Item
8.
|
Financial
Statements and Supplementary Data.
|
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of
Flexible Solutions International,
Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Flexible Solutions International Inc. (the Company) as of December 30, 2017 and
2016, and the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in
the two-year period ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In
our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December
31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
|
|
We
have served as the Company’s auditor since 2009.
|
|
Vancouver,
BC
|
|
March
31, 2017
|
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Balance Sheets
As
at December 31
(U.S.
Dollars)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,912,138
|
|
|
$
|
2,470,066
|
|
Accounts receivable (see Note 3)
|
|
|
2,105,471
|
|
|
|
3,008,153
|
|
Inventories (see Note 4)
|
|
|
4,686,852
|
|
|
|
3,786,093
|
|
Prepaid expenses
|
|
|
255,080
|
|
|
|
228,699
|
|
Total current assets
|
|
|
13,959,541
|
|
|
|
9,493,011
|
|
|
|
|
|
|
|
|
|
|
Property, equipment and leaseholds, net (see Note 5)
|
|
|
1,938,509
|
|
|
|
3,393,944
|
|
Patents (see Note 6)
|
|
|
79,452
|
|
|
|
95,890
|
|
Long term deposits (see Note 7)
|
|
|
18,531
|
|
|
|
26,163
|
|
Investment (Note 8)
|
|
|
13,414
|
|
|
|
122,480
|
|
Deferred tax asset (Note 11)
|
|
|
1,763,923
|
|
|
|
2,026,999
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
17,773,370
|
|
|
$
|
15,158,487
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
939,116
|
|
|
$
|
902,037
|
|
Deferred revenue
|
|
|
208,608
|
|
|
|
95,308
|
|
Income taxes payable
|
|
|
1,101,596
|
|
|
|
893,867
|
|
Short term line of credit (Note 9)
|
|
|
250,000
|
|
|
|
250,000
|
|
Current portion of long term debt (Note 10)
|
|
|
201,193
|
|
|
|
201,193
|
|
Total current liabilities
|
|
|
2,700,513
|
|
|
|
2,342,405
|
|
Long term debt (Note 10)
|
|
|
150,896
|
|
|
|
352,089
|
|
Total liabilities
|
|
|
2,851,409
|
|
|
|
2,694,494
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock (see 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:
|
|
|
|
|
|
|
|
|
11,597,991 (2016: 11,457,991) common shares
|
|
|
11,598
|
|
|
|
11,458
|
|
Capital in excess of par value
|
|
|
15,114,835
|
|
|
|
14,842,863
|
|
Other comprehensive loss
|
|
|
(656,093
|
)
|
|
|
(1,087,208
|
)
|
Accumulated earnings (deficit)
|
|
|
451,621
|
|
|
|
(1,303,120
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
14,921,961
|
|
|
|
12,463,993
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
17,773,370
|
|
|
$
|
15,158,487
|
|
Commitments
and Subsequent events (See
Notes 16 and 17)
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Income and Comprehensive Income
For
the Years Ended December 31
(U.S.
Dollars)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
15,494,325
|
|
|
$
|
16,246,014
|
|
Cost of sales
|
|
|
9,508,827
|
|
|
|
9,256,526
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,985,498
|
|
|
|
6,989,488
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Wages
|
|
|
1,647,780
|
|
|
|
1,528,031
|
|
Administrative salaries and benefits
|
|
|
1,007,850
|
|
|
|
838,837
|
|
Advertising and promotion
|
|
|
18,257
|
|
|
|
21,199
|
|
Investor relations and transfer agent fee
|
|
|
152,362
|
|
|
|
131,037
|
|
Office and miscellaneous
|
|
|
238,195
|
|
|
|
269,800
|
|
Insurance
|
|
|
285,418
|
|
|
|
301,856
|
|
Interest expense
|
|
|
44,125
|
|
|
|
41,699
|
|
Rent
|
|
|
241,286
|
|
|
|
117,715
|
|
Consulting
|
|
|
133,949
|
|
|
|
119,198
|
|
Professional fees
|
|
|
222,743
|
|
|
|
184,931
|
|
Travel
|
|
|
137,392
|
|
|
|
140,340
|
|
Telecommunications
|
|
|
26,071
|
|
|
|
24,363
|
|
Shipping
|
|
|
19,624
|
|
|
|
16,338
|
|
Research
|
|
|
98,928
|
|
|
|
95,098
|
|
Commissions
|
|
|
112,678
|
|
|
|
66,839
|
|
Bad debt expense
|
|
|
1,191
|
|
|
|
-
|
|
Currency exchange
|
|
|
64,870
|
|
|
|
(10,602
|
)
|
Utilities
|
|
|
21,339
|
|
|
|
17,495
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,474,058
|
|
|
|
3,904,174
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,511,440
|
|
|
|
3,085,314
|
|
Gain on sale of equipment
|
|
|
-
|
|
|
|
6,848
|
|
Gain on involuntary disposition (net of tax)
|
|
|
2,043,614
|
|
|
|
-
|
|
Write down of inventory
|
|
|
(51,346
|
)
|
|
|
-
|
|
Loss on investment
|
|
|
(84,066
|
)
|
|
|
(15,086
|
)
|
Interest income
|
|
|
913
|
|
|
|
2,184
|
|
Income before income tax
|
|
|
3,420,555
|
|
|
|
3,079,260
|
|
|
|
|
|
|
|
|
|
|
Income taxes (Note 11)
|
|
|
|
|
|
|
|
|
Deferred income (expense) tax recovery
|
|
|
(985,495
|
)
|
|
|
(303,793
|
)
|
Income tax recovery (expense)
|
|
|
(680,319
|
)
|
|
|
(982,133
|
)
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
$
|
1,754,741
|
|
|
$
|
1,793,334
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
431,115
|
|
|
|
118,590
|
|
Comprehensive income
|
|
|
2,185,856
|
|
|
|
1,911,924
|
|
Income per share (basic) (Note 12)
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
Income per share (diluted) (Note 12)
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Weighted average number of common shares (basic)
|
|
|
11,485,580
|
|
|
|
11,464,270
|
|
Weighted average number of common shares (diluted)
|
|
|
11,725,482
|
|
|
|
11,635,136
|
|
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Cash Flows
For
Years Ended December 31
(U.S.
