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, 2018

 

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)

 

Nevada   91-1922863

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

 

Issuer’s telephone number: (250) 477-9969

 

N/A

 

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

 

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

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 and posted on its corporate Web site, if any, 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 [  ] Smaller reporting company [X]
(Do not check if a smaller reporting company) Emerging growth company [  ]

 

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

 

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

[  ] Yes [X] No

 

Class of Stock  No. Shares Outstanding   Date 
         
Common   11,630,991    May 15, 2018 

 

 

 

   

 

 

FORM 10-Q

 

Index

 

PART I. FINANCIAL INFORMATION 4
     
Item 1. Financial Statements. 4
     
  (a) Unaudited Interim Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017. 4
     
  (b) Unaudited Interim Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2018 and 2017. 5
     
  (c) Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017. 6
     
  (d) Notes to Unaudited Interim Condensed Consolidated Financial Statements for the Three Months Ended March 31, 2018. 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 19
     
Item 4 Controls and Procedures. 22
     
PART II. OTHER INFORMATION 23
     
Item 6. Exhibits. 23
     
SIGNATURES 24

 

 2 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

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, 2017.

 

 3 

 

 

PART I  

FINANCIAL INFORMATION

 

Item 1.   Financial Statements.

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS

(U.S. Dollars - Unaudited)

 

  

March 31, 2018

   December 31, 2017 
Assets          
Current          
Cash and cash equivalents  $6,613,875   $6,912,138 
Accounts receivable (see Note 3)   2,566,498    2,105,471 
Inventory (see Note 4)   4,789,409    4,686,852 
Prepaid expenses   165,928    255,080 
Total current assets   14,135,710    13,959,541 
Property, plant and equipment (see Note 5)   1,877,044    1,938,509 
Patents (see Note 6)   75,342    79,452 
Long term deposits (see Note 7)   18,498    18,531 
Investment (see Note 8)   7,164    13,414 
Deferred tax asset   1,763,923    1,763,923 
Total Assets  $17,877,681   $17,773,370 
           
Liabilities          
Current          
Accounts payable and accrued liabilities  $351,126   $939,116 
Deferred revenue   2,616    208,608 
Taxes payable   1,403,492    1,101,596 
Line of credit (see Note 9)   250,000    250,000 
Current portion of long term debt (see Note 10)   201,193    201,193 
Total current liabilities   2,208,427    2,700,513 
Long term debt (see Note 10)   100,598    150,896 
Total Liabilities   2,309,025    2,851,409 
           
Stockholders’ Equity          
Capital stock          
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 11,630,991 (December 31, 2017: 11,597,991) common shares   11,631    11,598 
Capital in excess of par value   15,176,862    15,114,835 
Accumulated other comprehensive loss   (775,122)   (656,093)
Retained earnings   1,155,285    451,621 
           
Total Stockholders’ Equity   15,568,656    14,921,961 
           
Total Liabilities and Stockholders’ Equity  $17,877,681   $17,773,370 
Commitments (Note 14)          

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements —

 

 4 

 

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

 

(U.S. Dollars — Unaudited)

 

   Three Months Ended March 31, 
   2018   2017 
         
Sales  $4,201,180   $4,663,708 
Cost of sales   2,233,917    2,569,675 
           
Gross profit   1,967,263    2,094,033 
Operating expenses          
Wages   421,310    358,417 
Administrative salaries and benefits   260,593    249,082 
Advertising and promotion   4,343    9,577 
Investor relations and transfer agent fee   35,655    37,341 
Office and miscellaneous   29,673    34,902 
Insurance   62,778    81,609 
Interest expense   7,400    11,567 
Rent   61,742    55,514 
Consulting   32,854    34,296 
Professional fees   43,314    57,552 
Travel   30,150    33,899 
Telecommunications   6,156    6,296 
Shipping   4,109    3,862 
Research   37,206    11,144 
Commissions   -    40,655 
Bad debt expense   -    380 
Currency exchange   (86,134)   9,004 
Utilities   4,535    6,965 
Total operating expenses   955,684    1,042,062 
           
Income before other items and income tax   1,011,579    1,051,971 
Gain (loss) on involuntary disposition (net of tax)   (7,716)   2,572,288 
Write down of inventory   -    (51,346)
Interest income   1,697    33 
           
