UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2021

 

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		71 163 0889
(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 [X]

 

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 [X] 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 [X] 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 [X]	Smaller reporting company [X]
	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 [X] No

 

Class of Stock		No. Shares Outstanding		Date
Common		12,315,746		May 14, 2021

 

 

 

FORM 10-Q

 

Index

 

PART I.	FINANCIAL INFORMATION		4
Item 1.	Financial Statements.		4
	(a)	Unaudited Interim Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020.	4
	(b)	Unaudited Interim Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2021 and 2020.	5
	(c)	Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020.	6
	(d)	Unaudited Interim Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020.	7
	(d)	Notes to Unaudited Interim Condensed Consolidated Financial Statements for the Three Months Ended March 31, 2021 and 2020.	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		26
Item 4	Controls and Procedures.		29
PART II.	OTHER INFORMATION		30
Item 6.	Exhibits.		30
SIGNATURES			31

 

 

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 for the year ended December 31, 2020.

 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

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

 

		March 31, 2021				December 31, 2020
		(Unaudited)
Assets
Current
Cash and cash equivalents		$	1,853,567			$	3,472,776
Term deposits			1,000,000				1,000,000
Accounts receivable (Note 4)			7,539,314				5,889,813
Inventories (Note 5)			9,989,338				8,372,476
Prepaid expenses			243,243				302,447
Total current assets			20,625,462				19,037,512
Property, equipment and leaseholds, net (Note 6)			5,053,321				5,142,041
Patents (Note 7)			26,028				30,137
Right of use assets (Note 3)			408,230				483,113
Intangible assets (Note 8)			2,732,000				2,776,000
Long term deposits (Note 9)			8,540				8,540
Investments (Note 10)			4,972,635				4,776,167
Goodwill (Note 8)			2,534,275				2,534,275
Deferred tax asset			299,603				299,603
Total Assets		$	36,660,094			$	35,087,388
Liabilities
Current
Accounts payable		$	515,518			$	558,105
Accrued liabilities			395,569				1,225,804
Deferred revenue			278,417				314,277
Income taxes payable			3,053,671				2,540,348
Short term line of credit (Note 11)			3,228,434				2,116,073
Current portion of lease liability (Note 3)			223,535				287,900
Current portion of long term debt (Note 12)			837,724				848,794
Total current liabilities			8,532,868				7,891,301
Lease liability (Note 3)			184,695				195,213
Deferred income tax liability			233,751				233,751
Long term debt (Note 12)			2,263,097				2,998,844
Total Liabilities			11,214,411				11,319,109
Stockholders’ Equity
Capital stock (Note 15)
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:
12,315,746 (December 31, 2020: 12,260,545) common shares			12,316				12,261
Capital in excess of par value			16,749,084				16,633,190
Other comprehensive loss			(789,769	)			(872,121	)
Accumulated earnings			6,883,769				5,433,198
Total stockholders’ equity – controlling interest			22,855,400				21,206,528
Non-controlling interests (Note 16)			2,590,283				2,561,751
Total Stockholders’ Equity			25,455,683				23,768,279
Total Liabilities and Stockholders’ Equity		$	36,660,094			$	35,087,388

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements —

 

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(U.S. Dollars — Unaudited)

 

		Three Months Ended March 31,
		2021				2020
Sales		$	7,624,697			$	8,429,486
Cost of sales			4,916,776				5,479,947
Gross profit			2,707,921				2,949,539
Operating Expenses
Wages			579,355				535,433
Administrative salaries and benefits			222,490				204,543
Insurance			124,458				131,569
Consulting			72,961				67,311
Lease expense			66,028				118,468
Interest expense			62,274				101,425
Professional fees			53,689				51,053
Office and miscellaneous			42,119				39,392
Advertising and promotion			34,770				65,621
Investor relations and transfer agent fee			25,087				18,624
Research			18,275				28,578
Travel			10,994				55,362
Telecommunications			9,991				11,876
Currency exchange			8,300				(57,727	)
Commissions			4,768				2,358
Shipping			4,355				4,613
Utilities			2,722				4,305
Total operating expenses			1,342,636				1,382,804
Operating income			1,365,285				1,566,735
PPP loan forgiveness			537,960				-
Gain on investments			208,968				199,529
Interest income			10,298				414
Income before income tax			2,122,511				1,766,678
Income taxes
Deferred income tax recovery			-				-
Income tax expense			(485,456	)			(434,988	)
Net income for the period including non-controlling interests			1,637,055				1,331,690
Less: Net income attributable to non-controlling interests			(186,484	)			(67,015	)
Net income attributable to controlling interest		$	1,450,571			$	1,264,675
Income per share (basic and diluted)		$	0.12			$	0.10
Weighted average number of common shares (basic)			12,292,452				12,237,798
Weighted average number of common shares (diluted)			12,518,331				12,300,896
Other comprehensive income (loss):
Net income			1,637,055				1,331,690
Unrealized gain (loss) on foreign currency translations			82,352				(98,928	)
Total comprehensive income			1,719,407				1,232,762
Comprehensive income – non-controlling interest			(186,484	)			(67,015	)
Comprehensive income attributable to Flexible Solutions International Inc.		$	1,532,923			$	1,165,747

