $30,334). The balance owing at September 30, 2023 was $nil (December 31, 2022 - $nil).

 

(b)        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. In June 2022, the loan was paid in full with funds from Stock Yards. Interest expense for the nine months ended September 30, 2023 was $nil (2022 - $5,816). The balance owing at September 30, 2023 was $nil (December 31, 2022 - $nil)

 

20
 

 

(c)        In January 2020, ENP Mendota refinanced its mortgage and signed a loan for $450,000 with Stock Yards 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 nine months ended September 30, 2023 was $13,459 (2022 - $13,959). The balance owing at September 30, 2023 was $402,137 (December 31, 2022 - $415,430).

 

(d)         In June 2022, NanoChem signed a loan for $1,935,000 with Stock Yards with an interest rate of 4.90% to be repaid over three years with equal monthly payments including interest. The funds were used to replace the loans at Midland for the purchase of the 65% interest in ENP Investments and the new manufacturing equipment. Interest expense for the nine months ended September 30, 2023 was $53,176 (2022 - $23,632). The balance owing at September 30, 2023 was $1,164,686 (December 31, 2022 - $1,632,672).

 

(e)        In January 2020 ENP Peru signed a $3,000,000 loan with an interest rate 4.35% to be repaid over ten years with equal monthly payments including interest. Upon the purchase of the remainder of ENP Peru in June 2022, the Company assumed the first mortgage at Stock Yards with a balance of $2,849,500. Interest expense for the nine months ended September 30, 2023 was $92,304 (2022 - $23,632). The balance owing at September 30, 2023 was $2,756,573 (December 31, 2022 - $2,813,015).

 

(f)        In June 2022, ENP Peru obtained a second mortgage for $259,000 with Stock Yards to be repaid over 10 years with monthly installments plus interest with an interest rate of 5.4%. Interest expense for the nine months ended September 30, 2023 was $10,447 (2022 - $3,568). The balance owing at September 30, 2023 was $251,735 (December 31, 2022 - $256,162).

 

(g)        In December 2022, NanoChem signed a three year loan for up to $2,000,000 with Stock Yards with an interest rate of 6.5%. Interest only payments are required for the first 18 months with interest and principal being paid in the last 18 months. The funds are being used to purchase new manufacturing equipment. Interest expense for the nine months ended September 30, 2023 was $50,361 (2022 - $nil). The balance owing at September 30, 2023 was $1,036,798 (December 31, 2022 - $1,036,798).

 

(h)        In June 2023, 317 Mendota signed a five year loan for up to $3,240,000 with Stock Yards Bank to purchase the building and any necessary renovations. Interest only payments are required for the first 12 months with interest and principal being paid the remaining four years and a lump sum due in June 2028. Interest expense for the nine months ended September 30, 2023 was $47,450 (2022 - $nil). The balance owing at September 30, 2023 was $2,248,292 (December 31, 2022 - $nil).

 

As of September 30, 2023, Company was in compliance with all loan covenants.

 

SCHEDULE OF LOAN COVENANTS

Continuity 

September 30,

2023

  

December 31,

2022

 
Balance, January 1  $6,154,077   $2,366,598 
Plus: Proceeds from loans   2,248,292    3,230,798 
Plus: Loan acquired with acquisition of ENP Peru   -    2,849,500 
Less: Payments on loan   (542,148)   (2,292,819)
Balance, end of period  $7,860,221   $6,154,077 

 

SCHEDULE OF OUTSTANDING BALANCE LOAN

Outstanding balance at December 31, 

September 30,

2023

  

December 31,

2022

 
a) Long term debt – Midland States Bank  $-   $- 
b) Long term debt – Midland States Bank   -    - 
c) Long term debt – Stock Yards Bank & Trust   402,137    415,430 
d) Long term debt – Stock Yards Bank & Trust   1,164,686    1,632,672 
e) Long term debt – Stock Yards Bank & Trust   2,756,573    2,813,015 
f) Long term debt – Stock Yards Bank & Trust   251,735    256,162 
g) Long term debt – Stock Yards Bank & Trust   1,036,798    1,036,798 
h) Long term debt – Stock Yards Bank & Trust   2,248,292     
Long-term Debt   7,860,221    6,154,077 
Less: current portion   (830,760)   (717,612)
Long-term debt non current  $7,029,461   $5,436,465 

 

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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.