Income before income tax   1,005,560    3,572,946 
Deferred tax expense   -    23,404 
Provision for income taxes   301,896    296,875 
Net income   703,664    3,252,667 
           
Other comprehensive income (loss)   (119,029)   39,667 
Comprehensive income (loss)   584,635    3,292,334 
           
Net income per share (basic and diluted)  $0.06   $0.28 
Weighted average number of common shares (basic)   11,620,291    11,458,170 
Weighted average number of common shares (diluted)   11,847,061    11,638,732 

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements —

 

 5 

 

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2018 and 2017

(U.S. Dollars — Unaudited)

 

   Three Months Ended March 31, 
   2018   2017 
Operating activities          
Net income  $703,664   $3,252,667 
Stock compensation expense   25,700    23,482 
Depreciation and amortization   59,700    80,375 
Increase in deferred tax asset   -    23,404 
Gain on involuntary disposition   -    (2,572,288)
Changes in non-cash working capital items:          
(Increase) in accounts receivable   (467,008)   (1,975,550)
Decrease (Increase) in inventory   (111,400)   (925,992)
Decrease in prepaid expenses   88,612    47,193 
Increase (decrease) in accounts payable   (577,021)   (91,874)
Increase in taxes payable   301,896    296,875 
Decrease in deferred revenue   (205,920)   (52,499)
           
Cash (used in) provided by operating activities   (181,777)   (1,894,207)
           
Investing activities          
Investment   6,250    6,250 
Proceeds from insurance   -    4,053,612 

Net purchase of property, equipment and leaseholds

   (7,497)   (29,903)
           
Cash (used in) provided by investing activities   (1,247)    4,029,959
           
Financing activities          
Short term line of credit   -    450,000 
Loan repayment   (50,298)   (50,298)
Proceeds from issuance of common stock   36,360    2,250 
           
Cash provided (used) by financing activities   (13,938)   401,952
           
Effect of exchange rate changes on cash   (101,301)   (138,350)
           
(Outflow) Inflow of cash   (298,263)   2,399,354
Cash and cash equivalents, beginning   6,912,138    2,470,066 
           
Cash and cash equivalents, ending  $6,613,875   $4,869,420 
           
Supplemental disclosure of cash flow information:          
Income taxes paid  $-   $- 
Interest paid  $7,356   $11,567 

 

— See Notes to Unaudited Interim Condensed Consolidated Financial Statements—

 

 6 

 

 

FLEXIBLE SOLUTIONS INTERNATIONAL INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2018

(U.S. Dollars)

 

1. Basis of Presentation.

 

These unaudited interim condensed 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.

 

These unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements. These unaudited interim financial statements are condensed and do not include all disclosures required for annual financial statements. The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the Company’s audited consolidated financial statements filed as part of the Company’s December 31, 2017 Annual Report on Form 10-K/A. This quarterly report should be read in conjunction with such annual report.

 

In the opinion of the Company’s management, these unaudited interim condensed consolidated financial statements reflect all adjustments, all of which are of normal recurring nature, necessary to present fairly the Company’s consolidated financial position at March 31, 2018, the consolidated results of operations for the three months ended March 31, 2018 and 2017, and the consolidated statements of cash flows for the three months ended March 31, 2018 and 2017. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year.

 

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.

 

 7 

 

 

  (a) Cash and Cash Equivalents.

 

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

 

  (b) Inventories and Cost of Sales

 

The Company has three major classes of inventory: completed goods, work in progress and raw materials and supplies. In all classes, inventories are stated at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis. Cost of sales includes all expenditures incurred in bringing the goods to the point of sale. Inventory costs and costs of sales include direct costs of the raw material, inbound freight charges, warehousing costs, handling costs (receiving and purchasing) and utilities and overhead expenses related to the Company’s manufacturing and processing facilities.

 

  (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
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 its carrying amount 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.

 8 

 

 

  (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 payment 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.

 

 9 

 

 

  (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, comprised 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, 2018 and 2017.

 

  (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.

 

 10 

 

 

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 March 31, 2018, the Company believes it has appropriately accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be affected. Interest and penalties associated with the Company’s tax positions are recorded as interest expense in the consolidated statements of income and comprehensive income.

 

  (q) Risk Management.