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements —

 

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. Dollars — Unaudited)

 

		Three Months Ended March 31,
		2021				2020
Operating activities
Net income for the period including non-controlling interests		$	1,637,055			$	1,331,690
Adjustments to reconcile net income to net cash:
Stock based compensation			39,589				29,582
Depreciation and amortization			232,965				148,058
Lease right of use financing			8,187				17,532
Lease right of use amortization			74,884				83,547
Gain on investments			(208,968	)			(140,182	)
PPP loan forgiveness			(537,960	)			-
Changes in non-cash working capital items:
(Increase) Decrease in accounts receivable			(1,649,501	)			(3,192,845	)
(Increase) Decrease in inventories			(1,616,862	)			235,397
(Increase) Decrease in prepaid expenses			59.204				(85,116	)
Increase (Decrease) in accounts payable and accrued liabilities			(872,823	)			444,898
Increase (Decrease) in taxes payable			513,323				(29,038	)
Increase (Decrease) deferred revenue			(35,860	)			2,560
Cash used in operating activities			(2,356,767	)			(1,153,917	)
Investing activities
Long term deposit			-				22,084
Purchase of investments			-				(1,000,000	)
Proceeds of equity investment distributions			12,500				256,563
Net purchase of property, equipment and leaseholds			(96,136	)			(96,280	)
Cash used in investing activities			(83,636	)			(817,633	)
Financing activities
Draw from short term line of credit			1,112,361				1,165,850
Repayment of long term debt			(208,857	)			(201,027	)
Lease financing costs			(83,070	)			(101,079	)
Partnership distributions			(157,952	)			(143,002	)
Proceeds from issuance of common stock			76,360				24,750
Cash provided by financing activities			738,842				745,492
Effect of exchange rate changes on cash			82,352				3,653
Outflow of cash			(1,619,209	)			(1,222,405	)
Cash, cash equivalents and restricted cash, beginning			4,472,776				4,634,670
Cash, cash equivalents and restricted cash, ending		$	2,853,567			$	3,412,265
Cash, cash equivalents and restricted cash are comprised of:
Cash and cash equivalents		$	1,853,567			$	3,412,265
Term deposits			1,000,000				-
		$	2,853,567			$	3,412,265
Supplemental disclosure of cash flow information:
Income taxes paid		$	-			$	464,026
Interest paid		$	62,274			$	101,245

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements —

 

 

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 (Deficiency)				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

 

		Shares				Capital Stock				Capital in Excess of Par Value				Accumulated Earnings (Deficiency)				Other Comprehensive Income (Loss)				Total				Non- Controlling Interests				Total Stockholders’ Equity
Balance December 31, 2019			12,215,545			$	12,216			$	16,437,473			$	2,456,148			$	(994,610	)		$	17,911,227			$	2,550,149			$	20,461,376
Translation adjustment			—				—				—				—				(98,928	)			(98,928	)			—				(98,928	)
Net income			—				—				—				1,264,675				—				1,264,675				67,015				1,331,690
Common stock issued			25,000				25				24,725				—				—				24,750				—				24,750
Distributions to non-controlling interests			—				—				—				—				—				—				(143,002	)			(143,002	)
Stock-based compensation			—				—				29,582				—				—				29,582				—				29,582
Balance March 31, 2020			12,240,545			$	12,241			$	16,491,780			$	3,720,823			$	(1,093,538	)		$	19,130,306			$	2,474,162			$	21,605,468

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements —

 

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2021

(U.S. Dollars)

 

1. Basis of Presentation.

 

These consolidated financial statements include the accounts of Flexible Solutions International, Inc. (the “Company”), its wholly-owned subsidiaries Flexible Fermentation Ltd. , 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 Realty, LLC (“ENP Realty”). 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, a wholly-owned subsidiary of the Company, completed the purchase of a 65% interest in ENP Investments for an aggregate purchase price of $5,110,560. An unrelated party owns the remaining 35% interest in ENP Investments, and ENP Investments is consolidated into 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. ENP Realty 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 options 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.