Dollars)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,754,741
|
|
|
$
|
1,793,334
|
|
Adjustments to reconcile net income to net cash:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
116,092
|
|
|
|
66,318
|
|
Depreciation and amortization
|
|
|
286,616
|
|
|
|
540,079
|
|
Loss on investment
|
|
|
84,066
|
|
|
|
15,086
|
|
Decrease in deferred tax asset
|
|
|
985,495
|
|
|
|
303,793
|
|
Write down of inventory
|
|
|
(51,346
|
)
|
|
|
-
|
|
Gain on involuntary disposition
|
|
|
(2,043,614
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes in non-cash working capital items:
|
|
|
|
|
|
|
|
|
(Increase) Decrease in accounts receivable
|
|
|
912,056
|
|
|
|
(1,199,267
|
)
|
(Increase) Decrease in inventories
|
|
|
(887,339
|
)
|
|
|
(506,278
|
)
|
(Increase) Decrease in prepaid expenses
|
|
|
(23,758
|
)
|
|
|
15,793
|
|
Increase (Decrease) in accounts payable and accrued liabilities
|
|
|
(407,555
|
)
|
|
|
90,111
|
|
Increase (Decrease) in taxes payable
|
|
|
207,729
|
|
|
|
600,629
|
|
Increase (Decrease) deferred revenue
|
|
|
109,242
|
|
|
|
55,628
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
1,042,425
|
|
|
|
1,775,226
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Long term deposits
|
|
|
7,980
|
|
|
|
(15,925
|
)
|
Investment
|
|
|
25,000
|
|
|
|
(87,500
|
)
|
Proceed from insurance
|
|
|
3,366,889
|
|
|
|
-
|
|
Net purchase of property, equipment and leaseholds
|
|
|
(426,480
|
)
|
|
|
(114,270
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
2,973,389
|
|
|
|
(217,695
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Draw from short term line of credit
|
|
|
-
|
|
|
|
50,000
|
|
Loan repayment
|
|
|
(201,193
|
)
|
|
|
(201,193
|
)
|
Repurchase of common stock
|
|
|
-
|
|
|
|
(1,575,000
|
)
|
Proceeds of issuance of common stock
|
|
|
156,020
|
|
|
|
32,600
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(45,173
|
)
|
|
|
(1,693,593
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
471,431
|
|
|
|
107,390
|
|
|
|
|
|
|
|
|
|
|
Inflow (outflow) of cash
|
|
|
4,442,072
|
|
|
|
(28,672
|
)
|
Cash and cash equivalents, beginning
|
|
|
2,470,066
|
|
|
|
2,498,738
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending
|
|
$
|
6,912,138
|
|
|
$
|
2,470,066
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
|
833,766
|
|
|
|
452,654
|
|
Interest paid
|
|
|
43,003
|
|
|
|
41,699
|
|
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Stockholders’ Equity
For
the Years Ended December 31, 2017 and 2016
(U.S.
Dollars)
|
|
|
|
|
|
|
|
Capital in
|
|
|
Accumulated
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Excess of
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Par Value
|
|
|
(Deficiency)
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2015
|
|
|
13,177,991
|
|
|
$
|
13,178
|
|
|
$
|
16,317,225
|
|
|
$
|
(3,096,454
|
)
|
|
$
|
(1,205,798
|
)
|
|
$
|
12,028,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118,590
|
|
|
|
118,590
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,793,334
|
|
|
|
—
|
|
|
|
1,793,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,911,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock cancelled
|
|
|
(1,750,000
|
)
|
|
|
(1,750
|
)
|
|
|
(1,573,250
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,575,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
30,000
|
|
|
|
30
|
|
|
|
32,570
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
66,318
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2016
|
|
|
11,457,991
|
|
|
$
|
11,458
|
|
|
$
|
14,842,863
|
|
|
$
|
(1,303,120
|
)
|
|
$
|
(1,087,208
|
)
|
|
$
|
12,463,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
431,115
|
|
|
|
431,115
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,754,741
|
|
|
|
—
|
|
|
|
1,754,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,185,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
140,000
|
|
|
|
140
|
|
|
|
155,880
|
|
|
|
—
|
|
|
|
—
|
|
|
|
156,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
116,092
|
|
|
|
—
|
|
|
|
—
|
|
|
|
116,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2017
|
|
|
11,597,991
|
|
|
$
|
11,598
|
|
|
$
|
15,114,835
|
|
|
$
|
451,621
|
|
|
$
|
(656,093
|
)
|
|
$
|
14,921,961
|
|
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(U.S.
