UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): November16, 2018
FLEXIBLE SOLUTIONS INTERNATIONAL INC.
-------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 001-31540 91-1922863
-------------------- ------------------ ------------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
6001 54 Ave.
Taber, Alberta, Canada T1G 1X4
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(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (250) 477-9969
N/A
-----------------------------------------
(Former name or former address if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-14(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of Trading Name of each exchange
each class Symbol(s) on which registered
----------- -------- --------------------
Common Stock FSI NYSE American
1
Indicate by check mark whether the Registrant is an emerging growth company as
defined in Rule 405 of the Securities Act of 1933 (230.405 of this chapter) or
Rule 12b-2 of the Securities Exchange Act of 1934 (240.12b-2 of this chapter).
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 13a of the
Exchange Act. [ ]
2
Item 2.01 Completion of Acquisition or Disposition of Assets
On November 16th, 2018 the Company acquired 65% of ENP Investments, LLC, a
manufacturer, distributor and retailer of specialty agriculture products which
are used for golf courses, turf and ornamental plants.
The purchase price for the 65% interest in ENP was US$5.11 million and was
paid with cash of US$4.11 million and a convertible note in the principal amount
of US$1.00 million. The note is unsecured, bears interest at 5% per year, and is
payable on September 30, 2023. The Company, at its option, may extend the
maturity date of the note to September 30, 2028. The note, at the option of the
holder of the note, may be converted into 400,000 shares of the Company's common
stock.
The interest in ENP was acquired from the owners of ENP, none of whom had
or have any relationship with the Company or the Company's officers or
directors.
The financial statements of ENP as required by Item 2.01 of Form 8-K are
filed with this amended report.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance Sheet Arrangement of a Registrant
See Item 2.01 of this report.
Item 9.01 Financial Statements and Exhibits
Exhibits
(a) Financial statements of ENP Investments, LLC
(b) Proforma financial statements.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: June 21, 2018
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
By: /s/ Daniel B. O'Brien
--------------------------------------
Daniel B. O'Brien, President and Chief
Executive Officer
4
(a)
5
Report of the Independent Registered Public Accounting Firm
To the Partners of ENP Investments LLC:
Opinion on the Financial Statements
We have audited the accompanying financial statements of ENP Investments LLC
(the "Company"), which comprise the balance sheets as at September 30, 2018 and
December 31, 2017, and the statements of income, statements of members units and
cash flows for the periods then ended, and the related notes, comprising a
summary of significant accounting policies and other explanatory information
(collectively referred to as the financial statements).
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as at September 30, 2018 and
December 31, 2017, and its financial performance and its cash flows for the
periods then ended in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
MNPLLP
Chartered Professional Accountants
Vancouver, BC
June 21, 2019
6
ENP INVESTMENTS, LLC
Balance Sheet
(U.S. Dollars)
As of As of
September 30, December 31,
2018 2017
Assets
Current:
Cash and cash equivalents $ 16,823 $ 10,521
Accounts receivable (Note 3) 1,072,322 1,053,562
Inventory (Note 4) 1,849,686 2,010,079
Prepaid expenses 66,457 267,163
--------------------------------------------------------------------------------
Total current assets 3,341,325 3,005,288
Property, equipment and leaseholds, net
(Note 5) 728,162 590,765
Intangible asset (Note 6) 48,000 -
Long term deposits (Note 8) 12,079 12,072
Investments (Note 9) 118,135 115,347
Goodwill (Note 7) 189,000 189,000
--------------------------------------------------------------------------------
Total assets 4,100,664 4,248,509
================================================================================
Liabilities
Current:
Accounts payable and accrued liabilities 209,940 199,859
Wages payable and accrued wage liabilities 218,696 54,759
Deferred state replacement tax 6,003 6,542
Deferred revenue (Note 12) 16,941 80,884
Provision 22,971 2,500
Short term line of credit (Note 10) 110,734 1,465,298
Current portion of long term debt (Note 11) 43,635 36,341
--------------------------------------------------------------------------------
Total current Liabilities 628,920 1,846,183
Long term debt (Note 11) 163,286 22,970
--------------------------------------------------------------------------------
Total Liabilities 792,206 1,869,153
Equity
Membership units 10,000 10,000
Retained earnings 3,298,458 2,369,356
--------------------------------------------------------------------------------
Total equity 3,308,458 2,379,356
--------------------------------------------------------------------------------
Total liabilities and members' equity $ 4,100,664 $ 4,248,509
================================================================================
See Notes to Financial Statements.
