Item
8. |
Financial
Statements and Supplementary Data. |
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To
the Stockholders and the Board of Directors of Flexible Solutions International, Inc.
Opinion
on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Flexible Solutions International, Inc. and its subsidiaries (the
“Company”) which comprise the consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated statements
of income and comprehensive income, cash flows and stockholders’ equity for the years then ended, and the related notes (collectively
referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its consolidated cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
Critical
Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material
to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication
of this critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we
are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.
Valuation
of inventory
At December 31, 2022, the Company’s inventory balance was $14,419,430. As discussed in Note 2 to the consolidated financial statements,
the Company records inventory at the lower of cost on a first-in, first-out or weighted average basis and net realizable value. To determine
inventory valuation, management conducts regular reviews of overhead costs and the calculation to allocate these expenditures to inventory
cost.
We
identified the assessment of valuation of inventory as a critical audit matter. Auditing management’s inventory valuation involved
significant judgment because the estimates are based on several factors. In particular, in estimating inventory cost inputs, management
developed assumptions such as the allocation of overhead expenditures to inventory cost.
The following are the primary procedures we performed to address this critical audit matter. We obtained an understanding and reviewed
the appropriateness over the Company’s costing of inventory. We performed substantive procedures over the inputs of costing of inventory,
including overhead allocation by agreeing inputs to third party source documentation. We tested management’s allocation of overhead
costs between inventory products by assessing the appropriateness of the allocation method and recalculated the formula used to determine
computational accuracy.
Smythe LLP
Chartered
Professional Accountants
Vancouver,
Canada
March
31, 2023
We
have served as the Company’s auditor since 2019.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Balance Sheets
As
at December 31
(U.S.
Dollars)
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Income and Comprehensive Income
For
the Years Ended December 31
(U.S.
Dollars)
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Cash Flows
For
Years Ended December 31
(U.S.
Dollars)
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
Consolidated
Statements of Stockholders’ Equity
For
the Years Ended December 31, 2022 and 2021
(U.S.
Dollars)
See
Notes to Consolidated Financial Statements.
FLEXIBLE
SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(U.S.
Dollars)
1.
Basis of Presentation.
BASIS
OF PRESENTATION
These
consolidated financial statements (“consolidated financial statements”) include the accounts of Flexible Solutions International,
Inc. (the “Company”), its wholly-owned subsidiaries Flexible Fermentation Ltd., NanoChem Solutions Inc. (“NanoChem”),
Flexible Solutions Ltd., Flexible Biomass LP, FS Biomass Inc., NCS Deferred Corp., Natural Chem SEZC Ltd., and InnFlex Holdings Inc.,
its 97% controlling interest in ENP Peru Investments LLC (“ENP Peru”) and its 65% interest in ENP Investments, LLC (“ENP
Investments”) and ENP Mendota, LLC (“ENP Mendota”). All inter-company balances and transactions have been eliminated
upon consolidation. The Company was incorporated on May 12, 1998 in the State of Nevada and had no operations until June 30, 1998. In
2019, the Company redomiciled into Alberta, Canada.
In
2018, NanoChem completed the purchase of a 65% interest in ENP Investments for an aggregate purchase price of $5,110,560. An unrelated
party owns the remaining 35% interest in ENP Investments, and ENP Investments is consolidated into the financial statements. The outside
investor’s ownership interest in ENP Investments is included in noncontrolling interests in these consolidated financial statements
from the acquisition date onward. In 2020, ENP Investments increased its investment in ENP Realty from 24% to 100%, making ENP Realty
a wholly-owned subsidiary of ENP Investments. In 2021, ENP Realty was renamed ENP Mendota and is consolidated into the financial statements.
In
2022, NanoChem purchased an additional 50% in ENP Peru, increasing its share to 91.67%. ENP Investments owns the remaining 8.33%, of
which the Company has a 65% interest. ENP Peru was previously accounted for under the equity method however, is now consolidated into
the financial statements from the date control was obtained. The 35% non-controlling interest portion of the 8.33% held by ENP Investments
is included in non-controlling interests in these consolidated financial statements.
The
Company and its subsidiaries develop, manufacture and market specialty chemicals which slow the evaporation of water. One product, HEATSAVR®,
is marketed for use in swimming pools and spas where its use, by slowing the evaporation of water, allows the water to retain a higher
temperature for a longer period of time and thereby reduces the energy required to maintain the desired temperature of the water in the
pool. Another product, WATERSAVR®, is marketed for water conservation in irrigation canals, aquaculture, and reservoirs where its
use slows water loss due to evaporation. In addition to the water conservation products, the Company also manufactures and markets water-soluble
chemicals utilizing thermal polyaspartate biopolymers (hereinafter referred to as “TPAs”), which are beta-proteins manufactured
from the common biological amino acid, L-aspartic. TPAs can be formulated to prevent corrosion and scaling in water piping within the
petroleum, chemical, utility and mining industries. TPAs are also used as proteins to enhance fertilizers in improving crop yields and
can be used as additives for household laundry detergents, consumer care products and pesticides. The TPA division also manufactures
two nitrogen conservation products for agriculture that slows nitrogen loss from fields.
The
outbreak of the novel strain of coronavirus, specifically identified as “COVID-19”, has resulted in a widespread health crisis
that has affected economies and financial markets around the world resulting in an economic downturn. This outbreak may also cause staff
shortages, reduced customer demand, increased government regulations or interventions, all of which may negatively impact the business,
financial condition or results of operations of the Company. The duration and impact of the COVID-19 outbreak is unknown at this time
and it is not possible to reliably estimate the length and severity of these developments.
2.
Significant Accounting Policies.
SIGNIFICANT
ACCOUNTING POLICIES
These
consolidated financial statements have been prepared on a historical cost basis, except where otherwise noted, in accordance with accounting
principles generally accepted in the United States applicable to a going concern and reflect the policies outlined below.
(a)
Cash and Cash Equivalents.
The
Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date
of purchase to be cash equivalents. Cash and cash equivalents are maintained with several financial institutions.
(b)
Term Deposits.
The
deposits maintained by the Company with banks comprises term deposits. The Company has two term deposits, the first for $700,000
that matures in 2023 and pays interest at a rate of 3.0%.
If withdrawn before maturity, the greater of the loss of accrued interest or $150,
plus 1% of the principal shall be levied. The other term deposit for $300,000
pays 1.3% interest, matures in 2023 and can be withdrawn by the Company at any point without prior notice or penalty on the
principal.
(c)
Inventories and Cost of Sales.
The
Company has three major classes of inventory: completed goods, work in progress and raw materials and supplies. In all classes inventories
are stated at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis or weighted average cost
formula to inventories in different subsidiaries. Cost of sales includes all expenditures incurred in bringing the goods to the point
of sale. Inventory costs and costs of sales include direct costs of the raw material, inbound freight charges, warehousing costs, handling
costs (receiving and purchasing) and utilities and overhead expenses related to the Company’s manufacturing and processing facilities.
Shipping and handling charges billed to customers are included in revenue (2022 - $433,015; 2021 - $465,493). Shipping and handling costs
incurred are included in cost of goods sold (2022 - $913,890; 2021 - $1,058,674).
(d)
Allowance for Doubtful Accounts.
The
Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable are
continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate
allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall
customer credit-worthiness and historical experience.
(e)
Property, Equipment, Leaseholds and Intangible Assets.
The
following assets are recorded at cost and depreciated using the methods and annual rates shown below:
SCHEDULE
OF METHOD OF DEPRECIATION
|
|
|
Computer
hardware |
|
30%
Declining balance |
Manufacturing
equipment |
|
20%
Declining balance |
Office
equipment |
|
20%
Declining balance |
Boat |
|
20%
Declining balance |
Building
and improvements |
|
10%
Declining balance |
Trailer |
|
30%
Declining balance |
Automobiles |
|
Straight-line
over 5 years |
Patents |
|
Straight-line
over 17 years |
Technology |
|
Straight-line
over 10 years |
Leasehold
improvements |
|
Straight-line
over lease term |
Customer
relationships |
|
Straight-line
over 15 years |
Software
|
|
Straight-line
over 3 years |
|
|
|
(f)
Impairment of Long-Lived Assets.