 

These consolidated financial statements have been prepared on a historical cost basis, except where otherwise noted, in accordance with accounting principles generally accepted in the United States applicable to a going concern and reflect the policies outlined below.

 

(a) Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with several financial institutions.

 

 

(b) Inventories and Cost of Sales

 

The Company has three major classes of inventory: completed goods, work in progress and raw materials and supplies. In all classes, inventories are stated at the lower of cost and net realizable value. 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 (2021 - $131,348; 2020 – $162,905). Shipping and handling costs incurred are included in cost of goods sold (2021 - $263,089; 2020 – $290,748).

 

(c) Allowance for Doubtful Accounts

 

The Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall customer credit-worthiness and historical experience.

 

(d) Property, Equipment, Leaseholds and Intangible Assets.

 

The following assets are recorded at cost and depreciated using the methods and annual rates shown below:

 

Computer hardware		30% Declining balance
Furniture and fixtures		20% Declining balance
Manufacturing equipment		20% Declining balance
Office equipment		20% Declining balance
Boat		20% Declining balance
Building and improvements		10% Declining balance
Trailer		30% Declining balance
Automobile		Straight-line over 5 years
Patents		Straight-line over 17 years
Technology		Straight-line over 10 years
Right of Use Asset		Straight-line over lease term
Leasehold improvements		Straight-line over lease term
Customer Relationships – ENP Investments		Straight line over 15 years
Software – ENP Investments		Straight line over 3 years

 

(e) Impairment of Long-Lived Assets.

 

In accordance with FASB Codification Topic 360, Property, Plant and Equipment (ASC 360), the Company reviews long-lived assets, including, but not limited to, property, equipment and leaseholds, patents and other assets, for impairment annually or whenever events or changes in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived assets is assessed for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets. If the expected future cash flows of an asset are less than its carrying value, an impairment measurement is indicated. Long-lived assets are written down to net realizable value when management determines there has been a change in circumstances which indicates their carrying amounts may not be recoverable. Impairment charges are recorded to the extent that an asset’s carrying value exceeds its fair value. Accordingly, actual results could vary significantly from such estimates. There were no impairment charges during the periods presented.

 

(f) Foreign Currency.

 

The functional currency of the Company is the U.S. dollar. The functional currency of three of the Company’s subsidiaries is the Canadian Dollar. The translation of the Canadian Dollar to the reporting currency of the Company, the U.S. Dollar, is performed for assets and liabilities using exchange rates in effect at the balance sheet date. Revenue and expense transactions are translated using average exchange rates prevailing during the year. Translation adjustments arising on conversion of the Company’s financial statements from the subsidiary’s functional currency, Canadian Dollars, into the reporting currency, U.S. Dollars, are excluded from the determination of income (loss) and are disclosed as other comprehensive income in the consolidated statements of income and comprehensive income.

 

 

Foreign exchange gains and losses relating to transactions not denominated in the applicable local currency are included in operating income (loss) if realized during the year and in comprehensive income (loss) if they remain unrealized at the end of the year.

 

(g) Revenue Recognition.

 

The Company generates revenue primarily from energy and water conservation products and biodegradable polymer, as further discussed in Note 17.

 

The Company follows a five-step model for revenue recognition. The five steps are: (1) identification of the contract(s) with the customer, (2) identification of the performance obligation(s) in the contract(s), (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligation, and (5) recognition of revenue when (or as) the performance obligation is satisfied. The Company has fulfilled its performance obligations when control transfers to the customer, which is generally at the time the product is shipped since risk of loss is transferred to the purchaser upon delivery to the carrier. For shipments which are F.O.B. shipping point, the Company has elected to account for shipping and handling activities as a fulfillment cost rather than as an additional promised service and performance obligation.

 

The Company recognizes revenue when there are no significant remaining performance obligations. When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled. To date, there have been no such significant post-delivery obligations.

 

Since the Company’s inception, product returns have been insignificant; therefore, no provision has been established for estimated product returns.

 

Deferred revenues consist of products sold to distributors with payment terms greater than the Company’s customary business terms due to lack of credit history or operating in a new market in which the Company has no prior experience. The Company defers the recognition of revenue until the criteria for revenue recognition has been met, and payments become due or cash is received from these distributors.

 

(h) Stock Issued in Exchange for Services.

 

The Company’s common stock issued in exchange for services is valued at estimated fair market value based upon trading prices of the Company’s common stock on the dates of the stock transactions. The corresponding expense of the services rendered is recognized over the period that the services are performed.

 

(i) Stock-based Compensation.

 

The Company recognizes compensation expense for all share-based payments in accordance with FASB Codification Topic 718, Compensation — Stock Compensation, (ASC 718). Under the fair value recognition provisions of ASC 718, the Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.