 

The Company’s credit risk is primarily attributable to its accounts receivable. The amounts presented in the accompanying consolidated balance sheets are net of allowances for doubtful accounts, estimated by the Company’s management based on prior experience and the current economic environment. The Company is exposed to credit-related losses in the event of non-payment by customers. Credit exposure is minimized by dealing with only credit worthy counterparties. Accounts receivable for the Company’s three primary customers totaled $1,133,325 (44%) at March 31, 2018 (December 31, 2017 - $1,247,374 or 65%).

 

 11 

 

 

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 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 is effective January 1, 2018. We have evaluated the effect and do not expect this to have a material impact on our consolidated financial statements.

 

3. Accounts Receivable

 

   March 31, 2018   December 31, 2017 
Accounts receivable  $2,605,742   $2,145,803 
Allowances for doubtful accounts   (39,244)   (40,332)
   $2,566,498   $2,105,471 

 

4. Inventory

 

   March 31, 2018   December 31, 2017 
         
Completed goods  $2,555,914   $2,530,914 
Work in progress   -    183,944 
Raw materials and supplies   2,233,495    1,971,994 
   $4,789,409   $4,686,852 

 

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.

 

 12 
 

 

5. Property, Plant & equipment

 

   March 31, 2018   Accumulated   March 31, 2018 
   Cost   Depreciation   Net 
Buildings  $3,394,428   $2,433,501   $960,927 
Computer hardware   40,904    39,511    1,393 
Furniture and fixtures   17,673    11,481    6,192 
Manufacturing equipment   2,596,260    2,128,427    467,833 
Boat   34,400    15,576    18,824 
Office equipment   1,440    209    1,231 
Trailer   9,304    1,989    7,315 
Leasehold Improvements   85,432    36,778    48,654 
Land   364,675    -    364,675 
Technology   105,956    105,956    - 
   $6,650,472   $4,773,428   $1,877,044 

 

   December 31, 2017   Accumulated   December 31, 2017 
   Cost   Depreciation   Net 
Buildings  $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 

 

Amount of depreciation expense for three months ended March 31, 2018: $55,590 (2017: $76,265) and is included in cost of sales in the unaudited interim condensed consolidated statements of income and comprehensive income (loss).

 

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 quarter ended March 31, 2017, the Company was approved for interim insurance proceeds of $5,570,000CAD ($4,207,578USD). Subsequent to the quarter ended March 31, 2018, the Company was approved for and received a final insurance payment of $3,132,666CAD ($2,429,695USD).

 

6. 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.

 

 13 
 

 

  

March 31, 2018

Cost

   Accumulated
Amortization
  

March 31, 2018

Net

 
Patents  $205,613   $130,271   $75,342 

 

  

December 31, 2017

Cost

   Accumulated
Amortization
  

December 31, 2017

Net

 
Patents  $212,426   $132,974   $79,452 

 

Decrease in 2018 cost was due to currency conversion. The 2018 cost in Canadian dollars - $265,102 (2017 - $265,102 in Canadian dollars).

 

Amount of amortization for 2018 - $4,110 (2017 - $4,110) 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 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, 2018   December 31, 2017 
          
Long term deposits  $18,498   $18,531 

 

8. Equity Method Investment

 

The Company has a 42% ownership interest in ENP Peru Investments LLC (“ENP Peru”), which we acquired in fiscal 2016. ENP Peru is located in the state of Illinois and leases warehouse space. We account for this investment using the equity method of accounting. A summary of our investment is as follows:

 

Balance, January 1, 2017  $122,480 
Return of equity   (25,000)
Loss in equity method investment   (84,066)
Balance, December 31, 2017  $13,414 
Return of equity   (6,250)
Balance, March 31, 2018  $7,164 

 

 14 
 

 

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% 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 March 31, 2018, 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 March 31, 2018 were $250,000 (December 31, 2017 - $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% (December 31, 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 March 31, 2018 was $301,791 (December 31, 2017 - $352,089). The final payment will be made in September 2019.

 

The Company has committed to the following repayments:

 

2018  $150,895 
2019  $150,896 

 

Continuity  March 31, 2018   December 31, 2017 
Balance, beginning of year  $352,089   $553,282 
Less: Payments on loan   50,298    201,193 
Balance, end of year  $301,791   $352,089 
Less: current portion   (201,193)   (201,193)
Long term balance  $100,598   $150,896 

 

 15 
 

 

11. 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 its 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 exercise price of all options are not less than fair market value at the date of grant.