7
ENP Investments LLC
Statements of Income
(U.S Dollars)
For the nine months For the year
ended September 30, ended December
2018 31, 2017
Revenue (Note 14) $ 6,419,642 $ 7,624,901
Cost of sales 4,047,627 4,374,111
--------------------------------------------------------------------------------
Gross income 2,372,015 3,250,790
Operating Expenses:
Wages 281,887 302,039
Administrative salaries and benefits 121,875 230,704
Advertising and promotion 156,382 201,851
Office and miscellaneous expenses 43,401 40,320
Insurance 60,634 74,244
Interest expense 51,479 39,526
Rent 4,633 10,769
Consulting 31,920 49,099
Professional fees 64,951 95,519
Travel 97,781 112,469
Telecommunications 14,028 17,992
Research 14,481 88,831
Bad debt - 128,736
Total operating expenses 943,452 1,392,099
Operating Income 1,428,563 1,858,691
Interest income 2,236 4,749
Other Income 9,956 14,277
Gain on the sale of assets 150 -
--------------------------------------------------------------------------------
Net Income 1,877,717 1,440,905
- -
Weighted average units outstanding 102,041 102,041
--------------------------------------------------------------------------------
Basic earnings per unit 14.12 18.40
================================================================================
See Notes to Financial Statements.
8
ENP Investments LLC
Statement of Cash Flows
(U.S Dollars)
For the nine For the year
months ended ended December
September 30, 2018 31, 2017
------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 1,440,905 $ 1,877,717
Adjustments to reconcile net income to net cash:
Depreciation of property, plant and equipment 140,137 179,790
Investment income accounted under equity method
(Note 8) (5,768) (7,028)
Increase in provision 20,471 (7,500)
Gain on disposal of property, plant and equipment (150)
Allowance for doubtful accounts - 97,727
Changes in non-cash working capital items:
(Increase) Decrease in accounts receivable (18,760) (977,222)
(Increase) Decrease in inventories 160,393 (578,668)
(Increase) Decrease in prepaids 200,699 (137,954)
Increase (Decrease) in accounts payable
and accrued liabilities 173,479 (1,122)
Increase (Decrease) in deferred revenue (Note 13) (63,943) 80,884
------------------------------------------------------------------------------------------------
Cash (used in) provided by operating activities 2,047,463 526,624
------------------------------------------------------------------------------------------------
Investing Activities:
Acquisition of ENP Reality LLC (Note 9) - (52,319)
Distribution from investments (Note 9) 2,980 -
Net purchase of property, equipment and leaseholds (277,384) (132,743)
Purchase of intangible (48,000) -
Distribution to members (548,003) (1,191,745)
------------------------------------------------------------------------------------------------
Cash (used in) provided by investing activities (870,407) (1,376,807)
------------------------------------------------------------------------------------------------
Financing Activities:
Change in short term line of credit, net (1,354,564) 939,552
Payment of loans (net) 147,610 (22,773)
Notes receivable from units purchased 36,200 (66,200)
------------------------------------------------------------------------------------------------
Cashflow proved by (used in) financing activities (1,170,754) 850,579
------------------------------------------------------------------------------------------------
Inflow (outflow) of Cash
6,302 396
Cash and cash equivalents, beginning 10,521 10,125
------------------------------------------------------------------------------------------------
Cash and cash equivalents, ending 16,823 10,521
================================================================================================
Supplemental disclosure of cashflow information
Interest paid 54,039 38,424
See Notes to Financial Statements.
9
ENP Investments LLC
Statement of Members' Equity
For the Year Ended December 31, 2017 and Nine Months Ended September 30, 2018
(U.S Dollars)
Units
-------------------------------------------
Units Balance Retained Earnings Total
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2016
102,041 10,000 1,779,584 1,789,584
Partner distribution - - (1,191,745) (1,191,745)
Note receivable from units
purchased - - (96,200) (96,200)
Net income - - 1,877,717 1,877,717
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2017
102,041 10,000 2,369,356 2,379,356
Partner distribution - - (548,003) (548,003)
Note receivable from units
purchased 36,200 36,200
Net income - - 1,440,905 1,440,905
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2018 102,041 10,000 3,298,458 3,308,458
---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
10
ENP INVESTMENTS, LLC
NOTES TO FINANCIAL STATEMENTS
September 30, 2018 and December 31, 2017
(U.S. Dollars)
1. BASIS OF PRESENTATION.
These financial statements include the accounts of EnP Investments, LLC
(the "Company"). The Company was incorporated December 23, 2010 in the State of
Indiana.
EnP Investments, LLC develops, manufactures and markets specialty
fertilizer products to distributors who resell these products to primarily golf
courses and the lawn care industry.