 

The fair value at grant date of stock options is estimated using the Black-Scholes option-pricing model. Compensation expense is recognized on a straight-line basis over the stock option vesting period based on the estimated number of stock options that are expected to vest. Shares are issued from treasury upon exercise of stock options.

 

(j) Other Comprehensive Income.

 

Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income, but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders’ equity. The Company’s other comprehensive income is comprised only of unrealized foreign exchange gains and losses.

 

(k) Income Per Share.

 

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding in the period. Diluted earnings per share is calculated giving effect to the potential dilution of the exercise of options and warrants. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options and warrants are included in diluted net income per share to the extent that these shares are dilutive. Common equivalent shares that have an anti-dilutive effect on net income per share have been excluded from the calculation of diluted weighted average shares outstanding for the three months ended March 31, 2021 and 2020.

 

(l) Use of Estimates.

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and would impact the results of operations and cash flows.

 

Estimates and underlying assumptions are reviewed at each period end. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

 

Significant areas requiring the use of management estimates include assumptions and estimates relating to the valuation of goodwill and intangible assets, asset impairment analysis, share-based payments and warrants, valuation allowances for deferred income tax assets, determination of useful lives of property, equipment and leaseholds and intangible assets, recoverability of accounts receivable, recoverability of investments, discount rates for right of use assets and the valuation of inventory.

 

(m) Fair Value of Financial Instruments

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs described below, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.

 

	●	Level 1 – Quoted prices in active markets for identical assets or liabilities
	●	Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
	●	Level 3 — Unobservable inputs that are supported by little or no market activity which is significant to the fair value of the assets or liabilities.

 

The fair values of cash and cash equivalents, accounts receivable, accounts payable, 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 approximate their respective carrying amounts due to these financial instruments being at market rates.

 

 

(n) 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.

 

(o) Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance so that the assets are recognized only to the extent that when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized.

 

Per FASB ASC 740 “Income taxes” under the liability method, it is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At March 31, 2021, 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.

 

(p) 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 $3,120,819 (41%) for the three months ended March 31, 2021 (2020 - $3,744,455 or 44%). Accounts receivable for the Company’s three primary customers totaled $4,134,780 (55%) at March 31, 2021 (December 31, 2020 - $3,986,284 or 68%).

 

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 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.

 

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.

 

(q) Equity Method Investment

 

The Company accounts for investments using the equity method of accounting if the investment provides the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company’s ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment is recorded at cost in the consolidated balance sheets under other assets and adjusted for dividends received and the Company’s share of the investee’s earnings or losses together with other-than-temporary impairments which are recorded through other income (loss), net in the consolidated statements of income and comprehensive income.

 

(r) 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 2020 and 2019. Based on the results of assessment, it was determined that it is more likely than not the reporting unit, customer lists and trademarks had a fair value in excess of their carrying value. 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, 2021.

 

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.

 

(s) 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, 2021:

 

		March 31, 2021
Right of Use Assets
Balance at December 31, 2020		$	483,113
Depreciation			(74,883	)
Balance at March 31, 2021		$	408,230
Lease Liability
Balance at December 31, 2020		$	483,113
Lease interest expense			8,187
Payments			(83,070	)
Balance at March 31, 2021		$	408,230
Short-term portion		$	223,535
Long-term portion			184,695
Total		$	408,230

 

 

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

 

2021		$	204,830
2022			67,320
2023			66,180
2024			59,520
2025			61,020
Total		$	458,870
Impact of discounting			50,640
Lease liability, March 31, 2021		$	408,230

 

4. Accounts Receivable

 

		March 31, 2021				December 31, 2020
Accounts receivable		$	7,810,978			$	6,161,249
Allowances for doubtful accounts			(271,664	)			(271,436	)
		$	7,539,314			$	5,889,813

 

5. Inventories

 

		March 31, 2021				December 31, 2020
Completed goods		$	4,337,962			$	3,393,794
Work in progress			177,201				152,595
Raw materials and supplies			5,474,175				4,826,087
		$	9,989,338			$	8,372,476

 

6. Property, Plant & equipment

 

		March 31, 2021				Accumulated				March 31, 2021
		Cost				Depreciation				Net
Buildings and improvements		$	4,799,742			$	2,873,647			$	1,926,095
Automobiles			180,956				69,450				111,506
Computer hardware			43,609				42,090				1,519
Furniture and fixtures			111,167				102,043				9,124
Office equipment			1,875				1,022				853
Manufacturing equipment			6,252,435				3,715,223				2,537,212
Trailer			9,476				6,920				2,556
Boat			34,400				24,762				9,638
Leasehold improvements			88,872				87,705				1,167
Technology			107,909				107,909				—
Land			453,651				—				453,651
		$	12,084,092			$	7,030,771			$	5,053,321