 

The following table summarizes the Company’s stock option activity for the year ended December 31, 2017 and the three-month period ended March 31, 2018:

 

   Number of shares   Exercise price
per share
   Weighted average exercise price 
             
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 
Cancelled or expired   -    -    - 
Exercised   (33,000)  $1.00 - 1.42   $1.10 
Balance, March 31, 2018   680,000   $0.75 – 1.70   $1.22 
Exercisable, March 31, 2018   526,000   $0.75 – 1.41   $1.08 

 

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

 

   2017 
     
Expected life – years   3.0 
Interest rate   2.23%
Volatility   73.09%
Dividend yield   %
Weighted average fair value of options granted  $0.8344 

 

The Company did not grant any options during the three months ended March 31, 2018 or 2017. Options granted in previous quarters resulted in expenses in the amount of $6,675 for consultants (2017 - $5,658) and $19,025 for employees (2017 - $17,824) during the quarter ended March 31, 2018. There were 23,000 employee and 10,000 consultant stock options exercised during the during the three months ended March 31, 2018 (2017 – 3,000 employee stock options).

 

As of March 31, 2018, there was approximately $77,099 of compensation expense related to non-vested awards. This expense is expected to be recognized over a weighted average period of 0.75 years.

 

 16 
 

 

12. Capital Stock.

 

During the three months ended March 31, 2018, 23,000 shares were issued upon the exercise of employee stock options (2017 – 3,000) and 10,000 shares were issued upon the exercise of consultant stock options (2017 – nil).

 

13. 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 and chemical additives used within the petroleum, chemical, utility and mining industries to prevent corrosion and scaling in water piping (as shown under the column heading “TPA” below). These chemical additives are also manufactured for use in laundry and dish detergents, as well as in products to reduce levels of insecticides, herbicides and fungicides.

 

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, 2018:            
   EWCP   TPA   Total 
Revenue  $75,820   $4,125,360   $4,201,180 
Interest expense   -    7,400    7,400 
Depreciation and amortization   12,640    47,060    59,700 
Segment profit (loss)   (97,834)   

801,498

    703,664 
Segment assets   555,710    1,396,676    1,952,386 
Expenditures for segment assets   (1,419)   (6,078)   (7,497)

 

Three months ended March 31, 2017:            
   EWCP   TPA   Total 
Revenue  $247,726   $4,415,982   $4,663,708 
Interest expense   55    11,512    11,567 
Depreciation and amortization   31,971    48,404    80,375 
Segment profit (loss)   

2,384,013

    

868,654

    3,252,667 
Segment assets   323,228    1,482,276    1,805,504 
Expenditures for segment assets   (22,497)   (7,406)   (29,903)

 

 17 
 

 

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

 

   Three months ended March 31, 2018   Three months ended March 31, 2017 
Canada  $100,189   $74,835 
United States and abroad   4,100,991    4,588,873 
Total  $4,201,180   $4,663,708 

 

The Company’s long-lived property and equipment, and patents are located in Canada and the United States as follows:

 

   March 31, 2018   December 31, 2017 
Canada  $555,710   $580,304 
United States   1,396,676    1,437,657 
Total  $1,952,386   $2,017,961 

 

Three customers accounted for $1,999,638 (47%) of sales during the three-month period ended March 31, 2018 (2017 - $2,642,973 or 57%).

 

14. Commitments.

 

The Company is committed to minimum rental payments for property and premises aggregating approximately $685,315 over the term of three leases, the last expiring on October 31, 2021.

 

Commitments in the next four years are as follows:

 

2018  $151,485 
2019  $205,580 
2020  $209,400 
2021  $118,850 

 

15. Comparative Figures.

 

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

 

16. Subsequent Events

 

Subsequent to the quarter ended March 31, 2018, the Company was approved for and received a final insurance payment of $3,132,666CAD ($2,429,695USD).