2. SIGNIFICANT ACCOUNTING POLICIES.
These financial statements have been prepared on a historical cost basis,
except where otherwise noted, in accordance with accounting principles generally
accepted in the United States applicable to a going concern and reflect the
policies outlined below.
(a) Cash and Cash Equivalents.
The Company considers all highly liquid investments purchased with an
original or remaining maturity of less than three months at the date of purchase
to be cash equivalents. Cash and cash equivalents are maintained with several
financial institutions.
(b) Inventories and Cost of Sales
The Company has three major classes of inventory: completed goods, raw
materials and packaging. In all classes, inventories are stated at the lower of
cost and net realizable value. Cost is determined on a weighted average. 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, direct and indirect labor costs, warehousing
costs, handling costs (receiving and purchasing) and utilities and overhead
expenses related to the Company's manufacturing and processing facilities.
(c) Trade Receivables and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoice amount and do not
bear interest. 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.
11
(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 Straight-line over 3 years
Furniture and fixtures Straight-line over 7 years
Manufacturing equipment Straight-line over 7 years
Vehicles Straight-line over 5 years
Technology Straight-line over 3 years
Leasehold improvements Straight-line over lease term
-----------------------------------------------------
Property and equipment are written down to net realizable value when
management determines there has been a change in circumstances which indicates
their carrying amounts may not be recoverable. No write-downs have been
necessary to date.
(e) Impairment of Long-Lived Assets.
In accordance with FASB Codification Topic 360, "Property, Plant and
Equipment (ASC 360), the Company reviews long-lived assets, including, but not
limited to, property, equipment, leaseholds, 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.
All transactions are recorded in USD. The Company does purchase and sell
to foreign companies. All payments and sales are made and received are in USD.
Any foreign currency translations are based on the exchange rate on the date of
the transaction.
(g) Revenue Recognition.
We follow 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. We have fulfilled our performance obligations when
control transfers to the customer, which is generally at the time the product is
shipped since risk of loss is transferred to the purchaser upon delivery to the
carrier. For shipments which are F.O.B. shipping point, the Company has elected
to account for shipping and handling activities as a fulfillment cost rather
than as an additional promised service and performance obligation.
The Company recognizes revenue when there are no significant remaining
performance obligations. When significant post-delivery obligations exist,
revenue is deferred until such obligations are fulfilled. To date there have
been no such significant post-delivery obligations.
12
Since the Company's inception, product returns have been insignificant;
therefore, no provision has been established for estimated product returns.
Deferred revenues consist of products sold to distributors with payment
terms greater than the Company's customary business terms due to lack of credit
history or operating in a new market in which the Company has no prior
experience. The Company defers the recognition of revenue until the criteria for
revenue recognition has been met, and payments become due or cash is received
from these distributors.
(h) Use of Estimates.
The preparation of 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 financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates and would impact the results of operations and cash flows.
Estimates and underlying assumptions are reviewed at each period end.
Revisions to accounting estimates are recognized in the period in which the
estimates are revised and in any future periods affected.
Significant areas requiring the use of management estimates include
assumptions and estimates relating to the valuation of goodwill and intangible
assets, asset impairment analysis, share-based payments and warrants, valuation
allowances for deferred income tax assets, determination of useful lives of
property, equipment and leaseholds and intangible assets, and the valuation of
inventory.
(i) 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.
(j) 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.
o Level 1 - Quoted prices in active markets for identical assets or
liabilities
o 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.
13
o 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.
(k) 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.
(l) Income Taxes
The Company was formed as a limited liability corporation, which is treated
as partnerships for income tax purposes. Under this form of entity, profits and
losses are passed directly to the members for inclusion in their income tax
returns. Accordingly, no liability or provision for federal or state income
taxes is included in the accompanying financial statements for the entity.
Management has evaluated uncertain tax positions and believes an accrual is
not necessary as any liability would be passed through to the shareholders and
members. The Company files income tax returns in the U.S. federal jurisdiction
and state jurisdiction.
(m) Risk Management.
The Company's credit risk is primarily attributable to its accounts
receivable. The amounts presented in the accompanying 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 $963,484 (90%) at
September 30, 2018 (December 31, 2017 - $1,019,218 or 97%).
14
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.
(n) 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 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
statements of income and comprehensive income.
(o) 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 can begin 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 not more likely than not that the fair value of a reporting unit is less than
its carrying amount, including goodwill, then no further analysis is necessary.