Dollars)
1. Basis
of Presentation
.
These
consolidated financial statements include the accounts of Flexible Solutions International, Inc. (the “Company”),
and its wholly-owned subsidiaries Flexible Fermentation Ltd. (“Flexible Ltd.”), NanoChem Solutions Inc. (“NanoChem”),
Flexible Solutions Ltd., Flexible Biomass LP, FS Biomass Inc., NCS Deferred Corp., Conserve H2O Ltd. and Natural Chem SEZC Ltd.
All inter-company balances and transactions have been eliminated. The Company was incorporated May 12, 1998 in the State of Nevada
and had no operations until June 30, 1998.
Flexible
Solutions International, Inc. 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.
2. Significant
Accounting Policies.
These
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States applicable to a going concern and reflect the policies outlined below.
(a)
Cash
and Cash Equivalents
.
The
Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at
the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with several financial institutions.
(b)
Inventories
and Cost of Sales
The
Company has three major classes of inventory: 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 for 2017 and at the lower of cost or market for 2016. Cost
is determined on a first-in, first-out basis. Cost of sales includes all expenditures incurred in bringing the goods to the point
of sale. Inventory costs and costs of sales include direct costs of the raw material, inbound freight charges, warehousing costs,
handling costs (receiving and purchasing) and utilities and overhead expenses related to the Company’s manufacturing and
processing facilities.
(c)
Allowance
for Doubtful Accounts
The
Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable
are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate
allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer,
overall customer credit-worthiness and historical experience.
(d)
Property,
Equipment, 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
|
Patents
|
|
Straight-line
over 17 years
|
Technology
|
|
Straight-line
over 10 years
|
Leasehold
improvements
|
|
Straight-line
over lease term
|
Property
and equipment are written down to net realizable value when management determines there has been a change in circumstances which
indicates their carrying amounts may not be recoverable. No write-downs have been necessary to date.
(e)
Impairment
of Long-Lived Assets
.
In
accordance with FASB Codification Topic 360, “Property, Plant and Equipment (ASC 360), the Company reviews long-lived assets,
including, but not limited to, property, equipment and leaseholds, patents and other assets, for impairment annually or whenever
events or changes in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived
assets is assessed for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets.
If the expected future cash flows of an asset is less than its carrying value, an impairment measurement is indicated. Impairment
charges are recorded to the extent that an asset’s carrying value exceeds its fair value. Accordingly, actual results could
vary significantly from such estimates. There were no impairment charges during the periods presented.
(f)
Foreign
Currency
.
The
functional currency of 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
.
Revenue
from product sales is recognized at the time the product is shipped since title and risk of loss is transferred to the purchaser
upon delivery to the carrier. Shipments are made F.O.B. shipping point. The Company recognizes revenue when there is persuasive
evidence of an arrangement, delivery to the carrier has occurred, the fee is fixed or determinable, collectability is reasonably
assured and there are no significant remaining performance obligations. When significant post-delivery obligations exist, revenue
is deferred until such obligations are fulfilled. To date, there have been no such significant post-delivery obligations.
Since
the Company’s inception, product returns have been insignificant; therefore, no provision has been established for estimated
product returns.
Deferred
revenues consist of products sold to distributors with payment terms greater than the Company’s customary business terms
due to lack of credit history or operating in a new market in which the Company has no prior experience. The Company defers the
recognition of revenue until the criteria for revenue recognition has been met, and payments become due or cash is received from
these distributors.
(h)
Stock
Issued in Exchange for Services
.
The
Company’s common stock issued in exchange for services is valued at estimated fair market value based upon trading prices
of the Company’s common stock on the dates of the stock transactions. The corresponding expense of the services rendered
is recognized over the period that the services are performed.
(i)
Stock-based
Compensation
.
The
Company recognizes compensation expense for all share-based payments in accordance with FASB Codification Topic 718,
Compensation
— Stock Compensation
, (ASC 718). Under the fair value recognition provisions of ASC 718, the Company recognizes share-based
compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.
The
fair value at grant date of stock options is estimated using the Black-Scholes option-pricing model. Compensation expense is recognized
on a straight-line basis over the stock option vesting period based on the estimated number of stock options that are expected
to vest. Shares are issued from treasury upon exercise of stock options.
(j)
Comprehensive
Income
.
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 primarily comprised of unrealized foreign exchange gains and losses.
(k)
Income
Per Share
.
Basic
earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares
outstanding in the period. Diluted earnings per share are calculated giving effect to the potential dilution of the exercise of
options and warrants. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options
and warrants are included in diluted net income per share to the extent that these shares are dilutive. Common equivalent shares
that have an anti-dilutive effect on net income per share have been excluded from the calculation of diluted weighted average
shares outstanding for the years ended December 31, 2017 and 2016.
(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 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 the valuation of inventory.
(m)
Financial
Instruments
.
The
fair market value of the Company’s financial instruments comprising cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, and short term line of credit were estimated to approximate their carrying values due to immediate
or short-term maturity of these financial instruments.