In
accordance with FASB Codification Topic 360, Property, Plant and Equipment (ASC 360), the Company reviews long-lived assets, including,
but not limited to, property, equipment and leaseholds, patents and other assets, for impairment annually or whenever events or changes
in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived assets is assessed
for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets. If the expected future
cash flows of an asset is less than its carrying value, an impairment measurement is indicated. Impairment charges are recorded to the
extent that an asset’s carrying value exceeds its fair value. Accordingly, actual results could vary significantly from such estimates.
There were no impairment charges during the periods presented.
(g)
Foreign Currency.
The
functional currency of the Company is the U.S. dollar. The functional currency of three of the Company’s subsidiaries is the Canadian
dollar. The translation of the Canadian dollar to the reporting currency of the Company, the U.S. dollar, is performed for assets and
liabilities using exchange rates in effect at the balance sheet date. Revenue and expense transactions are translated using average exchange
rates prevailing during the year. Translation adjustments arising on conversion of the Company’s financial statements from the
subsidiary’s functional currency, Canadian dollars, into the reporting currency, U.S. dollars, are excluded from the determination
of income (loss) and are disclosed as other comprehensive income in the consolidated statements of income and comprehensive income.
Foreign
exchange gains and losses relating to transactions not denominated in the applicable local currency are included in operating income
(loss) if realized during the year and in comprehensive income (loss) if they remain unrealized at the end of the year.
(h)
Revenue Recognition.
The
Company generates revenue primarily from energy and water conservation products and biodegradable polymers, as further discussed in Note
18.
The
Company follows a five-step model for revenue recognition. The five steps are: (1) identification of the contract(s) with the customer,
(2) identification of the performance obligation(s) in the contract(s), (3) determination of the transaction price, (4) allocation of
the transaction price to the performance obligation, and (5) recognition of revenue when (or as) the performance obligation is satisfied.
The Company has fulfilled its performance obligations when control transfers to the customer, which is generally at the time the product
is shipped since risk of loss is transferred to the purchaser upon delivery to the carrier. For shipments which are free-on-board
shipping point, the Company has elected to account for shipping and handling activities as a fulfillment cost rather than as an additional
promised service and performance obligation.
Since
the Company’s inception, product returns have been insignificant; therefore, no provision has been established for estimated product
returns.
Deferred
revenues consist of products sold to distributors with payment terms greater than the Company’s customary business terms due to
lack of credit history or operating in a new market in which the Company has no prior experience. The Company defers the recognition
of revenue until the criteria for revenue recognition has been met and payments become due or cash is received from these distributors.
(i)
Stock Issued in Exchange for Services.
The
Company’s common stock issued in exchange for services is valued at estimated fair market value based upon trading prices of the
Company’s common stock on the dates of the stock transactions. The corresponding expense of the services rendered is recognized
over the period that the services are performed.
(j)
Stock-based Compensation.
The
Company recognizes compensation expense for all share-based payments in accordance with FASB Codification Topic 718, Compensation
— Stock Compensation, (ASC 718). Under the fair value recognition provisions of ASC 718, the Company recognizes share-based
compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.
The
fair value at grant date of stock options is estimated using the Black-Scholes option-pricing model. Compensation expense is recognized
on a straight-line basis over the stock option vesting period based on the estimated number of stock options that are expected to vest.
Shares are issued from treasury upon exercise of stock options.
(k)
Other Comprehensive Income.
Other
comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included
in comprehensive income, but are excluded from net income as these amounts are recorded directly as an adjustment to
stockholders’ equity. The Company’s other comprehensive income is comprised only of unrealized foreign exchange gains
and losses related to the translation of subsidiaries’ functional currency into the reporting currency.
(l)
Income Per Share.
Basic
earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding
in the period. Diluted earnings per share are calculated giving effect to the potential dilution of the exercise of options and warrants.
Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options and warrants are included
in diluted net income per share to the extent that these shares are dilutive. Common equivalent shares that have an anti-dilutive effect
on net income per share have been excluded from the calculation of diluted weighted average shares outstanding the years ended December
31, 2022 and 2021.
(m)
Use of Estimates.
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates and would impact the results of operations and cash flows.
Estimates
and underlying assumptions are reviewed at each period end. Revisions to accounting estimates are recognized in the period in which the
estimates are revised and in any future periods affected.
Significant
areas requiring the use of management estimates include assumptions and estimates relating to the valuation of goodwill and intangible
assets, share-based payments, valuation allowances for deferred
income tax assets, determination of useful lives of property, equipment and leaseholds and intangible assets, recoverability of accounts
receivable, recoverability of investments and the valuation of inventory.
(n)
Fair Value of Financial Instruments.
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The standard describes a fair value hierarchy based on three levels of inputs described below, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value.
|
● |
Level
1 – Quoted prices in active markets for identical assets or liabilities |
|
● |
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities. |
|
● |
Level
3 — Unobservable inputs that are supported by little or no market activity which is significant to the fair value of the assets
or liabilities. |
The
fair values of cash, term deposits, accounts receivable, accounts payable, accrued liabilities and the short term line of credit for
all periods presented approximate their respective carrying amounts due to the short term nature of these financial instruments.
The
fair value of the long term debt for all periods presented approximate their respective carrying amounts due to these financial instruments
being at market rates.
(o)
Contingencies.
Certain
conditions may exist as of the date the consolidated financial statements are issued which may result in a loss to the Company but which
will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess
such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related
to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s
legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount
of relief sought or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment
indicates that a potential material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would
be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Legal fees associated with loss contingencies are expensed as incurred. The Company is not aware of any contingencies at the date of these consolidated financials statements.
(p)
Income Taxes.
Income taxes are computed by multiplying the Company’s taxable
net income by the Company’s effective tax rates. Deferred income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial statement carrying amounts of existing
assets and liabilities and their respective tax bases, and operating loss carry-forwards, if any. Deferred
income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to reduce the carrying
amount of deferred income tax assets if it is considered more likely than not that some portion, or all, of the deferred income tax assets
will not be realized.
In
accordance with FASB Codification Topic 740, Income taxes (ASC 740) under the liability method, it is the Company’s policy
to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax
benefit is more likely than not to be sustained upon examination by tax authorities. At December 31, 2022, the Company believes it has
appropriately accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an
unrecognized benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate
in a given financial statement period may be affected. Interest and penalties associated with the Company’s tax positions are recorded
as interest expense in the consolidated statements of operations and comprehensive income.
(q)
Risk Management.
The
Company’s credit risk is primarily attributable to its accounts receivable. The amounts presented in the accompanying consolidated
balance sheets are net of allowances for doubtful accounts, estimated by the Company’s management based on prior experience and
the current economic environment. The Company is exposed to credit-related losses in the event of non-payment by customers. Credit exposure
is minimized by dealing with only credit worthy counterparties. Revenue for the Company’s three primary customers totaled $27,775,617
(61%) for the year ended December 31, 2022 (2021 - $16,917,947 or 49%). Accounts receivable for the Company’s three primary customers
totaled $6,124,424 (65%) at December 31, 2022 (2021 - $4,940,995 or 69%).
The
credit risk on cash is limited because the Company limits its exposure to credit loss by placing its cash with major financial institutions.
The Company maintains cash balances at financial institutions which at times exceed federally insured amounts. The Company has not experienced
any losses in such accounts.
The
Company is exposed to foreign exchange and interest rate risk to the extent that market value rate fluctuations materially differ from
financial assets and liabilities, subject to fixed long-term rates.