 

		December 31, 2020				Accumulated				December 31, 2020
		Cost				Depreciation				Net
Buildings and improvements		$	4,798,370			$	2,836,142			$	1,962,228
Automobiles			180,956				61,266				119,690
Computer hardware			43,593				41,957				1,636
Furniture and fixtures			111,145				101,186				9,959
Office equipment			1,864				971				893
Manufacturing equipment			6,154,425				3,573,748				2,580,677
Trailer			9,422				6,675				2,747
Boat			34,400				24,255				10,145
Leasehold improvements			88,872				87,205				1,667
Technology			107,295				107,295				—
Land			452,399				—				452,399
		$	11,982,741			$	6,840,700			$	5,142,041

 

Amount of depreciation expense for the three months ended March 31, 2021: $184,855 (2020: $99,948) and is included in cost of sales in the unaudited interim condensed consolidated statements of income and comprehensive income.

 

 

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, 2021 Cost				Accumulated Amortization				March 31, 2021 Net
Patents		$	209,404			$	183,376			$	26,028

 

		December 31, 2020 Cost				Accumulated Amortization				December 31, 2020 Net
Patents		$	208,211			$	178,074			$	30,137

 

The increase in the carrying amount of patents is primarily due to foreign currency translation effects. The 2021 cost in Canadian dollars - $265,102 (December 31, 2020 - $265,102 in Canadian dollars).

 

Amount of amortization for 2021 - $4,110 (2020 - $4,110) and is included in cost of sales in the consolidated statements of income and comprehensive income.

 

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

 

2021			16,438
2022			13,699

 

8. Goodwill and Indefinite Lived Intangible Assets

 

Goodwill
Balance as of December 31, 2019		$	2,534,275
Additions			-
Impairment			-
Balance as of December 31, 2020 and March 31, 2021		$	2,534,275
Indefinite Lived Intangible Assets
Balance as of December 31, 2019		$	770,000
Additions			-
Impairment			-
Balance as of December 31, 2020 and March 31, 2021		$	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, 2019		$	2,182,000
Amortization			(176,000	)
Balance as of December 31, 2020			2,006,000
Amortization			(44,000	)
Balance as of March 31, 2021		$	1,962,000

 

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:

 

2021		$	176,000
2022			160,000
2023			160,000
2024			160,000
2025			160,000

 

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, 2020				December 31, 2020
Long term deposits		$	8,540			$	8,540

 

10. Investments

 

(a) The Company has a 50% ownership interest in ENP Peru Investments LLC (“ENP Peru”), which was acquired in fiscal 2016. ENP Peru is located in Illinois and leases warehouse space. The Company accounts for this investment using the equity method of accounting. A summary of the Company’s investment follows:

 

Balance, December 31, 2019		$	11,387
Return of equity			(9,063	)
Gain in equity method investment			1,498
Balance, December 31, 2020			3,822
Return of equity			(3,822	)
Gain in equity method investment			-
Balance, March 31, 2021		$	-

 

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

 

		2020
Net sales		$	295,800
Net income		$	2,996

 

 

During the three months ended March 31, 2021, the Company received $8,678 from ENP Peru. At the time of receipt of the payment, the investment balance was $nil and the payment was not recorded against the investment balance but was included in gains on investments.

 

(b) In fiscal 2018, ENP Investments acquired a 24% ownership interest in ENP Realty LLC (“ENP Realty”). ENP Realty is located in Illinois and leases warehouse space. During the year ended December 31, 2020, the other partners of ENP Realty withdrew from the partnership, resulting in ENP Realty becoming a wholly owned subsidiary of ENP Investments. As a result, ENP Realty is consolidated in the financial statements of the Company and a 35% non-controlling interest is recognized from the acquisition date onwards.

 

It was determined that ENP Realty 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 Realty as of the acquisition date.

 

Investment eliminated upon consolidation		$	63,165
Assets acquired:
Cash			13,419
Building			630,000
Land			85,000
Liabilities assumed:
Accounts payable			(15,797	)
Long term debt			(450,000	)
Deferred income tax liability			(66,116	)
Total identifiable net assets:			196,506
Gain on acquisition of ENP Realty		$	133,341

 

The income tax expense arising from the deferred income tax liability was net against gain on acquisition of ENP Realty in the consolidated statements of income and comprehensive income for the full year ended December 31, 2020.