However, if the results of the qualitative test are unclear, the Company
performs a quantitative test, which involves comparing the fair value of a
reporting unit with its carrying amount, including goodwill. The Company uses an
income-based valuation method, determining the present value of future cash
flows, to estimate the fair value of a reporting unit. If the fair value of a
reporting unit exceeds its positive carrying amount, goodwill of the reporting
unit is considered not impaired, and no further analysis is necessary. If the
fair value of the reporting unit is less than its carrying amount, goodwill
impairment would be recognized equal to the amount of the carrying value in
excess of the reporting unit's fair value, limited to the total amount of
goodwill allocated to the reporting unit.
Intangible assets primarily include trademarks and trade secrets with
indefinite lives and customer-relationships with finite lives. Intangible assets
with indefinite lives are not amortized but are tested for impairment on an
annual basis, or more frequently if indicators of impairment are present.
Indefinite lived intangible assets are assessed using either a qualitative or a
quantitative approach. The qualitative assessment evaluates factors including
macro-economic conditions, industry and company-specific factors, legal and
regulatory environments, and historical company performance are evaluated in
assessing fair value. If it is determined that it is more likely than not that
the fair value of the reporting unit 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
reporting unit to its carrying amount, including goodwill. If the estimated fair
value of the reporting unit is less than the carrying amount of the reporting
unit, impairment is indicated, requiring recognition of an impairment charge for
the differential.
Qualitative assessments of goodwill and indefinite-lived intangible assets
were performed in 2018 and 2017. Based on the results of assessment, it was
determined that it is more likely than not the reporting unit, customer lists
and trademarks had a fair value in excess of carrying value. Accordingly, no
15
further impairment testing was completed, and no impairment charges related to
goodwill or indefinite-lived intangibles were recognized during the fiscal
period ended December 31, 2018.
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
"Property and Equipment" significant accounting policy.
(p) Adoption of new accounting principles
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers (Topic 606), which has been updated through several revisions and
clarifications since its original issuance and supersedes the revenue
recognition requirements in Accounting Standards Codification (ASC) Topic 605,
Revenue Recognition. The standard requires 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 was adopted for the current year using the
modified retrospective approach and had no material effect on the financial
statements.
On January 1, 2018, the Company adopted ASU No. 2016-01, Financial
Instruments--Overall (Subtopic 825-10) Recognition and Measurement of Financial
Assets and Financial Liabilities, which changes the income statement impact of
equity investments held by an entity. The amendments require the unrealized
gains or unrealized losses of equity instruments measured at fair value to be
recognized in net income. Our adoption of this ASU had no material effect on the
financial statements.
(q) Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases. The standard will
require lessees to recognize most leases on their balance sheet and makes
selected changes to lessor accounting. The standard is effective for annual and
interim reporting periods beginning after December 15, 2018. A modified
retrospective transition approach is required, with certain practical expedients
available. The Company will be required to capitalize its leases on the
warehouse and manufacturing buildings which will have a material impact on our
financial statements.
3. ACCOUNTS RECEIVABLE
-----------------------------------------------------------------------
2018 2017
----------------------------------------
Accounts receivable $ 1,072,322 $ 1,151,289
Allowances for doubtful
accounts - (97,727)
-------------- -------------------------
$ 1,072,322 $ 1,151,289
-------------- -------------------------
Included in the above accounts receivable is $779,818 due from a related parties
as at September 30, 2018 ($666,134- December 31, 2017). See Note 13.
16
4. INVENTORIES
-----------------------------------------------------------------------
2018 2017
----------------------------------------
Completed goods $ 1,024,597 $ 1,281,947
Raw materials and packaging 825,089 728,132
-------------- -------------------------
$ 1,849,686 $ 2,010,079
-----------------------------------------------------------------------
17
5. PROPERTY, EQUIPMENT AND LEASEHOLDS
Building Vehicles Equipment Furnitures Total
Improvements and Fixtures
--------------------------------------------------------------------------------
Cost
Balance at December 31, 2016 53,537 164,023 850,195 80,866 1,148,621
Additions - 65,041 67,701 - 132,742
Disposals - - - - -
--------------------------------------------------------------------------------
Balance at December 31, 2017 53,537 229,064 917,896 80,866 1,281,363
Additions 74,842 42,356 178,412 3,800 299,409
Disposals - (78,022) - (400) (78,422)
--------------------------------------------------------------------------------
Balance at December 31, 2018 128,378 193,397 1,096,308 84,266 1,502,350
--------------------------------------------------------------------------------
Accumulated depreciation
Balance at December 31, 2016 7,873 50,658 367,499 67,385 493,415
Additions 22,802 39,297 126,128 8,956 197,183
Disposals
--------------------------------------------------------------------------------
Balance at December 31, 2017 30,674 89,955 493,628 76,341 690,598
Additions 9,387 31,261 95,865 3,624 140,137
Disposals - (56,147) (400) (56,547)
--------------------------------------------------------------------------------
Balance at December 31, 2018 40,061 65,069 598,493 79,565 774,188
--------------------------------------------------------------------------------
Net book value
Balance at December 31, 2016 45,664 113,365 482,696 13,481 655,206
================================================================================
Balance at December 31, 2017 22,863 139,108 424,269 4,525 590,765
================================================================================
Balance at September 30, 2018 88,317 128,328 506,815 4,701 728,162
================================================================================
Amount of depreciation expense for 2018: $140,137 (2017: $179,790) is included
in cost of sales in the statements of income.