(n)
Fair
Value of Financial Instruments
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs described below,
of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
|
●
|
Level
1 – Quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
●
|
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level
3 — Unobservable inputs that are supported by little or no market activity which is significant to the fair value of
the assets or liabilities.
|
The
fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and the short term line
of credit for all periods presented approximate their respective carrying amounts due to the short term nature of these financial
instruments
(o)
Contingencies
Certain
conditions may exist as of the date the financial statements are issued which may result in a loss to the Company but which will
only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess
such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the
Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates
that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material,
would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed. Legal fees associated with loss contingencies are expensed as incurred.
(p)
Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance so that the
assets are recognized only to the extent that when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will be realized.
Per
FASB ASC 740 “Income taxes” under the liability method, it is the Company’s policy to provide for uncertain
tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more
likely than not to be sustained upon examination by tax authorities. At December 31, 2017, the Company believes it has appropriately
accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized
benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given
financial statement period may be affected. Interest and penalties associated with the Company’s tax positions are recorded
as interest expense in the consolidated statements of income and comprehensive income.
(q)
Risk Management.
The
Company’s credit risk is primarily attributable to its accounts receivable. The amounts presented in the accompanying consolidated
balance sheets are net of allowances for doubtful accounts, estimated by the Company’s management based on prior experience
and the current economic environment. The Company is exposed to credit-related losses in the event of non-payment by customers.
Credit exposure is minimized by dealing with only credit worthy counterparties. Accounts receivable for the Company’s two
primary customers totaled $1,247,374 (65%) at December 31, 2017 (December 31, 2016 - $2,032,646 or 67%).
The
credit risk on cash and cash equivalents is limited because the Company limits its exposure to credit loss by placing its cash
and cash equivalents with major financial institutions. The Company maintains cash balances at financial institutions which at
times exceed federally insured amounts. The Company has not experienced any material losses in such accounts.
The
Company is exposed to foreign exchange and interest rate risk to the extent that market value rate fluctuations materially differ
from financial assets and liabilities, subject to fixed long-term rates.
In
order to manage its exposure to foreign exchange risks, the Company is closely monitoring the fluctuations in the foreign currency
exchange rates and the impact on the value of cash and cash equivalents, accounts receivable, and accounts payable and accrued
liabilities. The Company has not hedged its exposure to currency fluctuations.
(r)
Equity
Method Investment
The
Company accounts for investments using the equity method of accounting if the investment provides the Company the ability to exercise
significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company’s
ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation
on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate.
Under the equity method of accounting, the investment is recorded at cost in the consolidated balance sheets under other assets
and adjusted for dividends received and the Company’s share of the investee’s earnings or losses together with other-than-temporary
impairments which are recorded through interest and other loss, net in the consolidated statements of income and comprehensive
income.
(s)
Adoption
of new accounting principles
In
July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The standard will require inventory to be measured
at the lower of cost or net realizable value. The guidance will not apply to inventories for which cost is determined using the
last-in, first-out method or the retail inventory method. The standard is effective for annual and interim reporting periods beginning
after December 15, 2016. Adoption of this standard had no material effect on our consolidated financial statements.
In
March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU
2016-09”). This standard was issued as part of the FASB’s Simplification Initiative that involve several aspects of
the accounting for share based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic
entities. For public business entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim
periods within those annual periods. The method of adoption is dependent on the specific aspect of accounting addressed in this
new guidance. Early adoption is permitted in any interim or annual period. Adoption of this standard had no material effect on
our consolidated financial statements.
(t)
Accounting
Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU 2016-02, Leases. The standard will require lessees to recognize most leases on their balance
sheet and makes selected changes to lessor accounting. The standard is effective for annual and interim reporting periods beginning
after December 15, 2018. A modified retrospective transition approach is required, with certain practical expedients available.
We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which has been updated through several revisions
and clarifications since its original issuance. The standard will require revenue recognized to represent the transfer of promised
goods or services to customers at an amount that reflects the consideration which a company expects to receive in exchange for
those goods or services. The standard also requires new, expanded disclosures regarding revenue recognition. The standard will
be effective January 1, 2018 with early adoption permissible beginning January 1, 2017. We do not expect this to have a material
impact on our consolidated financial statements.
3.
Accounts
Receivable
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
2,145,803
|
|
|
$
|
3,044,652
|
|
Allowances
for doubtful accounts
|
|
|
(40,332
|
)
|
|
|
(36,499
|
)
|
|
|
$
|
2,105,471
|
|
|
$
|
3,008,153
|
|
4. Inventories
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Completed
goods
|
|
$
|
2,530,914
|
|
|
$
|
1,646,465
|
|
Work
in progress
|
|
|
183,944
|
|
|
|
2,572
|
|
Raw
materials and supplies
|
|
|
1,971,994
|
|
|
|
2,137,056
|
|
|
|
$
|
4,686,852
|
|
|
$
|
3,786,093
|
|
In
February 2017, the Company lost $367,331CAD ($277,482USD) in inventory in a fire at the Taber, AB location. Insurance was in place.
See Note 5.
5.