 

A summary of the Company’s investment follows:

 

Balance, December 31, 2019		$	63,165
Investment eliminated upon consolidation			(63,165	)
Balance, December 31, 2020 and March 31, 2021		$	-

 

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

 

		2019
Net sales		$	75,870
Net income		$	34,200

 

(c) In December 2018 the Company invested $200,000 in Applied Holding Corp. (“Applied”). Applied is a captive insurance company and the Company received a promissory note for its investment which becomes due in 2021 but may be extended with notice for a maximum of two years. 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.

 

(d) In December 2018 the Company invested $500,000 in Trio Opportunity Corp. (“Trio”), a privately held entity. Trio is a real estate investment vehicle and the Company received 50,000 non-voting Class B shares at $10.00/share. In accordance with ASC 323, the Company has elected to account for this investment at cost.

 

 

(e) In January 2019, the Company invested $1,001,000 in a Florida based LLC that is engaged in international sales of fertilizer additives. The Company accounts for this investment using the equity method of accounting. According to the operating agreement, the Company has a 50% interest in the profit and loss of the Florida based LLC but does not have control. A summary of the Company’s investment follows:

 

Balance, December 31, 2019		$	1,141,033
Additional payments			2,518,684
Gain in equity method investment			809,342
Return of equity			(896,714	)
Balance, December 31, 2020			3,572,345
Gain in equity method investment			200,290
Return of equity			-
Balance, March 31, 2021		$	3,772,635

 

Further to the original investment amount, the Company had placed $1,000,000 in trust, which was released upon the Florida based LLC reaching a milestone related to earnings before interest, taxes and depreciation (“EBITDA”) targets. This amount was accounted for as restricted cash on the balance sheet as at December 31, 2019. During the year ended December 31, 2020, this amount was released. 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:

 

		Three months ended March 31, 2021				Three months ended March 31, 2020
Net sales		$	2,332,304			$	2,791,754
Gross profit			860,676				945,395
Net income			400,580				280,364

 

f) In December 2020, the Company invested $500,000 in Lygos Inc., a privately held entity. Both companies intend to work together in pursuit of sustainable aspartic acid through synthetic biology. The Company has elected to account for this investment at cost. A summary of the Company’s investment follows:

 

Balance, January 1, 2020		$	-
Acquisition			500,000
Balance, December 31, 2020 and March 31, 2021		$	500,000

 

11. Short-Term Line of Credit

 

(a) In September 2018, the Company signed a new agreement with Harris Bank (“Harris”) to renew the expiring credit line. The revolving line of credit is for an aggregate amount of up to the lesser of (i) $2,500,000, or (ii) 80% of eligible domestic accounts receivable and certain foreign accounts receivable plus 60% of inventory. The loan had an annual interest rate of 3.25% and a balance of $1,641,085 at December 31, 2019. The revolving line of credit at Harris was paid in October 2020, upon the opening of the revolving line of credit at Midland States Bank (“Midland”).

 

(b) In April, 2020, ENP Investments signed a new agreement with Midland to renew the expiring credit line. The revolving line of credit is for an aggregate amount up to $3,000,000. 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 4.050 percentage points over the Index. Under no circumstances will the interest rate of this loan be less than 4.500% per annum or more than the maximum rate allowed by applicable law. The interest rate at March 31, 2021 is 4.5% (December 31, 2020 – 4.5%).

 

 

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 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 $1,625,000. March 31, 2021, 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, 2021 were $1,739,280 (December 31, 2020 - $541,456).

 

(c) In October 2020, 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) $2,500,000, or (ii) 80% of eligible domestic accounts receivable and certain foreign accounts receivable plus 50% of inventory with a rate of prime plus 0.5%. The loan has an annual interest rate of 3.75% at March 31, 2021 (December 31, 2020 – 3.75%).

 

The revolving line of credit contains customary affirmative and negative covenants, including the following: compliance with laws, provision of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance of operating accounts at 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, 2021, 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, 2021 were $1,489,154 (December 31, 2020 - $1,574,617).

 

12. Long Term Debt

 

(a) In October 2018, NanoChem signed a $4,100,000 term loan with Harris with a rate of prime (March 31, 2020 – 3.25%) to be repaid over 7 years with equal monthly installments plus interest along two payments consisting of 25% prior year cash flow recapture, capped at $300,000, due May 31, 2019 and 2020. The money was used to purchase a 65% interest in ENP Investments. Interest expense for the three months ended March 31, 2020 was $34,458. This loan was paid in October 2020 upon opening of credit facilities at Midland. The balance owing at March 31, 2020 was $2,970,238.