18
6. INTANGIBLE ASSET -
On April 10, 2018 the Company entered into a contract with EduSource to
create reports from soil samples submitted by Company personnel that diagnose
nutrient deficiencies, optimize nutrient applications, and develop the right
course of action for the turf's specific needs through a comprehensive soil
testing. As of September 30, 2018, the Company has spent $48,000 on this project
and it introduced the "Soil Solver" approach for the 2019 season. The Company
estimates the useful life to be 3 years and started amortizing the asset
beginning January 1, 2019.
Estimated amortization expense over the next five years is as follows:
--------------------------------------------
2019 $ 16,000
2020 16,000
2021 16,000
--------------------------------------------
7. GOODWILL
Balance as of December 31, 2016 $189,000
Additions -
Impairment -
-------------
Balance as of December 31, 2017 189,000
Additions -
Impairment -
-------------
Balance as of September 30, 2018 189,000
-------------
8. LONG TERM DEPOSITS
The Company has security deposits that are long term in nature which
consist of damage deposits held by landlords and certificate of deposits.
2018 2017
-----------------------
-----------------------
Long term deposits $12,079 $12,072
--------- -------
9. INVESTMENTS
(a) The Company has a 8.3% ownership interest in ENP Peru Investments LLC
("ENP Peru) , which was acquired in fiscal 2016. ENP Peru is a private company
located in Illinois and leases warehouse space. The Company accounts for this
investment using the cost method of accounting. A summary of the Company's
investment follows:
-----------------------
Balance, January 1, 2017 $ 54,839
Return of equity ( 4,839)
-----------------------
Balance, December 31, 2017 $ 50,000
Return of equity -
-----------------------
Balance, September 30, 2018 $ 50,000
-----------------------
19
(b) The Company has a 24% ownership interest in ENP Realty LLC ("ENP
Realty), which was acquired in fiscal 2016. ENP Realty is private company
located in Illinois and leases warehouse and manufacturing space. The Company
accounts for this investment using the cost method of accounting. A summary of
the Company's investment follows:
Balance, January 1, 2017 $ 59,570
Return of equity -
---------------------
Balance, December 31, 2017 $ 59,570
---------------------
Return of equity 2,788
---------------------
Balance, September 30, 2018 62,358
---------------------
(c) The Company has a 10% ownership interest in Spero Chelates, LLC
("Spero""), which was acquired in fiscal 2016. Spero Chelates, LLC is a private
company located in Indiana. The purpose of the Spero are to create, market, and
sell synthetic and naturally derived chelates to various domestic and
international industries, including, but not limited to: agrochemical, household
and industrial cleaning, chemical processing, mining/drilling, and paper and
pulp manufacturing industries. The Company accounts for this investment using
the cost method of accounting. A summary of the Company's investment follows:
---------------------
Balance, January 1, 2017 $ 5,777
Return of equity -
---------------------
Balance, December 31, 2017 $ 5,777
---------------------
Return of equity -
---------------------
Balance, September 30, 2018 $ 5,777
---------------------
10. SHORT-TERM LINE OF CREDIT
In February 2018, the Company signed a new agreement with Midland States
Bank ("Midland") to renew the expiring credit line. The revolving line of credit
is for an aggregate amount of up to $2,500,000. The interest rate of this loan
is subject to change from time to time based on changes in an independent index
which is the 1-month LIBOR as published in the Wall Street Journal (the
"Index"). Interest on the unpaid principal balance of this loan will be
calculated using a rate of 4.060 percentage points over the Index. Under no
circumstances will the interest rate of this loan be less than 4.000% per annum
or more than the maximum rate allowed by applicable law. The interest rate at
September 30, 2018 is 6.2281% (December 31, 2017 - 5.5550%) (December 31, 2016 -
4.7711%).