In
order to manage its exposure to foreign exchange risks, the Company is closely monitoring the fluctuations in the foreign currency exchange
rates and the impact on the value of cash, accounts receivable, and accounts payable and accrued liabilities. The Company has not hedged
its exposure to currency fluctuations.
The
Company is exposed to interest rate risk to the extent that the fair value or future cash flows for financial liabilities will fluctuate
as a result of changes in market interest rates. The Company is exposed to interest rate risk on its long-term debt.
In
order to manage its exposure to interest rate risk, the Company is closely monitoring fluctuations in market interest risks and will
refinance its long-term debt where possible to obtain more favourable rates.
(r)
Equity Method Investment.
The
Company accounts for investments using the equity method of accounting if the investment provides the Company the ability to exercise
significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company’s
ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation on
the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate. Under
the equity method of accounting, the investment is initially recorded at cost in the consolidated balance sheets under other assets and
adjusted for dividends received and the Company’s share of the investee’s earnings or losses together with other-than-temporary
impairments which are recorded through other income (loss), net in the consolidated statements of income and comprehensive income.
(s)
Goodwill and Intangible Assets.
Goodwill
represents the excess of the purchase price of an acquired entity over the amounts assigned to the assets acquired and liabilities assumed.
Goodwill is not amortized, but is reviewed for impairment annually or more frequently if certain impairment conditions arise. The Company
performs an annual goodwill impairment review in the fourth quarter of each year at the reporting unit level. The evaluation begins with
a qualitative assessment of the factors that could impact the significant inputs used to estimate fair value. If after performing the
qualitative assessment, it is determined that it is more likely than not that the fair value of a reporting unit is greater than its
carrying amount, including goodwill, then no further analysis is necessary. However, if the results of the qualitative test are unclear,
the Company performs a quantitative test, which involves comparing the fair value of a reporting unit with its carrying amount, including
goodwill. The Company uses an income-based valuation method, determining the present value of future cash flows, to estimate the fair
value of a reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit
is considered not impaired, and no further analysis is necessary. If the fair value of the reporting unit is less than its carrying amount,
goodwill impairment would be recognized equal to the amount of the carrying value in excess of the reporting unit’s fair value,
limited to the total amount of goodwill allocated to the reporting unit.
Intangible
assets primarily include trademarks and trade secrets with indefinite lives and customer-relationships with finite lives. Intangible
assets with indefinite lives are not amortized but are tested for impairment on an annual basis, or more frequently if indicators of
impairment are present. Indefinite lived intangible assets are assessed using either a qualitative or a quantitative approach. The qualitative
assessment evaluates factors including macro-economic conditions, industry and company-specific factors, legal and regulatory environments,
and historical company performance in assessing fair value. If it is determined that it is more likely than not that the fair value of
the intangible asset is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is required.
When using a quantitative approach, the Company compares the fair value of the intangible asset to its carrying amount.
If the estimated fair value of the intangible asset is less than the carrying amount of the intangible asset, impairment is indicated,
requiring recognition of an impairment charge for the differential.
In
accordance with FASB Codification Topic 350, Intangibles – Goodwill and Other, (ASC 350), qualitative assessments of goodwill
and indefinite-lived intangible assets were performed in 2022 and 2021. Based on the results of the assessment, it was determined that
it is more likely than not the reporting unit, customer lists and trademarks had a fair value in excess of their carrying amounts. Accordingly,
no further impairment testing was completed and no impairment charges related to goodwill or indefinite-lived intangibles were recognized
during the year ended December 31, 2022.
Finite-lived
intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company reviews for impairment indicators
of finite-lived intangibles and other long-lived assets as described in the “Impairment of Long Lived Assets” significant
accounting policy.
(t)
Recent Accounting Pronouncements.
The
Company has implemented all applicable new accounting pronouncements that are in effect. Those pronouncements did not have any material
impact on the consolidated financial statements unless otherwise disclosed, and the Company does not believe that there are any other
new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
3.
Leases
LEASES
Accounting
and reporting guidance for leases requires that leases be evaluated and classified as either operating or finance leases by the lessee
and as either operating, sales-type or direct financing leases by the lessor. For leases with terms greater than 12 months, the Company
records the related right-of-use (“ROU”) asset and lease obligation at the present value of lease payments over the term.
Leases may include fixed rental escalation clauses, renewal options and / or termination options that are factored into the determination
of lease payments when appropriate. The Company’s operating leases are included in ROU assets, lease liabilities-current portion
and lease liability-long term portion in the accompanying consolidated balance sheets. ROU assets represent the Company’s right
to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the
lease. The Company’s leases do not usually provide a readily determinable implicit rate; therefore, an estimate of the Company’s
incremental borrowing rate is used to discount the lease payments based on information available at the lease commencement date. The
discount rate used was 5.5%.
The
table below summarizes the right-of-use asset and lease liability for the years ended December 31, 2022 and 2021:
SUMMARY
OF RIGHT-OF-USE ASSET AND LEASE LIABILITY
Right of Use Assets | |
| | |
Balance at December 31, 2020 | |
$ | 483,113 | |
Depreciation | |
| (265,846 | ) |
Balance at December 31, 2021 | |
$ | 217,267 | |
Depreciation | |
| (50,045 | ) |
Balance at December 31, 2022 | |
$ | 167,222 | |
| |
| | |
Lease Liability | |
| | |
Balance at December 31, 2020 | |
$ | 483,113 | |
Lease interest expense | |
| 22,057 | |
Payments | |
| (287,903 | ) |
Balance at December 31, 2021 | |
$ | 217,267 | |
Lease interest expense | |
| 8,566 | |
Payments | |
| (58,611 | ) |
Balance at December 31, 2022 | |
$ | 167,222 | |
| |
| | |
Short-term portion | |
$ | 58,080 | |
Long-term portion | |
| 109,142 | |
Total | |
$ | 167,222 | |
Undiscounted
rent payments are as follows:
SCHEDULE
OF UNDISCOUNTED RENT PAYMENTS
| |
| | |
2023 | |
| 58,080 | |
2024 | |
| 59,520 | |
2025 | |
| 61,020 | |
Total | |
$ | 178,620 | |
Impact of discounting | |
| (11,398 | ) |
Lease liability, December 31, 2022 | |
$ | 167,222 | |
4.
Accounts Receivable ACCOUNTS
RECEIVABLE
SCHEDULE
OF ACCOUNTS RECEIVABLE
| |
2022 | | |
2021 | |
| |
| | |
| |
Accounts receivable | |
$ | 9,739,150 | | |
$ | 7,403,308 | |
Allowances for doubtful accounts | |
| (289,293 | ) | |
| (273,979 | ) |
Total
accounts receivable | |
$ | 9,449,857 | | |
$ | 7,129,329 | |
5.
Inventories INVENTORIES
SCHEDULE
OF INVENTORY
| |
2022 | | |
2021 | |
| |
| | |
| |
Completed goods | |
$ | 3,806,646 | | |
$ | 3,417,829 | |
Raw materials and supplies | |
| 10,612,784 | | |
| 6,084,176 | |
Total
inventory | |
$ | 14,419,430 | | |
$ | 9,502,005 | |
6.