 

(b) In April 2019, NanoChem signed a loan for $1,100,000 with Harris with a rate of prime plus 0.5% (December 31, 2019 – 5.25%) for the purchase of new manufacturing equipment. The Company paid interest monthly until February 2020, when equal monthly installments of the principal and interest were due until January 2024. Interest expense for the year ended December 31, 2020 was $36,272 (2019 – $36,333). This loan was paid in October 2020 upon opening of credit facilities at Midland. The balance owing at December 31, 2019 was $1,100,000.

 

(c) 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. Interest expense expense for the three months ended March 31, 2021 was $1,510 (2020 - 2,104). The principal balance owing at March 31, 2021 is $118,481 (December 31, 2020 - $125,543).

 

 

The Company has committed to the following repayments:

 

2021		$	28,410
2022		$	29,900
2023		$	31,508
2024		$	33,202
2025		$	2,523

 

(d) In March 2016, ENP Investments signed a $45,941 promissory note with Ford Motor Credit Company with a rate of 0.00% interest to be repaid over 5 years with equal monthly installments. In August 2020, the loan was paid off in full

 

(e) 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.

 

(f) 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.

 

(g) 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, 2021 was $18,606 (2020 - $nil). The balance owing at March 31, 2021 is $1,830,392 (December 31, 2020 - $1,920,976).

 

The Company has committed to the following repayments:

 

2021		$	368,332
2022		$	382,705
2023		$	397,414
2024		$	413,516
2025		$	359,009

 

(h) 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, 2021 was $7,739 (2020 - $nil). The balance owing at March 31, 2021 is $713,735 (December 31, 2020 - $822,380).

 

2021		$	441,260
2022		$	381,120

 

(i) 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, 2021 was $4,766 (2020 - $3,260). The balance owing at March 31, 2021 is $438,213 (December 31, 2020 - $440,779).

 

 

As of March 31, 2021, Company was in compliance with all loan covenants.

 

Continuity		March 31, 2021				December 31, 2020
Balance, January 1		$	3,847,638			$	4,380,393
Plus: Proceeds from loans			-				3,413,160
Plus: Loan acquired with acquisition of ENP Realty			-				450,000
Less: Forgiveness on PPP loans			(537,960	)			-
Less: Payments on loan			(208,857	)			(4,395,915	)
Balance, end of period		$	3,100,821			$	3,847,638

 

Outstanding balance at December 31,		March 31, 2021				December 31, 2020
a) Long term debt – Harris Bank		$	-			$	-
b) Long term debt – Harris Bank			-				-
c) Long term debt – Midland States Bank			118,481				125,543
d) Long term debt – Ford Credit			-				-
e) Long term debt – PPP			-				322,000
f) Long term debt - PPP			-				215,960
g) Long term debt – Midland States Bank			1,830,392				1,920,976
h) Long term debt – Midland States Bank			713,735				822,380
i) Long term debt – Stock Yards Bank & Trust			438,213				440,779
Long-term Debt			3,100,821				3,847,638
Less: current portion			(837,724	)			(848,794	)
		$	2,263,097			$	2,998,844

 

13. Convertible Note Payable

 

In October 2018, the Company issued a convertible note payable in the amount of $1,000,000 in connection with the acquisition of EnP Investments LLC. The convertible note is due on or before September 30, 2023 with 5% interest due per year. At the option of the holder, the Note may be converted into 400,000 shares in the Company’s common stock.

 

In June 2019, the holder opted to convert $500,000 of the convertible note payable into 200,000 shares of the Company’s common stock.

 

In April 2020, the Company repaid the remaining principal balance of $500,000 and accrued interest of $13,046.

 

14. 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, 2020 and the three-month period ended March 31, 2021:

 

		Number of shares				Exercise price per share				Weighted average exercise price
Balance, December 31, 2019			635,000			$	0.75 – 1.75			$	1.35
Granted			172,000			$	2.44			$	2.44
Cancelled or expired			(13,000	)		$	2.44 – 3.46			$	2.75
Exercised			(45,000	)		$	0.75 – 1.05			$	0.88
Balance, December 31, 2020			749,000			$	0.75 – 4.13			$	2.42
Cancelled or expired			(27,799	)		$	1.42 – 3.46			$	2.45
Exercised			(55,201	)		$	0.75 – 3.46			$	1.55
Balance, March 31, 2021			666,000			$	1.42 – 4.13			$	2.66
Exercisable, March 31, 2021			423,000			$	1.42 – 4.13			$	2.44

 

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:

 

		2020
Expected life – years			3.0
Interest rate			0.37	%
Volatility			70.14	%
Weighted average fair value of options granted		$	1.12

 

The Company did not grant any options during the three months ended March 31, 2021 or 2020. Options granted in previous quarters resulted in expenses in the amount of $13,065 for consultants (2020 - $11,272) and $26,524 for employees (2020 - $18,310) during the quarter ended March 31, 2021. There were 32,000 employee and 23,201 consultant stock options exercised during the three months ended March 31, 2021 (2020 – 15,000 employee and 10,000 consultant stock options).