The revolving line of credit contains customary affirmative and negative
covenants, including the following: compliance with laws, provisions of
financial statements and periodic reports, payment of taxes, maintenance of
inventory and insurance, maintenance of operating accounts at Midland, Midland's
access to collateral, formation of 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. Advanced Turf
Solutions, Inc., a 35% owner of Company, is a Guarantor of said loan. As of
September 30, 2018, 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 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.
20
Short-term borrowings outstanding under the revolving line as of September
30, 2018 were $110,734 (December 31, 2017 - $1,465,298). Interest expense for
the 9 months ended September 30, 2018 was $44,670 and $39,526 for the year ended
December 31, 2017.
11. LONG TERM DEBT
(a) In January 2018, the Company signed a $200,000 promissory note with
Midland States Bank 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. The principal balance owing at September 30, 2018 is $183,951.
The Company has committed to the following repayments:
--------------------
2018 $ 8,572
2019 $ 34,287
2020 $ 34,287
2021 $ 34,287
2022 $ 34,287
2023 $ 34,287
--------------------
(b) In March 2016, the Company signed a $45,941 promissory note with Ford
Motor Credit Company with a rate of 0.00% interest to be repaid over 5 years
with equal monthly installments. The balance owing at September 30, 2018 is
$22,970 (December 31, 2017 - $29,861).
The Company has committed to the following repayments:
--------------------
2018 $ 2,297
2019 $ 9,188
2020 $ 9,188
2021 $ 2,297
--------------------
Continuity 2018 2017
--------------------------------------------------------------------------------
Balance, January 1 $ 59,311 82,084
Plus: Proceeds from loans 200,000 -
Less: Payments on loan (52,390) (22,773)
--------------------------------------------------------------------------------
Balances, September 30, 2018 and $ 206,921 $ 59,311
December 31, 2017
================================================================================
As at September 30, 2018, the Company paid interest of $6,809 (December 31,
2017 - $nil).
Outstanding balance September 30, 2018 December 31, 2017
--------------------------------------------------------------------------------
a) Long term debt - Midland $ 183,951 $
States Bank
b) Long term debt - Ford Credit 22,970 29,861
21
c) Long term debt - Ally
Financial - 21,580
d) Long term debt - Chase - 7,870
--------------------------------------------------------------------------------
Long-term Debt $ 206,921 $ 36,341
Less: current portion (43,635) (30,084)
--------------------------------------------------------------------------------
$ 163,286 $ 22,970
================================================================================
12. DEFERRED REVENUE
Deferred revenue relates to customer deposits paid prior the invoice being
issued. The balance is reduced once items have been shipped to the customer.
2018 2017
---------------------
Beginning Balance 80,884 -
Additions 16,941 80,884
Revenue Recognized (80,884) -
----------------------------------------
Ending Balance 16,941 80,884
----------------------------------------
13. RELATED PARTY TRANSACTION
Related party balances include transaction with related party companies and
key management personnel. Details of the related party transactions are
disclosed below:
a) Related Party Company
As at September 30, 2018 the related party company, Company A, an Indiana
corporation, owns 66.64% interest of the Company (66.64% as at December 31,
2017). Company A is also a significant customer of the Company. Sales to Company
A in 2018 are $2,845,940 (2017 - $1,960,422). As at September 30, 2018 Company A
owed the ENP $779,818 (2017 - $666,134). Company A guarantees the Company's
$2,500,000 credit line at Midland States Bank. Company A provides medical,
dental, life and vision insurance coverage for the Company's employees on their
Company A Medical Plan. In 2018 the Company reimbursed medical expenses of
$109,286 (2017 - $176,512) for said employee health coverage. As at September
30, 2018 the Company paid a related party company rent in the amount of $56,903
(December 31, 2017 - $71,070).
b) Key Management Personnel compensation:
2018 2017
---- ----
Compensation to
key management $ 278,338 $ 474,740
c) At September 30, 2018, a minority partner owed the Company $60,000 (December
31, 2017 - $96,200) for ownership purchases.
22
14. SIGNIFICANT ECONOMIC DEPENDENCY.
Sales by significant customers are shown below:
2018 2017
-------------------- --------------
Company B $1,320,986 $3,007,290
Company A 2,845,940 1,960,422
-------------------- -------------
Total $4,166,926 $4,967,712
Two customers accounted for $4,166,926 (65%) of sales made in 2018 (2017 -
$4,967,712 or 65%). Company A is a related party. As at September 30, 2018,
Accounts receivable for the Company's three primary customers totaled $963,484
or 90% (December 31, 2017 - $1,019,218 or 97%) of total account receivable.
15. COMMITMENTS.
The Company is committed to minimum rental payments for property and
premises aggregating approximately $1,192,050 over the term of five leases, the
last expiring on September 30, 2023.