Property, Equipment and Leaseholds PROPERTY,
PLANT & EQUIPMENT
SCHEDULE
OF PROPERTY, EQUIPMENT AND LEASEHOLDS
| |
2022 | | |
Accumulated | | |
2022 | |
| |
Cost | | |
Depreciation | | |
Net | |
Buildings and improvements | |
$ | 8,775,629 | | |
$ | 3,310,920 | | |
$ | 5,464,709 | |
Automobiles | |
| 196,255 | | |
| 107,055 | | |
| 89,200 | |
Computer hardware | |
| 43,432 | | |
| 42,663 | | |
| 769 | |
Office equipment | |
| 133,280 | | |
| 112,782 | | |
| 20,498 | |
Manufacturing equipment | |
| 8,634,063 | | |
| 4,891,736 | | |
| 3,742,327 | |
Trailers | |
| 8,857 | | |
| 7,592 | | |
| 1,265 | |
Boat | |
| 34,400 | | |
| 27,907 | | |
| 6,493 | |
Leasehold improvements | |
| 88,872 | | |
| 88,872 | | |
| — | |
Technology | |
| 100,860 | | |
| 100,860 | | |
| — | |
Land | |
| 384,027 | | |
| — | | |
| 384,027 | |
| |
$ | 18,399,675 | | |
$ | 8,690,387 | | |
$ | 9,709,288 | |
| |
2021 | | |
Accumulated | | |
2021 | |
| |
Cost | | |
Depreciation | | |
Net | |
Buildings and improvements | |
$ | 4,823,708 | | |
$ | 2,983,589 | | |
$ | 1,840,119 | |
Automobiles | |
| 196,255 | | |
| 71,258 | | |
| 124,997 | |
Computer hardware | |
| 43,605 | | |
| 42,456 | | |
| 1,149 | |
Office equipment | |
| 132,530 | | |
| 107,256 | | |
| 25,274 | |
Manufacturing equipment | |
| 6,867,799 | | |
| 4,171,699 | | |
| 2,696,100 | |
Trailers | |
| 9,463 | | |
| 7,532 | | |
| 1,931 | |
Boat | |
| 34,400 | | |
| 26,284 | | |
| 8,116 | |
Leasehold improvements | |
| 88,872 | | |
| 88,872 | | |
| — | |
Technology | |
| 107,759 | | |
| 107,759 | | |
| — | |
Land | |
| 234,027 | | |
| — | | |
| 234,027 | |
| |
$ | 12,538,418 | | |
$ | 7,606,705 | | |
$ | 4,931,713 | |
Amount
of depreciation expense for 2022: $1,103,732 (2021 - $773,497) and is included in cost of sales in the consolidated statements of income
and comprehensive income.
During
the year ended December 31, 2021, 3.3 acres of cleared and undeveloped land in Taber, AB Canada was disposed of for proceeds of $263,380
($333,899CAD). With a cost of $219,318 ($278,040CAD) the Company recognized a gain of $44,330 ($55,859CAD) on the disposal.
7.
Patents PATENTS
SCHEDULE OF PATENTS
| |
2022 Cost | | |
Accumulated Amortization | | |
2022 Net | |
Patents | |
$ | 195,725 | | |
$ | 195,725 | | |
$ | - | |
| |
2021 Cost | | |
Accumulated Amortization | | |
2021 Net | |
Patents | |
$ | 208,079 | | |
$ | 194,380 | | |
$ | 13,699 | |
Decrease
in 2022 cost was due to currency conversion. The cost as of December 31, 2022 in Canadian dollars is $265,102 (2021 - $265,102 CAD).
Amount
of amortization for 2022 was $13,699 (2021 - $16,438) and is included in cost of sales in the consolidated statements of income and comprehensive
income.
8.
Goodwill and Intangible Assets
GOODWILL
AND INTANGIBLE ASSETS
SCHEDULE
OF GOODWILL AND INDEFINITE LIVED INTANGIBLE ASSETS
Goodwill | |
| | |
Balance as of December 31, 2021 and 2022 | |
$ | 2,534,275 | |
| |
| | |
Indefinite Lived Intangible Assets | |
| | |
Balance as of December 31, 2021 and 2022 | |
$ | 770,000 | |
Goodwill
relates to the acquisition of ENP Investments. Indefinite lived intangible assets consist of trade secrets and trademarks related to
the acquisition of ENP Investments.
Definite Life Intangible Assets | |
| | |
Balance as of December 31, 2020 | |
$ | 2,006,000 | |
Amortization | |
| (176,000 | ) |
Balance as of December 31, 2021 | |
| 1,830,000 | |
Amortization | |
| (160,000 | ) |
Balances as of December 31, 2022 | |
$ | 1,670,000 | |
Definite
lived intangible assets consist of customer relationships and software related to the acquisition of ENP Investments.
Estimated
amortization expense over the next five years is as follows:
SCHEDULE
OF ESTIMATED FUTURE AMORTIZATION EXPENSE
2023 | |
$ | 160,000 | |
2024 | |
| 160,000 | |
2025 | |
| 160,000 | |
2026 | |
| 160,000 | |
2027 | |
| 160,000 | |
9.
Long Term Deposits
LONG TERM DEPOSITS
The
Company has security deposits that are long term in nature which consist of damage deposits held by landlords and security deposits held
by various vendors.
SCHEDULE
OF LONG TERM DEPOSITS
| |
2022 | | |
2021 | |
| |
| | |
| |
Long term deposits | |
$ | 8,540 | | |
$ | 8,540 | |
10.
Investments
INVESTMENTS
(a) The
Company previously held a 50% ownership interest in ENP Peru, split between NanoChem (41.67%) and ENP Investments (8.33%), which was
acquired in fiscal 2016. ENP Peru is located in Illinois and leases warehouse space. In June 2022, NanoChem acquired an additional
50% ownership interest at a cost of $506,659 paid through a new $259,000 mortgage and cash on hand. The 35% non-controlling interest
of the 8.33% owned by ENP Investments is included in non-controlling interest in these consolidated financial statements. The
Company’s investment in ENP Peru was previously accounted for using the equity method, however, is now consolidated into the
consolidated financial statements from the date control was obtained.
It
was determined that ENP Peru did not meet the definition of a business in accordance with FASB Codification Topic 805, Business
Combinations (ASC 805), and the acquisition was accounted for as an asset acquisition. The following table summarizes the
final purchase price allocation of the consideration paid to the respective fair values of the assets acquired and liabilities
assumed in ENP Peru as of the acquisition date. The gain on acquisition of ENP Peru represents a gain on remeasurement of
the Company’s equity method investment immediately prior to the acquisition date.
SCHEDULE
OF FAIR VALUES OF THE ASSETS ACQUIRED AND LIABILITIES ASSUMED
| |
| |
Purchase consideration | |
$ | 506,659 | |
| |
| | |
Assets acquired: | |
| | |
Cash | |
| 7,330 | |
Building | |
| 3,750,000 | |
Land | |
| 150,000 | |
Liabilities assumed: | |
| | |
Deferred tax liability | |
| (174,582 | ) |
Long term debt | |
| (2,849,500 | ) |
Total identifiable net assets: | |
| 883,248 | |
Excess of assets acquired over consideration | |
| 376,589 | |
Less investment eliminated upon consolidation | |
| (41,538 | ) |
Gain on acquisition of ENP Peru | |
$ | 335,051 | |
A
summary of the Company’s investment follows:
SCHEDULE OF EQUITY METHOD INVESTMENT
Balance, December 31, 2020 | |
$ | 3,822 | |
Return of equity | |
| (3,822 | ) |
Gain in equity method investment | |
| 22,642 | |
Balance, December 31, 2021 | |
| 22,642 | |
Return of equity | |
| (8,750 | ) |
Gain in equity method investment | |
| 27,646 | |
Investment eliminated upon consolidation | |
| (41,538 | ) |
Balance, June 30 and December 31, 2022 | |
$ | - | |
Summarized
profit and loss information related to the equity accounted investment is as follows:
SUMMARY OF PROFIT AND LOSS INFORMATION RELATED TO EQUITY ACCOUNTED INVESTMENT
| |
Six months ended June 30, 2022 | | |
Year ended December 31, 2021 | |
| |
| | |
| |
Net sales | |
$ | 162,000 | | |
$ | 322,079 | |
| |
| | | |
| | |
Net income | |
| 55,292 | | |
$ | 45,285 | |
(b) In
December 2018 the Company invested $200,000
in Applied Holding Corp. (“Applied”). Applied is a captive insurance company and the Company received a non-convertible
promissory note for its investment which becomes due in 2021 but may be extended with notice for a maximum of two years. During the
year ended December 31, 2021, the Company entered an agreement with Applied to extend the maturity date of this promissory note to
December 6, 2023. In accordance with FASB Codification Topic 323, Investments – Equity Method and Joint Ventures (ASC
323), the Company has elected to account for this investment at cost.