Property,
Equipment and Leaseholds
|
|
2017
|
|
|
Accumulated
|
|
|
2017
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Buildings
and improvements
|
|
$
|
3,400,792
|
|
|
$
|
2,409,179
|
|
|
$
|
991,613
|
|
Computer
hardware
|
|
|
40,904
|
|
|
|
39,398
|
|
|
|
1,506
|
|
Furniture
and fixtures
|
|
|
17,673
|
|
|
|
11,156
|
|
|
|
6,517
|
|
Office
equipment
|
|
|
1,480
|
|
|
|
148
|
|
|
|
1,332
|
|
Manufacturing
equipment
|
|
|
2,590,158
|
|
|
|
2,104,137
|
|
|
|
486,021
|
|
Trailer
|
|
|
9,562
|
|
|
|
1,434
|
|
|
|
8,128
|
|
Boat
|
|
|
34,400
|
|
|
|
14,586
|
|
|
|
19,814
|
|
Leasehold
improvements
|
|
|
85,432
|
|
|
|
32,506
|
|
|
|
52,926
|
|
Technology
|
|
|
101,748
|
|
|
|
101,748
|
|
|
|
—
|
|
Land
|
|
|
370,652
|
|
|
|
—
|
|
|
|
370,652
|
|
|
|
$
|
6,652,801
|
|
|
$
|
4,714,292
|
|
|
$
|
1,938,509
|
|
|
|
2016
|
|
|
Accumulated
|
|
|
2016
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
Buildings
and improvements
|
|
$
|
4,762,094
|
|
|
$
|
2,967,370
|
|
|
$
|
1,794,724
|
|
Computer
hardware
|
|
|
89,480
|
|
|
|
85,784
|
|
|
|
3,696
|
|
Furniture
and fixtures
|
|
|
32,439
|
|
|
|
23,142
|
|
|
|
9,297
|
|
Office
equipment
|
|
|
17,745
|
|
|
|
16,788
|
|
|
|
957
|
|
Manufacturing
equipment
|
|
|
5,236,404
|
|
|
|
4,102,635
|
|
|
|
1,133,769
|
|
Trailer
|
|
|
12,859
|
|
|
|
12,250
|
|
|
|
609
|
|
Boat
|
|
|
34,400
|
|
|
|
9,632
|
|
|
|
24,768
|
|
Leasehold
improvements
|
|
|
85,432
|
|
|
|
15,419
|
|
|
|
70,013
|
|
Technology
|
|
|
101,748
|
|
|
|
101,748
|
|
|
|
—
|
|
Land
|
|
|
356,111
|
|
|
|
—
|
|
|
|
356,111
|
|
|
|
$
|
10,728,712
|
|
|
$
|
7,334,768
|
|
|
$
|
3,393,944
|
|
Amount
of depreciation expense for 2017: $270,178 (2016: $524,463) and is included in cost of sales in the consolidated statements of
income and comprehensive income.
In
February 2017, the Company lost a net carrying value total of $2,196,722CAD ($1,659,404USD) in building and manufacturing equipment
in a fire at the Taber, AB location. Insurance was in place. During the year ended December 31, 2017, the Company was approved
for interim insurance proceeds of $5,570,000CAD ($4,207,578USD).
6. Patents
|
|
2017
Cost
|
|
|
Accumulated
Amortization
|
|
|
2017
Net
|
|
Patents
|
|
$
|
212,426
|
|
|
$
|
132,974
|
|
|
$
|
79,452
|
|
|
|
2016
Cost
|
|
|
Accumulated
Amortization
|
|
|
2016
Net
|
|
Patents
|
|
$
|
197,448
|
|
|
$
|
101,558
|
|
|
$
|
95,890
|
|
Increase
in 2017 cost was due to currency conversion. 2017 cost in Canadian dollars - $265,102 (2016 - $265,102 in Canadian dollars).
Amount
of amortization for 2017: $16,438 (2016: $15,616) and is included in cost of sales in the consolidated statements of income
and comprehensive income (loss).
Estimated
amortization expense over the next five years is as follows:
2018
|
|
$
|
16,438
|
|
2019
|
|
|
16,438
|
|
2020
|
|
|
16,438
|
|
2021
|
|
|
16,438
|
|
2022
|
|
|
16,438
|
|
7.
Long
Term Deposits
The
Company has security deposits that are long term in nature which consist of damage deposits held by landlords and security deposits
held by various vendors.
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Long
term deposits
|
|
$
|
18,531
|
|
|
$
|
26,163
|
|
8. Equity
Method Investment
The Company has a 42%
ownership interest in ENP Peru Investments LLC (“ENP Peru”), which the Company 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 is as follows:
|
|
|
|
January 1,
2016 Balance
|
|
|
-
|
|
Capital
contributions
|
|
$
|
150,066
|
|
Return of
equity
|
|
|
(12,500
|
)
|
Loss
in equity method investment
|
|
|
(15,086
|
)
|
December 31,
2016 Balance
|
|
$
|
122,480
|
|
Return of
equity
|
|
|
(25,000
|
)
|
Loss
on equity method investment
|
|
|
(84,066
|
)
|
December
31, 2017 Balance
|
|
|
13,414
|
|
9. Short-Term
Line of Credit
In
May 2017, the Company signed a new agreement with Harris Bank (“the Bank”) to renew the expiring credit line. The
revolving line of credit is for an aggregate amount of up to the lesser of (i) $3,000,000, or (ii) 75% of eligible domestic accounts
receivable and certain foreign accounts receivable plus 40% of inventory. The loan has an annual interest rate of 5%. (2016
– 4%) and is up for renewal on June 30, 2018.