Commitments for rent in the next five years are as follows:
2018 $ 58,522
2019 $ 238,095
2020 $ 238,275
2021 $ 216,955
2022 $ 83,835
2023 $ 62,977
16. SUBSEQUENT EVENTS.
On October 1, 2018 Company A sold 31.64% of its own, authorized, issued and
outstanding units of ownership interest of the Company to Nanochem Solutions,
Inc. reducing their total ownership interest of the Company to 35%.
On October 1, 2018, the minority partners sold all of their owned,
authorized, issued and outstanding units of ownership interest of the Company to
Nanochem Solutions, Inc.
23
(b)
24
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
Pro-Forma Consolidated Statement of Income and
Comprehensive Income
For the Year Ended December 31, 2017
Unaudited
FSI ENP
Year Ended Year Ended Pro-forma Pro-forma
December 31, December 31,
2017 2017 Notes Adjustment Consolidated
-----------------------------------------------------------
$
Sales $15,494,325 $7,624,901 a. (313,889) $22,805,337
Cost of sales 9,508,827 4,374,111 a., b. (303,284) 13,579,654
------------------------------ ----------------------
Gross profit 5,985,498 3,250,790 10,605 9,225,683
------------------------------ ------------
Operating Expenses
Wages 1,647,780 302,039 1,949,819
Administrative Salaries 1,007,850 230,704 1,238,554
Advertising and promotion 18,257 201,851 220,108
Investor relations 152,362 - 152,362
Office and miscellaneous 238,195 40,320 278,515
Insurance 285,418 74,244 359,662
Interest expense 44,125 39,526 c. 280,500 364,151
Rent 241,286 10,769 252,055
Consulting 133,949 49,099 183,048
Professional fees 222,743 95,519 318,262
Travel 137,392 112,469 249,861
Telecommunications 26,071 17,992 44,063
Shipping 19,624 - 19,624
Research 98,928 88,831 187,759
Commissions 112,678 - 112,678
Bad debt expense 1,191 128,736 129,927
Currency exchange 64,870 - 64,870
Utilities 21,339 - 21,339
------------------------------ ------------
4,474,058 1,392,099 6,146,657
------------------------------ ------------
Operating income 1,511,440 1,858,691 3,079,026
Gain on involuntary
disposition (2,043,614) - (2,043,614)
Other items 134,499 (19,026) 115,473
------------------------------ ------------
Income before income taxes 3,420,555 1,877,717 5,007,167
Income taxes 1,665,814 - d. (81,510) 1,584,304
------------------------------ ------------
Net income for the period 1,754,741 1,877,717 3,422,862
Less - income
attributable to
non-controlling interests - - e. 657,201 657,201
------------------------------ ------------
Net income attributable to
controlling interest 1,754,741 1,877,717 2,765,661
Other comprehensive
income (431,115) - (431,115)
------------------------------ ----------------------
Comprehensive income for the
period $2,185,856 $1,877,717 $866,797 $3,196,776
============================== ======================
Weighted average number of common shares
(basic) 11,485,580
Weighted average number of common shares
(diluted) 11,725,482
Income per share (basic and
diluted) $ 0.24
25
FLEXIBLE SOLUTIONS INTERNATIONAL, INC.