(c)
In December 2018 the Company invested $500,000 in Trio Opportunity Corp. (“Trio”), a privately held
entity. Trio is a real estate investment vehicle and the Company received 50,000 non-voting Class B shares at $10.00/share. In
accordance with FASB Codification Topic 321, Investments – Equity Securities (ASC 321), the Company has elected to
account for this investment at cost.
d) In
January 2019, the Company invested in a Florida based LLC that is engaged in international sales of fertilizer additives. The
Company accounts for this investment using the equity method of accounting. According to the operating agreement, the Company has a
50% interest in the profit and loss of the Florida based LLC but does not have control. A
summary of the Company’s investment follows:
SCHEDULE
OF EQUITY METHOD INVESTMENT
Balance, December 31, 2020 | |
$ | 3,572,345 | |
Gain in equity method investment | |
| 454,023 | |
Return of equity | |
| (325,000 | ) |
Balance, December 31, 2021 | |
| 3,701,368 | |
Gain in equity method investment | |
| 307,527 | |
Return of equity | |
| (250,000 | ) |
Balance, December 31, 2022 | |
$ | 3,758,895 | |
Summarized
profit and loss information related to the equity accounted investment is as follows:
SUMMARY
OF PROFIT AND LOSS INFORMATION RELATED TO EQUITY ACCOUNTED INVESTMENT
| |
2022 | | |
2021 | |
| |
| | |
| |
Net sales | |
$ | 18,103,070 | | |
$ | 11,543,277 | |
Gross profit | |
| 4,204,311 | | |
| 3,517,387 | |
Net income | |
$ | 615,055 | | |
$ | 908,045 | |
During
the year ended December 31, 2022, the Company had sales of $12,938,735 (2021 - $7,982,281) to the Florida Based LLC, of which $2,423,285
is included within Accounts Receivable as at December 31, 2022 (2021 - $2,202,345).
f) In
December 2020, the Company invested $500,000 in
Lygos Inc. (“Lygos”), a privately held entity, under a Simple Agreement for Future Equity (“SAFE”)
agreement. Lygos is a company developing a sustainable aspartic acid microbe strain. In 2021, the Company made a second SAFE
investment of $500,000. The
Company has elected to account for this investment at cost. A summary of the Company’s investment follows:
SCHEDULE
OF EQUITY METHOD INVESTMENT
Balance, December 31, 2020 | |
$ | 500,000 | |
Additional investment | |
| 500,000 | |
Balance, December 31, 2021 and December 31, 2022 | |
$ | 1,000,000 | |
11.
Short-Term Line of Credit
SHORT-TERM LINE OF CREDIT
(a) In
March 2022, ENP Investments signed a new agreement with Midland States Bank (“Midland”) to renew the credit line. In
June 2022, ENP Investments closed the account. The revolving line of credit was for an aggregate amount up to $4,000,000.
The interest rate of this loan was subject to change from time to time based on changes in an independent index which is the 1 month
LIBOR as published in the Wall Street Journal (the “Index”). Interest on the unpaid principal balance of this loan was
calculated using a rate of 1.000
percentage points over the Index. Under no circumstances was the interest rate of this loan less than 4.25%
per annum or more than the maximum rate allowed by applicable law. The interest rate at December 31, 2021 was 4.25%.
The
revolving line of credit contained customary affirmative and negative covenants, including the following: compliance with laws, provisions
of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance of operating accounts
at Midland, Midland’s access to collateral, formation or acquisition of subsidiaries, incurrence of indebtedness, dispositions
of assets, granting liens, changes in business, ownership or business locations, engaging in mergers and acquisitions, making investments
or distributions and affiliate transactions. NanoChem was a guarantor of 65% of all the principal and other loan costs not to exceed
$2,600,000.
To
secure the repayment of any amounts borrowed under the revolving line of credit, ENP Investments granted Midland a security interest
in all inventory, equipment and fixtures and acknowledges a separate commercial security agreement from guarantor to Midland dated February
15, 2011 which has now been terminated.
Short-term
borrowings outstanding under the revolving line as of December 31, 2022 were $nil (2021 - $811,665).
(b) In
October 2021, the Company signed a new agreement with Midland to replace the expiring credit line at Harris. In June 2022, the
Company closed the account. The revolving line of credit was for an aggregate amount of up to the lesser of (i) $3,500,000, or (ii)
80% of eligible domestic accounts receivable and certain foreign accounts receivable plus 50% of inventory. Interest on the unpaid
principal balance of this loan was calculated using a rate of 0.500 percentage points over the Index. Under no circumstances was the
interest rate of this loan less than 4.50% per annum or more than the maximum rate allowed by applicable law. The interest rate at
December 31, 2021 was 4.50%.
The
revolving line of credit contained customary affirmative and negative covenants, including the following: compliance with laws, provision
of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance of operating accounts
at Midland, Midland’s access to collateral, formation or acquisition of subsidiaries, incurrence of indebtedness, dispositions
of assets, granting liens, changes in business, ownership or business locations, engaging in mergers and acquisitions, making investments
or distributions and affiliate transactions. The covenants also required that the Company maintain a minimum ratio of qualifying financial
assets to the sum of qualifying financial obligations.
To
secure the repayment of any amounts borrowed under the revolving line of credit, the Company had granted Midland a security interest
in substantially all of the assets of NanoChem, exclusive of intellectual property assets which has been revoked.
Short-term
borrowings outstanding under the revolving line as of December 31, 2022 were $nil (December 31, 2021 - $1,489,154).
(c) In
June 2022, ENP Investments signed a new agreement with Stock Yards Bank and Trust (“Stock Yards”) to replace the credit
line at Midland. The revolving line of credit is for an aggregate amount of up to the lesser of (i) $4,000,000, or (ii) 50-80% of
eligible domestic accounts receivable plus 50% of inventory, capped at $2,000,000. Interest on the unpaid principal balance of this
loan will be calculated using the greater of prime or 4.0%. The interest rate at December 31, 2022 is 7.5%.
The
revolving line of credit contains customary affirmative and negative covenants, including the following: compliance with laws,
provisions of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance of
operating accounts at Stock Yards, Stock Yard’s access to collateral, formation or acquisition of subsidiaries, incurrence of
indebtedness, dispositions of assets, granting liens, changes in business, ownership or business locations, engaging in mergers and
acquisitions, making investments or distributions and affiliate transactions. NanoChem is a guarantor of 65%
of all the principal and other loan costs not to exceed $2,600,000.
The non-controlling interest is the guarantor of the remaining 35% of all the principal and other loan costs not to exceed
$1,400,000. As of December 31, 2022, ENP Investments was in compliance with all loan covenants.
To
secure the repayment of any amounts borrowed under the revolving line of credit, the Company granted Stock Yards a security interest
in substantially all of the assets of ENP Investments, exclusive of intellectual property assets.
Short-term
borrowings outstanding under the revolving line as of December 31, 2022 were $2,477,794 (2021- $nil).
(d) In
June 2022, the Company signed a new agreement with Stock Yards to replace the credit line at Midland. The revolving line of credit
is for an aggregate amount of up to the lesser of (i) $4,000,000, or (ii) 80% of eligible domestic accounts receivable and certain
foreign accounts receivable plus 50% of inventory, capped at $2,000,000. Interest on the unpaid principal balance of this loan will
be calculated using the greater of prime or 4.0%. The interest rate at December 31, 2022 is 7.5%.