The
Revolving Line of Credit contains customary affirmative and negative covenants, including the following: compliance with laws,
provision of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance
of operating accounts at the Bank, the Bank’s access to collateral, formation or acquisition of subsidiaries, incurrence
of indebtedness, dispositions of assets, granting liens, changes in business, ownership or business locations, engaging in mergers
and acquisitions, making investments or distributions and affiliate transactions. The covenants also require that the Company
maintain a minimum ratio of qualifying financial assets to the sum of qualifying financial obligations. As of December 31, 2017,
Company was in compliance with all loan covenants.
To
secure the repayment of any amounts borrowed under the Revolving Line of Credit, the Company granted the Bank a security interest
in substantially all of the assets of NanoChem Solutions Inc., exclusive of intellectual property assets.
Short-term
borrowings outstanding under the Revolving Line as of December 31, 2017 were $250,000 (December 31, 2016 - $250,000).
10. Long
Term Debt
In
September 2014, NanoChem Solutions Inc. signed a $1,005,967 promissory note with Harris Bank with a rate of prime plus 0.5% (2017
– 5%) to be repaid over 5 years with equal monthly installments plus interest. This money was used to retire the previously
issued and outstanding debt obligations. The balance owing at December 31, 2017 was $352,089 (December 31, 2016 - $553,282). The
final payment will be made in September 2019.
The
Company has committed to the following repayments:
2018
|
|
$
|
201,193
|
|
2019
|
|
$
|
150,896
|
|
As
of December 31, 2017, Company was in compliance with all loan covenants.
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Continuity
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
553,282
|
|
|
$
|
754,475
|
|
Less:
Payments on loan
|
|
|
201,193
|
|
|
|
201,193
|
|
Balance,
end of year
|
|
$
|
352,089
|
|
|
$
|
553,282
|
|
Less:
current portion
|
|
|
(201,193
|
)
|
|
|
(201,193
|
)
|
Long
term balance
|
|
$
|
150,896
|
|
|
$
|
352,089
|
|
11. Income
Tax
The
provision for income tax expense (benefit) is comprised of the following:
|
|
2017
|
|
|
2016
|
|
Current tax, federal
|
|
$
|
547,486
|
|
|
$
|
787,539
|
|
Current tax, state
|
|
|
132,833
|
|
|
|
194,594
|
|
Current tax, foreign
|
|
|
-
|
|
|
|
-
|
|
Current tax, total
|
|
|
680,319
|
|
|
|
982,133
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax, federal
|
|
|
(11,069
|
)
|
|
|
41,343
|
|
Deferred income tax, state
|
|
|
(2,686
|
)
|
|
|
10,215
|
|
Deferred income tax, foreign
|
|
|
385,639
|
|
|
|
252,235
|
|
Deferred income tax, total
|
|
|
371,884
|
|
|
|
303,793
|
|
Total
|
|
$
|
1,052,203
|
|
|
$
|
3,191,056
|
|
The
following table reconciles the income tax benefit at the U.S. Federal statutory rate to income tax benefit at the Company’s
effective tax rates.
|
|
2017
|
|
|
2016
|
|
Income (loss) before tax, net of tax from gain on involuntary disposition
|
|
|
3,420,556
|
|
|
|
3,079,260
|
|
Tax from gain on involuntary disposition
|
|
|
(613,611
|
)
|
|
|
-
|
|
Income (loss) before taxes
|
|
|
2,806,945
|
|
|
|
3,079,260
|
|
US statutory tax rates
|
|
|
39.69
|
%
|
|
|
39.12
|
%
|
Expected income tax (recovery)
|
|
|
1,114,147
|
|
|
|
1,207,840
|
|
Non-deductible items
|
|
|
520,665
|
|
|
|
(139,975
|
)
|
Change in estimates
|
|
|
(91,632
|
)
|
|
|
228,495
|
|
Change in enacted tax rate
|
|
|
189,626
|
|
|
|
4,437
|
|
Option expired during the year
|
|
|
21,640
|
|
|
|
8,418
|
|
Foreign tax rate difference
|
|
|
(662,381
|
)
|
|
|
(46,498
|
)
|
Change in valuation allowance
|
|
|
(39,863
|
)
|
|
|
22,878
|
|
Total income taxes (recovery)
|
|
|
1,052,203
|
|
|
|
1,285,595
|
|
|
|
|
|
|
|
|
|
|
Current income tax expenses (recovery)
|
|
|
680,318
|
|
|
|
982,133
|
|
Deferred tax expenses (recovery)
|
|
|
371,884
|
|
|
|
303,792
|
|
Total income taxes (recovery)
|
|
|
1,052,203
|
|
|
|
1,285,925
|
|
Deferred
taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes. Deferred tax assets (liabilities) at December 31, 2017 and 2016 are comprised of the following:
Canada
|
|
2017
|
|
|
2016
|
|
Non capital loss carryforwards
|
|
|
1,378,242
|
|
|
|
830,476
|
|
Patents
|
|
|
69,597
|
|
|
|
45,351
|
|
Fixed assets
|
|
|
-
|
|
|
|
848,843
|
|
Financial instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,447,839
|
|
|
|
1,724,670
|
|
Valuation Allowance
|
|
|
-
|
|
|
|
-
|
|
Net Deferred tax asset (liability)
|
|
|
1,447,839
|
|
|
|
1,724,670
|
|
USA
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Fixed Assets
|
|
|
351,746
|
|
|
|
322,634
|
|
Stock-Based Compensation
|
|
|
154,023
|
|
|
|
209,242
|
|
|
|
|
505,768
|
|
|
|
531,876
|
|
Deferred tax asset not recognized
|
|
|
189,684
|
|
|
|
229,547
|
|
Net Deferred tax asset
|
|
|
316,084
|
|
|
|
302,329
|
|
The
Company has non-operating loss carryforwards of approximately $5,097,682 (2016 - $3,075,838) which may be carried forward to apply
against future year income tax for Canadian income tax purposes, subject to the final determination by taxation authorities, expiring
in the following years:
Expiry
|
|
Loss
|
|
2029
|
|
|
710,778
|
|
2030
|
|
|
862,371
|
|
2031
|
|
|
992,967
|
|
2032
|
|
|
649,299
|
|
2033
|
|
|
77,587
|
|
2037
|
|
|
1,804,680
|
|
Total
|
|
|
5,097,682
|
|
As
at December 31, 2017, the Company has no net operating losses carryforward available for US tax purposes.