 

As of March 31, 2021, 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, 2021 is $578,660 (2020 – $nil).

 

15. Capital Stock.

 

During the three months ended March 31, 2021, 32,000 shares were issued upon the exercise of employee stock options (2020 – 15,000) and 23,201 shares were issued upon the exercise of consultant stock options (2020 – 10,000).

 

On March 19, 2020, the Company suspended the annual dividend until further notice due to the uncertainty surrounding the COVID-19 virus.

 

16. 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.

 

 

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 $1,278,944.

 

Balance, December 31, 2019		$	2,550,149
Distribution			(594,882	)
Non-controlling interest share of income			606,484
Balance, December 31, 2020			2,561,751
Distribution			(157,952	)
Non-controlling interest share of income			186,484
Balance, March 31, 2021		$	2,590,283

 

17. 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, 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
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	)

 

 

 

Three months ended March 31, 2020:
		EWCP				TPA				Total
Revenue		$	89,928			$	8,339,558			$	8,429,486
Interest expense			-				101,425				101,425
Depreciation and amortization			10,476				137,582				148,058
Segment profit (loss)			(60,255	)			1,324,930				1,264,675
Segment assets			1,963,075				32,856,519				34,819,594
Expenditures for segment assets			-				(96,280	)			(96,280	)

 

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

 

		Three months ended March 31, 2021				Three months ended March 31, 2020
Canada		$	107,253			$	146,000
United States and abroad			7,517,444				8,283,486
Total		$	7,624,697			$	8,429,486

 

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, 2021				December 31, 2020
Canada		$	438,107			$	445,663
United States			10,315,747				10,519,903
Total		$	10,753,854			$	10,965,566

 

Three primary customers accounted for $3,120,819 (41%) of sales during the three-month period ended March 31, 2021 (2020 - $3,744,456 or 44%).

 

18. Comparative Figures.

 

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

 

19. Subsequent Events

 

None

 

 

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 our TPA division.

 

Material changes in the Company’s Statement of Operations for the three months ended March 31, 2021 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		D		Decreased customer orders.
Advertising and promotion		D		The COVID virus prevented trade shows from occurring.
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		D		Travel decreased due to COVID-19.
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.

 

 

Three primary customers accounted for 41% of the Company’s sales during the three months ended March 31, 2021 (2020 - 44%). The amount of revenue (all from the sale of TPA products) attributable to each customer is shown below.

 

		Three Months Ended March 31,
		2021				2020
Company A		$	358,528	*		$	985,942
Company B		$	998,336			$	915,820
Company C		$	1,434,684			$	1,842,694
Company D		$	687,800			$	670,163	*

 

*not a primary customer in that period

 

Customers with balances greater than 10% of our receivables as of March 31, 2021 and 2020 are shown below:

 

		March 31,
		2021				2020
Company A		$	127,205	*		$	603,655
Company B		$	2,577,497			$	2,037,071
Company C		$	1,138,276			$	1,010,104

 

*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, 2021 and 2020 are shown below:

 

		2021				2020
Cash provided (used) by operations			(2,356,767	)			(1,153,917	)
Long term deposits			-				22,084
Purchase of investments			-				(1,000,000	)
Proceeds of equity investment distributions			12,500				256,563
Acquisition of equipment			(96,136	)			(96,280	)
Borrowings from line of credit			1,112,361				1,165,850
Repayment of loans			(208,857	)			(201,027	)
Lease financing costs			(83,070	)			(101,079	)
Partnership distributions			(157,952	)			(143,001	)
Proceeds from sale of common stock			76,360				24,750
Changes in exchange rates			82,352				3,653

 

 

The Company has sufficient cash resources to meets its future commitments and cash flow requirements for the coming year. As of March 31, 2021, working capital was $12,092,594 (December 31, 2020 - $11,146,211).

 

We are committed to minimum rental payments for property and premises aggregating approximately $632,340 over the term of four leases, the last expiring on December 31, 2025.

 

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

 

2021		$	334,620
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, 2021.

 

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, 2021. 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, 2021.

 

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, 2021. 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, 2021 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		Amended and Restated Articles of Incorporation. (1)
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.*

 

* Filed with this report.

 

(1) Incorporated by reference to the registrant’s Registration Statement on Form 10-SB (SEC File. No. 000-29649) filed February 22, 2000.

 

 

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 14, 2021

 

	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