The
revolving line of credit contains customary affirmative and negative covenants, including the following: compliance with laws, provision
of financial statements and periodic reports, payment of taxes, maintenance of inventory and insurance, maintenance of operating accounts
at Stock Yards, Stock Yards access to collateral, formation or acquisition of subsidiaries, incurrence of indebtedness, dispositions
of assets, granting liens, changes in business, ownership or business locations, engaging in mergers and acquisitions, making investments
or distributions and affiliate transactions. The covenants also require that the Company maintain a minimum ratio of qualifying financial
assets to the sum of qualifying financial obligations. As of December 31, 2022, the Company was in compliance with all loan covenants.
To
secure the repayment of any amounts borrowed under the revolving line of credit, the Company granted Stock Yards a security interest
in substantially all of the assets of NanoChem, exclusive of intellectual property assets.
Short-term
borrowings outstanding under the revolving line as of December 31, 2022 were $340,797 (2021 - $nil).
12.
Long Term Debt
LONG TERM DEBT
(a) In
January 2018, ENP Investments signed a $200,000 promissory note with Midland with a rate of 5.250% to be repaid over 7 years with
equal monthly installments plus interest. This money was used to purchase production equipment and interest for the year ended
December 31, 2021 was $2,788. In May 2021, ENP Investments paid the loan in full with cash on hand.
(b) In
April 2020, NanoChem received a two year loan of $322,000 through the Paycheck Protection Program with a rate of 1%. In March 2021,
the loan was forgiven by the SBA and has been recorded as Other Income in the consolidated statements of operations and
comprehensive income for the year ended December 31, 2021.
(c) In
April 2020, ENP Investments received a two year loan of $215,960 through the Paycheck Protection Program with a rate of 1%. In March
2021, the loan was forgiven by the SBA and has been recorded as Other Income in the consolidated statements of operations and
comprehensive income for the year ended December 31, 2021.
(d) In
October 2020, NanoChem signed a $1,980,947 term loan with Midland with a rate of 3.85% to be repaid over 5 years with equal monthly
payments including interest. The money was used to retire the debt at Harris related to the loan to purchase a 65% interest in ENP
Investments. In June 2022, the loan was paid in full with funds from Stock Yards. Interest expense for the year December 31, 2022
was $30,334 (2021 - $69,831). The balance owing at December 31, 2022 was $nil (2021 - $1,554,044).
(e) In
October 2020, NanoChem signed a loan for $894,253 with Midland with an interest rate 3.85% to be repaid over two years with equal
monthly payments including interest. The funds were used to replace the loan at Harris for the purchase of new manufacturing
equipment. In June 2022, the loan was paid in full with funds from Stock Yards. Interest expense for the year ended December 31,
2022 was $5,816 (2021 - $24,827). The balance owing at December 31, 2022 was $nil (2021 - $381,674).
(f) In
January 2020, ENP Mendota refinanced its mortgage and signed a loan for $450,000 with Stock Yards to be repaid over 10 years with
monthly installments plus interest. Interest for the first five years is at 4.35% and it will be adjusted for the last five years to
the Cincinnati Federal Home Bank Loan 5 year fixed index plus 2.5%. Interest expense for the year ended December 31, 2022 was
$18,590 (2021 - $17,107). The balance owing at December 31, 2022 is $415,430 (2021 - $430,880).
(g) In
June 2022, NanoChem signed a loan for $1,935,000 with Stock Yards with an interest rate of 4.90% to be repaid
over three years with equal monthly payments including interest. The funds were used to replace the loans at Midland for the
purchase of the 65% interest in ENP Investments and the new manufacturing equipment. Interest expense for the year ended December
31, 2022 was $45,113 (2021 - $nil). The balance owing at December 31, 2022 is $1,632,672 (2021 - $nil).
(h) In
January 2020 ENP Peru signed a $3,000,000 loan with an interest rate 4.35% to be repaid over ten years with equal monthly payments
including interest. Upon the purchase of the remainder of ENP Peru in June 2022, the Company assumed the first mortgage at Stock
Yards with a balance of $2,849,500. Interest expense for the year ended December 31, 2022 was $62,679 (2021 - $nil). The balance
owing at December 31, 2022 was $2,813,015 (2021 - $nil).
(i) In
June 2022, ENP Peru Investments obtained a second mortgage for $259,000 with Stock Yards to be repaid over 10 years with monthly
installments plus interest with an interest rate of 5.4%. Interest expense for the year ended December 31, 2022 was $7,077 (2021 -
$nil). The balance owing at December 31, 2022 was $256,162 (2021 - $nil).
(j) In
December 2022, NanoChem signed a three year loan for up to $2,000,000 with Stock Yards with an interest rate of 6.5%. Interest only
payments are required for the first 18 months with interest and principal being paid in the last 18 months. The funds are being used
to purchase new manufacturing equipment. Interest expense for the year ended December 31, 2022 was $23,632 (2021 - $nil). The
balance owing at December 31, 2022 is $1,036,798 (2021 - $nil).
As
of December 31, 2022, Company was in compliance with all loan covenants.
SCHEDULE
OF LOAN COVENANTS
Continuity | |
December 31, 2022 | | |
December 31, 2021 | |
Balance, January 1 | |
$ | 2,366,598 | | |
$ | 3,847,638 | |
| |
| | | |
| | |
Balance, beginning of period | |
$ | 2,366,598 | | |
$ | 3,847,638 | |
Plus: Proceeds from loans | |
| 3,230,798 | | |
| - | |
Plus: Loan acquired with acquisition of ENP Peru | |
| 2,849,500 | | |
| - | |
Less: Forgiveness on PPP loans | |
| - | | |
| (537,960 | ) |
Less: Payments on loan | |
| (2,292,819 | ) | |
| (943,080 | ) |
Balance, end of period | |
$ | 6,154,077 | | |
$ | 2,366,598 | |
SCHEDULE
OF OUTSTANDING BALANCE LOAN
Outstanding balance at December 31, | |
December 31, 2022 | | |
December 31, 2021 | |
a) Long term debt – Midland States Bank | |
$ | - | | |
$ | - | |
b) Long term debt – PPP | |
| - | | |
| - | |
c) Long term debt – PPP | |
| - | | |
| - | |
d) Long term debt – Midland States Bank | |
| - | | |
| 1,554,044 | |
e) Long term debt – Midland States Bank | |
| - | | |
| 381,674 | |
f) Long term debt – Stock Yards Bank & Trust | |
| 415,430 | | |
| 430,880 | |
g) Long term debt – Stock Yards Bank & Trust | |
| 1,632,672 | | |
| - | |
h) Long term debt – Stock Yards Bank & Trust | |
| 2,813,015 | | |
| - | |
i) Long term debt – Stock Yards Bank & Trust | |
| 256,162 | | |
| - | |
j) Long term debt – Stock Yards Bank & Trust | |
| 1,036,798 | | |
| - | |
Total | |
| 6,154,077 | | |
| 2,366,598 | |
Less: current portion | |
| (717,612 | ) | |
| (793,574 | ) |
Long term debt | |
$ | 5,436,465 | | |
$ | 1,573,024 | |
13.
Income Taxes
INCOME TAXES
The
provision for income tax expense (benefit) is comprised of the following:
SCHEDULE
OF PROVISION FOR INCOME TAX EXPENSE (BENEFIT)
| |
2022 | | |
2021 | |
Current tax, federal | |
$ | 1,017,059 | | |
$ | 1,309,503 | |
Current tax, state | |
| 460,098 | | |
| 592,394 | |
Current tax, foreign | |
| 216,082 | | |
| 91,285 | |
Current tax | |
| 1,693,239 | | |
| 1,993,182 | |
Income tax recovery | |
| (1,476,088 | ) | |
| - | |
Current tax, total | |
| 217,151 | | |
| 1,993,182 | |
| |
| | | |
| | |
Deferred income tax, federal | |
| (49,088 | ) | |
| 250,153 | |
Deferred income tax, state | |
| (22,207 | ) | |
| 113,164 | |
Deferred income tax, foreign | |
| - | | |
| - | |
Deferred income tax, total | |
| (71,295 | ) | |
| 363,317 | |
Total | |
$ | 145,856 | | |
$ | 2,356,499 | |
The
following table reconciles the income tax expense at the U.S. Federal statutory rate to income tax expense at the Company’s effective
tax rates.