 

 18 
 

 

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

 

Overview

 

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

 

Results of Operations

 

The Company has two product lines:

 

Energy and Water Conservation products - The Company’s HEAT$AVR® product is used in swimming pools and spas. The product forms a thin, transparent layer on the water’s surface. The transparent layer slows the evaporation of water, allowing the water to retain a higher temperature for a longer period of time and thereby reducing the energy required to maintain the desired temperature of the water. WATER$AVR®, a modified version of HEAT$AVR®, can be used in reservoirs, potable water storage tanks, livestock watering ponds, canals, and irrigation ditches.

 

TPA products - The second product, TPA’s (i.e. thermal polyaspartate biopolymers), are biodegradable polymers 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.

 

Material changes in the Company’s Statement of Operations for the three months ended March 31, 2018 compared to the same period in the prior year are discussed below:

 

Item  Increase (I) or
Decrease (D)
  Reason
       
Sales      
EWCP products  D  Lower customer orders.
       
TPA products  D  Lower customer orders.
       
Gross profit, as a % of sales  I  Lower oil prices reduced aspartic acid costs.
       
Wages  I  Increased wages to retain employees.
       
Professional fess  D  Decreased legal fees related to intellectual property and general legal representation.
       
Research  I  New research projects started.
       
Commissions  D  All sales during the period were uncommissioned.

 

 19 
 

 

Three primary customers accounted for 47% of the Company’s sales during the three months ended March 31, 2018 (2017 - 57%). The amount of revenue (all from the sale of TPA products) attributable to each customer is shown below.

 

   Three Months Ended March 31, 
   2018   2017 
         
Company A  $256,639*   $1,458,352 
Company B  $752,692   $704,375 
Company C  $835,766   $480,247 
Company D  $411,180   $55,011*

 

*not a primary customer in that period

 

Customers with balances greater than 10% of our receivables as of March 31, 2018 and 2017 are shown below:

 

   March 31, 
   2018   2017 
         
Company A   246,088*   1,448,600 
Company B   418,389    685,364 
Company C   468,848    478,998 

 

*less than 10%

 

In 2007, we began construction of a plant in Taber, AB, Canada. The plant came on line during 2012 and we began depreciating the plant and related equipment effective January 2012.

 

In February 2014, we suspended production of aspartic acid at our Taber plant. The suspension was due to the fact that since construction of the plant began in 2008, economic conditions in Alberta and worldwide have changed significantly. In particular, plant operating costs increased and the price of aspartic acid derived from oil was less than forecast. On February 11, 2017, the Taber plant was destroyed in a fire. The building and contents with a carrying value of $1,936,886 are a total loss. Insurance was in place.

 

Other 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 products;
     
  activity in the oil and gas industry, as we sell our TPA products to oil and gas companies; and
     
  drought conditions, since we also sell our TPA products to farmers.

 

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.

 

 20 
 

 

Capital Resources and Liquidity

 

The Company’s sources and (uses) of cash for the three months ended March 31, 2018 and 2017 are shown below:

 

   2018   2017 
         
Cash provided (used) by operations   (181,777)   (1,894,207)
Investment   6,250    6,250 
Insurance proceeds from fire loss   -    4,053,612 
Acquisition of equipment   (7,497)   (29,903)
Borrowings from line of credit   -    450,000 
Repayment of loans   (50,298)   (50,298)
Proceeds from sale of common stock   36,360    2,250 
Changes in exchange rates   (101,301)   (138,350)

 

The Company has sufficient cash resources to meets its future commitments and cash flow requirements for the coming year. As of March 31, 2018, working capital was $11,927,283 (December 31, 2017 - $11,259,028) and the Company has no substantial commitments that require significant outlays of cash over the coming fiscal year.

 

The Company is committed to minimum rental payments for property and premises aggregating approximately $685,315 over the term of three leases, the last expiring on October 31, 2021.

 

Commitments in the next four years are as follows:

 

2018  $151,485 
2019  $205,580 
2020  $209,400 
2021  $118,850 

 

Other than as disclosed above, the Company does not anticipate any capital requirements for the twelve months ending December 31, 2018.

 

Other than as disclosed in Item 2 of this report, the Company does not know of any trends, demands, commitments, events or uncertainties that will result in, or that are reasonable likely to result in, its liquidity increasing or decreasing in any material way.

 

Other than as disclosed in Item 2 of this report, the Company does not know of any significant changes in its expected sources and uses of cash.

 

The Company does not have any commitments or arrangements from any person to provide it with any equity capital.

 

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

 

 21 
 

 

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, 2018. 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, 2018.