 

The following table summarizes the Company’s stock option activities for the year ended December 31, 2022 and the nine month period ended September 30, 2023:

 

SCHEDULE OF STOCK OPTION ACTIVITIES

   Number of shares   Exercise price
per share
   Weighted average
exercise price
 
             
Balance, December 31, 2021   789,500    $1.424.13   $2.78 
Granted   981,000    $3.553.61   $3.55 
Cancelled or expired   (13,486)   $1.703.61   $2.32 
Exercised   (71,014)   $1.422.44   $1.98 
Balance, December 31, 2022   1,686,000    $1.704.13   $3.27 
Cancelled or expired   (12,000)   $3.464.13   $3.60 
Exercised   (8,000)  $1.70   $1.70 
Balance, September 30, 2023   1,666,000    $1.754.13   $3.27 
Exercisable, September 30, 2023   664,000    $1.754.13   $2.93 

 

The weighted average remaining contractual life of options outstanding is 3.4 years.

 

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

 

SCHEDULE OF STOCK OPTION FAIR VALUE ASSUMPTIONS

   2022 
Expected life – years   3.0 
Interest rate   1.763.64% 
Volatility   66.01 - 69.66% 
Weighted average fair value of options granted  $1.461.65 

 

During the nine months ended September 30, 2023 and 2022, the Company did not grant any new options to consultants. Options granted in previous quarters resulted in expenses in the amount of $47,391 for consultants (2022 - $47,380). During the nine months ended September 30, 2023 the Company did not grant any new options to employees. The Company issued 5,000 new options to employees in the nine months ended September 30, 2022 for an expense of $5,475. Options granted in previous quarters resulted in expenses in the amount of $491,013 for employees during the nine months ended September 30, 2023 (2022 - $111,804).

 

There were 8,000 employee and nil consultant stock options exercised during the nine months ended September 30, 2023 (2022 – 29,500 employee; nil consultant).

 

As of September 30, 2023, there was approximately $887,957 compensation expense related to non-vested awards. This expense is expected to be recognized over a weighted average period of 1.9 years.

 

The aggregate intrinsic value of vested options outstanding at September 30, 2023 is $nil (2022 – $nil).

 

22
 

 

14. CAPITAL STOCK.

 

During the nine months ended September 30, 2023, 8,000 shares were issued upon the exercise of employee stock options (2022 – 29,500).

 

During the nine months ended September 30 2023, the Company issued 1,272 shares to a consultant for services rendered, resulting in an expense of $4,070 on the unaudited interim condensed consolidated statements of operations and comprehensive income for the nine months ended September 30, 2023

 

In nine months ended September 30, 2023, the Company announced a special dividend of $0.05 per share that was paid on May 16, 2023 to shareholders.

 

15. NON-CONTROLLING INTERESTS

 

(a) 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 (“NCI”) owns the remaining 35% interest in ENP Investments. ENP Mendota is a wholly owned subsidiary of ENP Investments. ENP Mendota is a LLC that 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 NCI’s ownership interest in ENP Investments is recorded in non-controlling interests in these consolidated financial statements. The non-controlling interest represents NCI’s interest in the earnings and equity of ENP Investments. ENP Investments is allocated to the TPA 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 $3,043,833.

 

SCHEDULE OF DISTRIBUTIONS

Balance, December 31, 2021  $2,602,843 
Distribution   (689,434)
Non-controlling interest share of income   691,625 
Balance, December 31, 2022   2,605,034 
Distribution   (537,314)
Non-controlling interest share of income   490,012 
Balance, September 30, 2023  $2,557,732 

 

During the nine months ended September 30, 2023, the Company had sales of $4,728,562 (2022 - $4,913,342) to the party that holds 35% interest in ENP Investments, of which $2,154,033 is included within Accounts Receivable as of September 30, 2023 (December 31, 2022 – $3,634,083).

 

b)            317 Mendota is a LLC that owns real estate that the Company intends to occupy part of while renting out the excess. The Company owns a 80% interest in 317 Mendota and an unrelated party (“NCI”) owns the remaining 20% interest in 317 Mendota. For financial reporting purposes, the assets, liabilities and earnings of 317 Mendota are consolidated into these financial statements. The NCI’s ownership interest in 317 Mendota is recorded in non-controlling interests in these consolidated financial statements. The non-controlling interest represents NCI’s interest in the earnings and equity of 317 Mendota. 317 Mendota is allocated to the TPA segment as that is the intended use of the building.

 

23
 

SCHEDULE OF NON CONTROLLING INTEREST RELATED TO ACQUISITION

Balance, December 31, 2022  $- 
Acquisition   200,000 
Non-controlling interest share of loss   (10,615)
Balance, September 30, 2023  $189,385 

 

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 save 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, also known as TPA’s (as shown under the column heading “BCPA” below), 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 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.

 

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 September 30, 2023:

 

SCHEDULE OF REPORTABLE SEGMENTS