SCHEDULE
OF RECONCILIATION OF INCOME TAXES
| |
2022 | | |
2021 | |
US statutory tax rates | |
| 30.50 | % | |
| 30.50 | % |
Expected income tax | |
| 2,397,021 | | |
| 2,028,481 | |
Non-deductible items | |
| (243,167 | ) | |
| (29,508 | ) |
Change in estimates and other | |
| (2,004,041 | ) | |
| (65,027 | ) |
Change in enacted tax rate | |
| - | | |
| 337,961 | |
Foreign tax rate difference | |
| (226,611 | ) | |
| (86,696 | ) |
Change in valuation allowance | |
| 222,654 | | |
| (171,288 | ) |
Total income taxes | |
| 145,856 | | |
| 2,356,499 | |
| |
| | | |
| | |
Current income tax expense | |
| 217,151 | | |
| 1,993,182 | |
Deferred tax expense (recovery) | |
| (71,295 | ) | |
| 363,317 | |
Total income tax expense | |
$ | 145,856 | | |
$ | 2,356,499 | |
Included
in current income tax expense for the year ended December 31, 2022 is a recovery of $1,476,088 (2022 - $nil) for a revision of estimated
current taxes payable for previous years.
Deferred
taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes. Deferred tax assets (liabilities) at December 31, 2022 and 2021 are comprised of the following:
SCHEDULE
OF DEFERRED TAX ASSETS (LIABILITIES)
| |
2022 | | |
2021 | |
Canada | |
| | | |
| | |
Non capital loss carryforwards | |
$ | 891,954 | | |
$ | 1,443,371 | |
Intangible assets | |
| - | | |
| 19,849 | |
Property, equipment and leaseholds | |
| 47,279 | | |
| 587,408 | |
| |
| 939,230 | | |
| 2,050,628 | |
Valuation allowance | |
| (939,230 | ) | |
| (2,050,628 | ) |
Net deferred tax asset | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
US | |
| | | |
| | |
| |
| 2022 | | |
| 2021 | |
Net operating loss carryforwards | |
$ | - | | |
$ | - | |
Intangible assets | |
| (6,070 | ) | |
| - | |
Investments | |
| (7,676 | ) | |
| (241,880 | ) |
Property, equipment and leaseholds | |
| (486,713 | ) | |
| (68,282 | ) |
Property, equipment and leaseholds | |
| 274,289 | | |
| 12,697 | |
Financial instruments | |
| - | | |
| - | |
Deferred tax asset not recognized | |
| - | | |
| - | |
Net deferred tax asset (liability) | |
$ | (226,170 | ) | |
$ | (297,465 | ) |
The
Company has non-capital loss carryforwards of approximately $3,878,060 (2021 - $6,275,526) which may be carried forward to apply against
future year income tax for Canadian income tax purposes, subject to the final determination by taxation authorities, expiring in the
following years:
SCHEDULE
OF NON OPERATING LOSS CARRYFORWARDS
| |
Loss | |
2030 | |
| 645,781 | |
2031 | |
| 919,683 | |
2032 | |
| 601,379 | |
2037 | |
| 1,652,709 | |
2039 | |
| 46,917 | |
2040 | |
| 11,591 | |
Total | |
| 3,878,060 | |
As
at December 31, 2022, the Company has no net operating loss carryforwards available for US tax purposes.
Accounting
for Uncertainty for Income Tax
As
at December 31, 2022 and 2021, the Company’s consolidated balance sheets did not reflect an asset for uncertain tax positions,
nor any accrued penalties or interest associated with income tax uncertainties. The Company has no income tax examinations in progress.
14.
Income Per Share
INCOME PER SHARE
The
Company presents both basic and diluted income per share on the face of its consolidated statements of income. Basic and diluted income
per share are calculated as follows:
SCHEDULE
OF BASIC AND DILUTED LOSS PER SHARE
| |
2022 | | |
2021 | |
| |
| | |
| |
Net income attributable to controlling interest | |
$ | 7,021,604 | | |
$ | 3,449,162 | |
Weighted average common shares outstanding: | |
| | | |
| | |
Basic | |
| 12,379,316 | | |
| 12,316,254 | |
Diluted | |
| 12,466,415 | | |
| 12,505,522 | |
Net income per common share attributable to controlling interest: | |
| | | |
| | |
Basic | |
$ | 0.57 | | |
$ | 0.28 | |
Diluted | |
$ | 0.56 | | |
$ | 0.28 | |
Certain
stock options whose terms and conditions are described in Note 15, “Stock Options” could potentially dilute basic EPS in
the future, but were not included in the computation of diluted EPS because to do so would have been anti-dilutive. Those anti-dilutive
options are as follows.
SCHEDULE
OF ANTI-DILUTIVE OPTIONS
| |
2022 | | |
2021 | |
| |
| | |
| |
Anti-dilutive options | |
| 1,304,000 | | |
| 21,000 | |
There
were no preferred shares issued and outstanding during the years ended December 31, 2022 or 2021.
15.
Stock Options.
STOCK OPTIONS
The
Company has a stock option plan (“Plan”). The purpose of this Plan is to provide additional incentives to key employees,
officers, directors and consultants of the Company and its subsidiaries in order to help attract and retain the best available personnel
for positions of responsibility and otherwise promote the success of the Company’s business. It is intended that options issued
under this Plan constitute non-qualified stock options. The general terms of awards under the option plan are that 100% of the options
granted will vest the year following the grant. The maximum term of options granted is 5 years and the exercise price for all options
are issued for not less than fair market value at the date of the grant.
The
following table summarizes the Company’s stock option activities for the years ended December 31, 2022 and 2021:
SCHEDULE
OF STOCK OPTION ACTIVITIES
| |
Number of shares | | |
Exercise price per share | | |
Weighted average exercise price | |
| |
| | |
| | |
| |
Balance, December 31, 2020 | |
| 749,000 | | |
$ | 0.75 – 4.13 | | |
$ | 2.42 | |
Granted | |
| 170,000 | | |
$ | 3.61 | | |
$ | 3.61 | |
Cancelled or expired | |
| (34,799 | ) | |
$ | 1.42 – 3.46 | | |
$ | 2.30 | |
Exercised | |
| (94,701 | ) | |
$ | 0.75 – 3.46 | | |
$ | 1.58 | |
Balance, December 31, 2021 | |
| 789,500 | | |
$ | 1.42 – 4.13 | | |
$ | 2.78 | |
Granted | |
| 981,000 | | |
$ | 3.55 – 3.61 | | |
$ | 3.55 | |
Cancelled or expired | |
| (13,486 | ) | |
$ | 1.70 – 3.61 | | |
$ | 2.32 | |
Exercised | |
| (71,014 | ) | |
$ | 1.42 – 2.44 | | |
$ | 1.98 | |
Balance, December 31, 2022 | |
| 1,686,000 | | |
$ | 1.70 – 4.13 | | |
$ | 3.26 | |
Exercisable, December 31, 2022 | |
| 680,000 | | |
$ | 1.70 – 4.13 | | |
$ | 2.92 | |
The
weighted-average remaining contractual life of outstanding options is 3.90 years.