Accounting
for Uncertainty for Income Tax
Effective
January 1, 2009, the Company adopted the interpretation for accounting for uncertainty in income taxes which was an interpretation
of the accounting standard accounting for income taxes. This interpretation created a single model to address accounting for uncertainty
in tax positions. This interpretation clarifies the accounting for income taxes, by prescribing a minimum recognition threshold
a tax position is required to meet before being recognized in the financial statements.
As
at December 31, 2017 and 2016, the Company’s consolidated balance sheets did not reflect a liability for uncertain tax positions,
nor any accrued penalties or interest associated with income tax uncertainties. The Company has no income tax examinations in
progress.
12. Income
Per Share
We
present both basic and diluted income per share on the face of our consolidated statements of income. Basic and diluted income
per share are calculated as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,754,741
|
|
|
$
|
1,793,334
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,485,580
|
|
|
|
11,464,270
|
|
Diluted
|
|
|
11,725,482
|
|
|
|
11,635,136
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Certain
stock options whose terms and conditions are described in Note 13, “Stock Options” could potentially dilute basic
EPS in the future, but were not included in the computation of diluted EPS because to do so would have been anti-dilutive. Those
anti-dilutive options are as follows.
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
options
|
|
|
nil
|
|
|
|
72,000
|
|
There
were no preferred shares issued and outstanding during the years ended December 31, 2017 or 2016.
13. Stock
Options
.
The
Company adopted a stock option plan (“Plan”). The purpose of this Plan is to provide additional incentives to key
employees, officers, directors and consultants of the Company and its subsidiaries in order to help attract and retain the best
available personnel for positions of responsibility and otherwise promote the success of 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.
The
Company may issue stock options and stock bonuses for shares of its common stock to provide incentives to directors, key employees
and other persons who contribute to the success of the Company. The exercise price of all incentive options are issued for not
less than fair market value at the date of grant.
The
following table summarizes the Company’s stock option activity for the years ended December 31, 2017 and 2016:
|
|
Number
of shares
|
|
|
Exercise
price
per share
|
|
|
Weighted
average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2015
|
|
|
1,190,000
|
|
|
|
$0.75
- $2.45
|
|
|
$
|
1.34
|
|
Granted
|
|
|
168,000
|
|
|
|
$1.42
|
|
|
$
|
1.42
|
|
Cancelled
or expired
|
|
|
(515,000
|
)
|
|
|
$0.75
– 2.45
|
|
|
$
|
1.61
|
|
Exercised
|
|
|
(30,000
|
)
|
|
|
$1.00
– 1.21
|
|
|
$
|
1.09
|
|
Balance,
December 31, 2016
|
|
|
813,000
|
|
|
|
$0.75
– 2.22
|
|
|
$
|
1.19
|
|
Granted
|
|
|
154,000
|
|
|
|
$1.70
|
|
|
$
|
1.70
|
|
Cancelled
or expired
|
|
|
(114,000
|
)
|
|
|
$1.00
- 2.22
|
|
|
$
|
1.75
|
|
Exercised
|
|
|
(140,000
|
)
|
|
|
$0.75
– 1.21
|
|
|
$
|
1.11
|
|
Balance,
December 31, 2017
|
|
|
713,000
|
|
|
|
$0.75
– 1.70
|
|
|
$
|
1.21
|
|
Exercisable,
December 31, 2017
|
|
|
559,000
|
|
|
|
$0.75
– 1.41
|
|
|
$
|
1.08
|
|
The
weighted-average remaining contractual life of outstanding options is 2.8 years.