 

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, 2018. 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, 2018 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 22 
 

 

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.

 

 23 
 

 

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 15, 2018

 

  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

 

 24 
 

 

 

 

 

Exhibit 31.1

 

CERTIFICATIONS

 

I, Daniel O’Brien, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Flexible Solutions International, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the unaudited consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of unaudited consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) any fraud, whether or not material, that involves management or other employees who have significant role in the registrant’s internal control over financial reporting.

 

May 15, 2018 /s/ Daniel B. O’Brien
  Daniel O’Brien
  Principal Executive Officer

 

 
 

 

Exhibit 31.2

 

CERTIFICATIONS

 

I, Daniel O’Brien, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Flexible Solutions International, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the unaudited consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of unaudited consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) any fraud, whether or not material, that involves management or other employees who have significant role in the registrant’s internal control over financial reporting.

 

May 15, 2018 /s/ Daniel B. O’Brien
  Daniel O’Brien
  Principal Financial Officer

 

 
 

 

Exhibit 32.1

 

CertificatION of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

 

Solely for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, the undersigned Principal Executive and Financial Officer of Flexible Solutions International, Inc. (the “Company”), hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

May 15, 2018 /s/ Daniel B. O’Brien
  Daniel B. O’Brien
  Principal Executive and Financial Officer

 

 
 

 

v3.8.0.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2018
May 15, 2018
Document And Entity Information    
Entity Registrant Name FLEXIBLE SOLUTIONS INTERNATIONAL INC  
Entity Central Index Key 0001069394  
Document Type 10-Q  
Document Period End Date Mar. 31, 2018  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   11,630,991
Trading Symbol FSI  
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2018  
v3.8.0.1
Condensed Interim Consolidated Balance Sheets (Unaudited) - USD ($)
Mar. 31, 2018
Dec. 31, 2017
Current    
Cash and cash equivalents $ 6,613,875 $ 6,912,138
Accounts receivable (see Note 3) 2,566,498 2,105,471
Inventory (see Note 4) 4,789,409 4,686,852
Prepaid expenses 165,928 255,080
Total current assets 14,135,710 13,959,541
Property, plant and equipment (see Note 5) 1,877,044 1,938,509
Patents (see Note 6) 75,342 79,452
Long term deposits (see Note 7) 18,498 18,531
Investment (see Note 8) 7,164 13,414
Deferred tax asset 1,763,923 1,763,923
Total Assets 17,877,681 17,773,370
Current    
Accounts payable and accrued liabilities 351,126 939,116
Deferred revenue 2,616 208,608
Taxes payable 1,403,492 1,101,596
Line of credit (see Note 9) 250,000 250,000
Current portion of long term debt (see Note 10) 201,193 201,193
Total current liabilities 2,208,427 2,700,513
Long term debt (see Note 10) 100,598 150,896
Total Liabilities 2,309,025 2,851,409
Stockholders’ Equity    
Capital stock 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 11,630,991 (December 31, 2017: 11,597,991) common shares 11,631 11,598
Capital in excess of par value 15,176,862 15,114,835
Accumulated other comprehensive loss (775,122) (656,093)