The
fair value of each option grant is calculated using the following weighted average assumptions:
SCHEDULE
OF STOCK OPTION FAIR VALUE ASSUMPTIONS
| |
2022 | | |
2021 | |
Expected life – years | |
| 3.0 | | |
| 3.0 | |
Interest rate | |
| 1.76 – 3.64 | % | |
| 1.23 | % |
Volatility | |
| 66.01
- 69.66 | % | |
| 63.28 | % |
Weighted average fair value of options granted | |
$ | 1.46 – 1.65 | | |
$ | 1.23 | |
During
the year ended December 31, 2022, the Company granted 46,000 (2021 – 45,000) stock options to consultants and has applied ASC 718
using the Black-Scholes option-pricing model, which resulted in expenses of $14,850 (2021 - $13,860). Options granted in other years
resulted in additional expenses of $62,187 (2021 – $51,210). During the year ended December 31, 2022, employees were granted 935,000
(2021 – 125,000) stock options, which resulted in expenses of $172,731 (2021 – $38,500). Options granted in other years resulted
in additional expenses in the amount of $149,380 for employees during the year ended December 31, 2022 (2021 - $106,542). There were
54,500 employee and 16,514 consultant stock options exercised during the year ended December 31, 2022 (2021 – 61,500 employee;
33,201 consultant).
As
of December 31, 2022, there was approximately $1,432,960 of compensation expense related to non-vested awards. This expense is expected
to be recognized over a weighted average period of 3.9 years.
The
aggregate intrinsic value of vested options outstanding at December 31, 2022 is $69,190 (2021 – $712,945). The intrinsic value
of options exercised during the year ended December 31, 2022 was $96,989 (2021 - $203,701).
16.
Capital Stock.
CAPITAL STOCK
During
the year ended December 31, 2022, 54,500 shares were issued upon the exercise of employee stock options (2021 – 61,500) and 16,514
shares were issued upon the exercise of consultant stock options (2021 – 33,201).
17.
Non-Controlling Interests
NON-CONTROLLING INTERESTS
ENP
Investments is a limited liability corporation (“LLC”) that manufactures and distributes golf, turf and ornamental
agriculture products in Mendota, Illinois. The Company owns a 65%
interest in ENP Investments through its wholly-owned subsidiary NanoChem. An unrelated party (“NCI”) owns the remaining 35%
interest in ENP Investments. ENP Mendota is a wholly owned subsidiary of ENP Investments. ENP Mendota leases warehouse space. For
financial reporting purposes, the assets, liabilities and earnings of both of the LLC’s are consolidated into these financial
statements. The NCI’s ownership interest in ENP Investments is recorded in non-controlling interests in these
consolidated financial statements. The non-controlling interest represents NCI’s interest in the
earnings and equity of ENP Investments. ENP Investments is allocated to the TPA segment.
ENP
Investments makes cash distributions to its equity owners based on formulas defined within its Ownership Interest Purchase Agreement
dated October 1, 2018. Distributions are defined in the Ownership Interest Purchase Agreement as cash on hand to the extent it exceeds
current and anticipated long-term and short-term needs, including, without limitation, needs for operating expenses, debt service, acquisitions,
reserves, and mandatory distributions, if any.
From
the effective date of acquisition onward, the minimum distributions requirements under the Ownership Interest Purchase Agreement were
satisfied. The total distribution from the effective date of acquisition onward was $2,506,518.
SCHEDULE
OF DISTRIBUTIONS
Balance, December 31, 2020 | |
$ | 2,561,751 | |
Distribution | |
| (804,003 | ) |
Non-controlling interest share of income | |
| 845,095 | |
Balance, December 31, 2021 | |
| 2,602,843 | |
Distribution | |
| (689,434 | ) |
Non-controlling interest share of income | |
| 691,625 | |
Balance, December 31, 2022 | |
$ | 2,605,034 | |
During
the year ended December 31, 2022, the Company had sales of $6,667,815 (2021 - $4,877,690) to the NCI, of which $3,634,083 is included within Accounts Receivable as of December 31, 2022 (2021 – $2,215,119).
18.
Segmented, Significant Customer Information and Economic Dependency.
SEGMENTED, SIGNIFICANT CUSTOMER INFORMATION AND ECONOMIC DEPENDENCY
The
Company operates in two segments:
(a)
Energy and water conservation products (as shown under the column heading “EWCP” below), which consists of a (i) liquid swimming
pool blankets which save energy and water by inhibiting evaporation from the pool surface, and (ii) food-safe powdered form of the active
ingredient within the liquid blankets and which are designed to be used in still or slow moving drinking water sources.
(b)
Biodegradable polymers, also known as TPA’s (as shown under the column heading “BCPA” below), used by the petroleum,
chemical, utility and mining industries to prevent corrosion and scaling in water piping. This product can also be used in detergents
to increase biodegradability and in agriculture to increase crop yields by enhancing fertilizer uptake.
The
accounting policies of the segments are the same as those described in Note 2, Significant Accounting Policies. The Company evaluates
performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange
gains and losses.
The
Company’s reportable segments are strategic business units that offer different, but synergistic products and services. They are
managed separately because each business requires different technology and marketing strategies.
Year
ended December 31, 2022:
SCHEDULE
OF REPORTABLE SEGMENTS
| |
EWCP | | |
BCPA | | |
Consolidated | |
| |
EWCP | | |
BCPA | | |
Consolidated | |
| |
| | |
| | |
| |
Sales | |
$ | 528,462 | | |
$ | 45,312,007 | | |
$ | 45,840,469 | |
Interest expense | |
| - | | |
| 292,949 | | |
| 292,949 | |
Depreciation | |
| 33,876 | | |
| 1,243,555 | | |
| 1,277,431 | |
Current and deferred income tax expense | |
| 18,898 | | |
| 126,958 | | |
| 145,856 | |
Segment profit | |
| (334,525 | ) | |
| 8,047,754 | | |
| 7,713,229 | |
Segment assets | |
| 2,810,091 | | |
| 48,777,101 | | |
| 51,587,192 | |
Expenditures for segment assets | |
| - | | |
| 1,981,307 | | |
| 1,981,307 | |
Year
ended December 31, 2021:
| |
EWCP | | |
BCPA | | |
Consolidated | |
| |
| | |
| | |
| |
Sales | |
$ | 420,811 | | |
$ | 33,995,524 | | |
$ | 34,416,335 | |
Interest expense | |
| - | | |
| 199,930 | | |
| 199,930 | |
Depreciation | |
| 40,247 | | |
| 925,688 | | |
| 965,935 | |
Current and deferred income tax expense | |
| 24,384 | | |
| 2,332,115 | | |
| 2,356,499 | |
Segment profit | |
| (368,994 | ) | |
| 4,663,251 | | |
| 4,294,257 | |
Segment assets | |
| 1,929,537 | | |
| 37,621,733 | | |
| 39,551,270 | |
Expenditures for segment assets | |
| - | | |
| 782,219 | | |
| 782,219 | |
Sales
by territory are shown below:
SCHEDULE
OF REVENUE GENERATED IN UNITED STATES AND CANADA
| |
2022 | | |
2021 | |
| |
| | |
| |
Canada | |
$ | 552,123 | | |
$ | 525,900 | |
United States and abroad | |
| 45,288,346 | | |
| 33,890,435 | |
Total | |
$ | 45,840,469 | | |
$ | 34,416,335 | |
The
Company’s long-lived assets (property, equipment, intangibles, goodwill, leaseholds, patents and right of use assets) are located
in Canada and the United States as follows:
SCHEDULE
OF LONG-LIVED ASSETS ARE LOCATED IN CANADA AND UNITED STATE
| |
2022 | | |
2021 | |
| |
| | |
| |
Canada | |
$ | 150,890 | | |
$ | 191,752 | |
United States | |
| 14,699,896 | | |
| 10,105,202 | |
Total | |
$ | 14,850,786 | | |
$ | 10,296,954 | |
Three
customers accounted for $27,775,617 (61%) of sales made in 2022 (2021 - $16,917,947 or 49%).
19.
Subsequent Events.
SUBSEQUENT EVENTS
The
Company issued 8,000
shares to employees and 1,272
shares to consultants upon the exercise of stock options in the three months ended March 30, 2023.