The
fair value of each option grant is calculated using the following weighted average assumptions:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expected
life – years
|
|
|
3.0
|
|
|
|
3.0
|
|
Interest
rate
|
|
|
2.23
|
%
|
|
|
1.37
|
%
|
Volatility
|
|
|
73.09
|
%
|
|
|
75.64
|
%
|
Dividend
yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Weighted average
fair value of options granted
|
|
$
|
0.8344
|
|
|
$
|
0.7073
|
|
During
the year ended December 31, 2017, the Company granted 40,000 (2016 – 40,000) stock options to consultants and has applied
ASC 718 using the Black-Scholes option-pricing model, which resulted in additional expenses of $6,675 (2016 - $5,658). Options
granted in other years resulted in additional expenses of $22,634 (2016 – $11,879). During the year ended December 31, 2017,
employees were granted 114,000 (2016 – 128,000) stock options, which resulted in additional expenses of $19,024 (2016 –
$17,824). Options granted in other years resulted in additional expenses in the amount of $67,759 for employees during the year
ended December 31, 2017 (2016 - $30,957). There were 110,000 employee and 30,000 consultant stock options exercised during the
year ended December 31, 2017 (2016 – 30,000 employee; nil consultant).
As
of December 31, 2017, there was approximately $102,798 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 December 31, 2017 is $413,410 (2016 – nil).
14.
Capital Stock
.
During
the year ended December 31, 2017, the Company issued 110,000 shares upon the exercise of employee stock options and 30,000 shares
upon the exercise of consultant stock options
On
January 6, 2016, the Company repurchased 1,750,000 shares of its common stock at $0.90 per share for a total purchase price of
$1,575,000. The shares were returned to treasury.
The
Company issued 30,000 shares upon the exercise of employee stock options during the year ended December 31, 2016.
15. Segmented,
Significant Customer Information and Economic Dependency
.
The
Company operates in two segments:
(a)
Energy and water conservation products (as shown under the column heading “EWCP” below), which consists of a (i) liquid
swimming pool blanket which saves energy and water by inhibiting evaporation from the pool surface, and (ii) food-safe powdered
form of the active ingredient within the liquid blanket and which is designed to be used in still or slow moving drinking water
sources.
(b)
Biodegradable polymers (“BCPA’s”), also known as TPA’s, used by the petroleum, chemical, utility and mining
industries to prevent corrosion and scaling in water piping. This product can also be used in detergents to increase biodegradability
and in agriculture to increase crop yields by enhancing fertilizer uptake.
The
accounting policies of the segments are the same as those described in Note 2,
Significant Accounting Policies
. The Company
evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses
and foreign exchange gains and losses.
The
Company’s reportable segments are strategic business units that offer different, but synergistic products and services.
They are managed separately because each business requires different technology and marketing strategies.
Year
ended December 31, 2017:
|
|
EWCP
|
|
|
BCPA
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
641,675
|
|
|
$
|
14,852,650
|
|
|
$
|
15,494,325
|
|
Interest expense
|
|
|
54
|
|
|
|
44,071
|
|
|
|
44,125
|
|
Depreciation
|
|
|
62,376
|
|
|
|
219,108
|
|
|
|
281,484
|
|
Income tax expense
|
|
|
-
|
|
|
|
680,319
|
|
|
|
680,319
|
|
Segment profit
|
|
|
2,021,289
|
|
|
|
(266,548)
|
|
|
|
1,754,741
|
|
Segment assets
|
|
|
580,304
|
|
|
|
1,437,657
|
|
|
|
2,017,961
|
|
Expenditures for segment assets
|
|
|
287,853
|
|
|
|
138,628
|
|
|
|
426,480
|
|
Year
ended December 31, 2016:
|
|
EWCP
|
|
|
BCPA
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
785,660
|
|
|
$
|
15,460,354
|
|
|
$
|
16,246,014
|
|
Interest expense
|
|
|
59
|
|
|
|
41,640
|
|
|
|
41,699
|
|
Depreciation
|
|
|
325,696
|
|
|
|
214,383
|
|
|
|
540,079
|
|
Income tax expense
|
|
|
-
|
|
|
|
982,133
|
|
|
|
982,133
|
|
Segment profit (loss)
|
|
|
(417,770
|
)
|
|
|
2,211,104
|
|
|
|
1,793,334
|
|
Segment assets
|
|
|
1,966,564
|
|
|
|
1,523,270
|
|
|
|
3,489,834
|
|
Expenditures
for
segment assets
|
|
|
6,352
|
|
|
|
107,918
|
|
|
|
114,270
|
|
Sales
by territory are shown below:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
362,362
|
|
|
$
|
453,480
|
|
United States
and abroad
|
|
|
15,131,963
|
|
|
|
15,792,534
|
|
Total
|
|
$
|
15,494,325
|
|
|
$
|
16,246,014
|
|
The
Company’s long-lived assets (property, equipment, leaseholds and patents) are located in Canada and the United States as
follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
580,304
|
|
|
$
|
1,966,564
|
|
United States
|
|
|
1,437,657
|
|
|
|
1,523,270
|
|
Total
|
|
$
|
2,017,961
|
|
|
$
|
3,489,834
|
|
Three
customers accounted for $8,453,163 (55%) of sales made in 2017 (2016 - $10,148,042 or 62%).
16.
Commitments
.
The Company is committed
to minimum rental payments for property and premises aggregating approximately $735,670 over the term of two leases, the
last expiring on October 31, 2021.
Commitments for rent
in the next four years are as follows:
2018
|
|
$
|
201,840
|
|
2019
|
|
$
|
205,580
|
|
2020
|
|
$
|
209,400
|
|
2021
|
|
$
|
118,850
|
|
17.
Subsequent Events.
In
January 2018, the Company issued 23,000 shares on the exercise of employee stock options and 10,000 shares on the exercise of
consultant stock options.