Retained earnings 1,155,285 451,621
Total Stockholders’ Equity 15,568,656 14,921,961
Total Liabilities and Stockholders’ Equity $ 17,877,681 $ 17,773,370
v3.8.0.1
Condensed Interim Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares
Mar. 31, 2018
Dec. 31, 2017
Statement of Financial Position [Abstract]    
Preferred stock, par value $ 0.01 $ 0.01
Preferred stock, shares authorized 1,000,000 1,000,000
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 50,000,000 50,000,000
Common stock, shares issued 11,630,991 11,597,991
Common stock, shares outstanding 11,630,991 11,597,991
v3.8.0.1
Condensed Interim Consolidated Statements of Income and Comprehensive Income (Unaudited) - USD ($)
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Income Statement [Abstract]    
Sales $ 4,210,180 $ 4,663,708
Cost of sales 2,233,917 2,569,675
Gross profit 1,967,263 2,094,033
Operating expenses    
Wages 421,310 358,417
Administrative salaries and benefits 260,593 249,082
Advertising and promotion 4,343 9,577
Investor relations and transfer agent fee 35,655 37,341
Office and miscellaneous 29,673 34,902
Insurance 62,778 81,609
Interest expense 7,400 11,567
Rent 61,742 55,514
Consulting 32,854 34,296
Professional fees 43,314 57,552
Travel 30,150 33,899
Telecommunications 6,156 6,296
Shipping 4,109 3,862
Research 37,206 11,144
Commissions 40,655
Bad debt expense 380
Currency exchange (86,134) 9,004
Utilities 4,535 6,965
Total operating expenses 955,684 1,042,062
Income before other items and income tax 1,011,579 1,051,971
Gain (loss) on involuntary disposition (net of tax) (7,716) 2,572,288
Write down of inventory (51,346)
Interest income 1,697 33
Income before income tax 1,005,560 3,572,946
Deferred tax expense 23,404
Provision for income taxes 301,896 296,875
Net income 703,664 3,252,667
Other comprehensive income (loss) (119,029) 39,667
Comprehensive income (loss) $ 584,635 $ 3,292,334
Net income per share (basic and diluted) $ 0.06 $ 0.28
Weighted average number of common shares (basic) 11,620,291 11,458,170
Weighted average number of common shares (diluted) 11,847,061 11,638,732
v3.8.0.1
Condensed Interim Consolidated Statements of Cash Flows (Unaudited) - USD ($)
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Operating activities    
Net income $ 703,664 $ 3,252,667
Stock compensation expense 25,700 23,482
Depreciation and amortization 59,700 80,375
Increase in deferred tax asset 23,404
Gain on involuntary disposition 7,716 (2,572,288)
Changes in non-cash working capital items:    
(Increase) in accounts receivable (467,008) (1,975,550)
Decrease (Increase) in inventory (111,400) (925,992)
Decrease in prepaid expenses 88,612 47,193
Increase (decrease) in accounts payable (577,021) (91,874)
Increase in taxes payable 301,896 296,875
Decrease in deferred revenue (205,920) (52,499)
Cash (used in) provided by operating activities (181,777) (1,894,207)
Investing activities    
Investment 6,250 6,250
Proceeds from insurance 4,053,612
Net purchase of property, equipment and leaseholds (7,497) (29,903)
Cash (used in) provided by investing activities (1,247) 4,029,959
Financing activities    
Short term line of credit 450,000
Loan repayment (50,298) (50,298)
Proceeds from issuance of common stock 36,360 2,250
Cash provided (used) by financing activities (13,938) 401,952
Effect of exchange rate changes on cash (101,301) (138,350)
(Outflow) Inflow of cash (298,263) 2,399,354
Cash and cash equivalents, beginning 6,912,138 2,470,066
Cash and cash equivalents, ending 6,613,875 4,869,420
Supplemental disclosure of cash flow information:    
Income taxes paid
Interest paid $ 7,356 $ 11,567
v3.8.0.1
Basis of Presentation
3 Months Ended
Mar. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation

1. Basis of Presentation.

 

These unaudited interim condensed 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.

 

These unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements. These unaudited interim financial statements are condensed and do not include all disclosures required for annual financial statements. The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the Company’s audited consolidated financial statements filed as part of the Company’s December 31, 2017 Annual Report on Form 10-K/A. This quarterly report should be read in conjunction with such annual report.

 

In the opinion of the Company’s management, these unaudited interim condensed consolidated financial statements reflect all adjustments, all of which are of normal recurring nature, necessary to present fairly the Company’s consolidated financial position at March 31, 2018, the consolidated results of operations for the three months ended March 31, 2018 and 2017, and the consolidated statements of cash flows for the three months ended March 31, 2018 and 2017. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year.

v3.8.0.1
Significant Accounting Policies
3 Months Ended
Mar. 31, 2018
Accounting Policies [Abstract]  
Significant Accounting Policies

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. 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
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 its carrying amount 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 payment 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, comprised 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, 2018 and 2017.

 

  (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 March 31, 2018, the Company believes it has appropriately accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be affected. Interest and penalties associated with the Company’s tax positions are recorded as interest expense in the consolidated statements of income and comprehensive income.

 

  (q) Risk Management.

 

The Company’s credit risk is primarily attributable to its accounts receivable. The amounts presented in the accompanying consolidated balance sheets are net of allowances for doubtful accounts, estimated by the Company’s management based on prior experience and the current economic environment. The Company is exposed to credit-related losses in the event of non-payment by customers. Credit exposure is minimized by dealing with only credit worthy counterparties. Accounts receivable for the Company’s three primary customers totaled $1,133,325 (44%) at March 31, 2018 (December 31, 2017 - $1,247,374 or 65%).

 

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 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 is effective January 1, 2018. We have evaluated the effect and do not expect this to have a material impact on our consolidated financial statements.

v3.8.0.1
Accounts Receivable
3 Months Ended
Mar. 31, 2018
Receivables [Abstract]  
Accounts Receivable

3. Accounts Receivable

 

    March 31, 2018     December 31, 2017  
Accounts receivable   $ 2,605,742     $ 2,145,803  
Allowances for doubtful accounts     (39,244 )     (40,332 )
    $ 2,566,498     $ 2,105,471  

v3.8.0.1
Inventory
3 Months Ended
Mar. 31, 2018
Inventory Disclosure [Abstract]  
Inventory

4. Inventory

 

    March 31, 2018     December 31, 2017  
             
Completed goods   $ 2,555,914     $ 2,530,914  
Work in progress     -       183,944  
Raw materials and supplies     2,233,495       1,971,994  
    $ 4,789,409     $ 4,686,852  

 

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.

v3.8.0.1
Property, Plant & Equipment
3 Months Ended
Mar. 31, 2018
Property, Plant and Equipment [Abstract]  
Property, Plant & Equipment

5. Property, Plant & equipment

 

    March 31, 2018     Accumulated     March 31, 2018  
    Cost     Depreciation     Net  
Buildings   $ 3,394,428     $ 2,433,501     $ 960,927  
Computer hardware     40,904       39,511       1,393  
Furniture and fixtures     17,673       11,481       6,192  
Manufacturing equipment     2,596,260       2,128,427       467,833  
Boat     34,400       15,576       18,824  
Office equipment     1,440       209       1,231  
Trailer     9,304       1,989       7,315  
Leasehold Improvements     85,432       36,778       48,654  
Land     364,675       -       364,675  
Technology     105,956       105,956       -  
    $ 6,650,472     $ 4,773,428     $ 1,877,044  

 

    December 31, 2017     Accumulated     December 31, 2017  
    Cost     Depreciation     Net  
Buildings   $ 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  

 

Amount of depreciation expense for three months ended March 31, 2018: $55,590 (2017: $76,265) and is included in cost of sales in the unaudited interim condensed consolidated statements of income and comprehensive income (loss).

 

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 quarter ended March 31, 2017, the Company was approved for interim insurance proceeds of $5,570,000CAD ($4,207,578USD). Subsequent to the quarter ended March 31, 2018, the Company was approved for and received a final insurance payment of $3,132,666CAD ($2,429,695USD).

v3.8.0.1
Patents
3 Months Ended
Mar. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Patents

6. 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, 2018

Cost

    Accumulated
Amortization
   

March 31, 2018

Net

 
Patents   $ 205,613     $ 130,271     $ 75,342  
                         

 

   

December 31, 2017

Cost

    Accumulated
Amortization
   

December 31, 2017

Net

 
Patents   $ 212,426     $ 132,974     $ 79,452  
                         

 

Decrease in 2018 cost was due to currency conversion. The 2018 cost in Canadian dollars - $265,102 (2017 - $265,102 in Canadian dollars).

 

Amount of amortization for 2018 - $4,110 (2017 - $4,110) 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

v3.8.0.1
Long Term Deposits
3 Months Ended
Mar. 31, 2018
Long Term Deposits  
Long Term Deposits

7. 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, 2018     December 31, 2017  
                 
Long term deposits   $ 18,498     $ 18,531  

v3.8.0.1
Equity Method Investment
3 Months Ended
Mar. 31, 2018
Equity Method Investments and Joint Ventures [Abstract]  
Equity Method Investment

8. Equity Method Investment

 

The Company has a 42% ownership interest in ENP Peru Investments LLC (“ENP Peru”), which we acquired in fiscal 2016. ENP Peru is located in the state of Illinois and leases warehouse space. We account for this investment using the equity method of accounting. A summary of our investment is as follows:

 

Balance, January 1, 2017   $ 122,480  
Return of equity     (25,