Pro-Forma Consolidated Statement of Income and Comprehensive
Income
For the Nine Months Ended September 30, 2018
Unaudited
FSI ENP
9 Months Ended 9 Months Ended
Sept. 30, Pro-forma Pro-forma
Sept. 30, 2018 2018 Notes Adjustments Consolidated
------------------------------------------------------------
Sales $12,155,351 $ 6,419,642 a. $(366,437) $18,208,556
Cost of sales 7,693,981 4,047,627 a., b. (344,897) 11,396,711
------------------------------- ----------------------
Gross profit 4,461,370 2,372,015 21,540 6,811,845
------------------------------- -----------
Operating Expenses
Wages 1,184,290 281,887 1,466,177
Administrative Salaries 811,646 121,875 933,521
Advertising and promotion 10,209 156,382 166,591
Investor relations 107,378 - 107,378
Office and miscellaneous 183,395 43,401 226,796
Insurance 207,387 60,634 268,021
Interest expense 22,222 51,479 c. 210,375 284,076
Rent 185,991 4,633 190,624
Consulting 93,134 31,920 125,054
Professional fees 141,600 64,951 206,551
Travel 103,005 97,781 200,786
Telecommunications 21,083 14,028 35,111
Shipping 13,117 14,481 27,598
Research 87,251 - 87,251
Commissions 11,629 - 11,629
Bad debt expense - - -
Currency exchange (113,826) - (113,826)
Utilities 13,032 - 13,032
------------------------------- -----------
3,082,543 943,452 4,236,370
------------------------------- -----------
Operating income 1,378,827 1,428,563 2,575,475
Gain on involuntary
disposition (1,714,261) - (1,714,261)
Other items (22,795) (12,342) (35,137)
------------------------------- -----------
Income before income taxes 3,115,883 1,440,905 4,324,873
Income taxes 421,783 - d. (64,936) 356,847
------------------------------- -----------
Net income for the period 2,694,100 1,440,905 3,968,026
Less - income
attributable to
non-controlling interests - - e. 504,317 504,317
------------------------------- -----------
Net income attributable to
controlling interest 2,694,100 1,440,905 3,463,709
Other comprehensive expense 188,331 - 188,331
------------------------------- ----------------------
Comprehensive income for the $ $
period $ 2,505,769 $ 1,440,905 671,296 3,275,378
=============================== ======================
Weighted average number of common shares
(basic) 11,627,464
Weighted average number of common shares
(diluted) 11,802,193
Income per share (basic and
diluted) $0.30
26
1. BASIS OF PRESENTATION
These unaudited pro-forma consolidated statements of income and comprehensive
income of Flexible Solutions International, Inc. ("FSI" or the "Company") have
been prepared by management in accordance with accounting principles generally
accepted in the United States. The following pro-forma consolidated statements
of income and comprehensive income are based on historical consolidated
financial statements as adjusted to give effect to the October 1, 2018
acquisition of ENP Investments LLC.("ENP").The unaudited pro-forma consolidated
statements of income and comprehensive income for the nine months ended
September 30, 2018 and the year ended December 31, 2017 give effect to the
acquisition of ENP as if it had occurred on January 1, 2017.
The unaudited pro-forma consolidated statements of income and comprehensive
income of the Company have been compiled from the following financial
information:
o Audited consolidated financial statements of the Company for the year
ended December 31, 2017;
o Unaudited consolidated interim financial statements of the Company for
the nine months ended September 30, 2018;
o Unaudited interim financial statements of ENP for the nine months
ended September 30, 2018; and
o Audited financial statements of ENP for the year ended December 31,
2017.
These unaudited pro-forma consolidated financial statements have not been
intended to reflect the income and comprehensive income or performance of the
Company that would have resulted had the proposed transactions described in note
2 and other pro-forma adjustments occurred as assumed. Further, these unaudited
pro-forma consolidated financial statements are not necessarily indicative of
the income and comprehensive income or performance that may be attained in the
future. These unaudited pro-forma consolidated financial statements should be
read in conjunction with the financial information referred to above.
An unaudited pro-forma consolidated balance sheet as at December 31, 2017 and
September 30, 2018 has not been included in these pro-forma financial statements
as the Company's most recent annual consolidated financial statements as at
December 31, 2018 have reflected the transaction.
Amounts in these pro-forma consolidated financial statements are denominated in
US dollars.
2. DESCRIPTION OF THE TRANSACTION
Effective October 1, 2018, the Company, through its NanoChem Solutions Inc.
subsidiary, entered into an agreement to purchase 65% of ENP Investments LLC.
Total consideration paid of $5,110,560 was paid through a combination of $10,560
cash on hand, $4,100,000 in debt financing provided by Harris Bank and a
$1,000,000 convertible note payable. The convertible note is due on or before
September 30, 2023 with 5% interest due per year. At the option of the holder,
the Note may be converted to 400,000 shares of the Company's common stock. The
Company has the option to extend the note to no later than September 30, 2028.
27
2. DESCRIPTION OF THE TRANSACTION (Continued)
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 Investments LLC as of the effective date.
The effective tax rate for the Company will be 28%.
Cash paid $4,110,5 0
Convertible note 1,000,0 0
---------
Total consideration $5,110,5 0
Assets acquired:
Accounts receivable $1,071,0 8
Note receivable 60,000
Prepaid expenses 105,473
Inventory 1,867,1 7
Investments 84,943
Equipment 740,000
Intangible assets 3,168,0 0
Liabilities assumed:
Account payable 520,164
Loans payable 292,706
Deferred income taxes 989,569
---------
Total identifiable net assets 5,294,1 2
Non-controlling interest 2,759,9 7
---------
Goodwill $2,534,2 5
=========
Had the transaction occurred on January 1, 2017 the pro-forma balance sheet
would have reflected a pro-forma adjustment to reduce cash by about $10,000 and
increase current and short term debt by $5,100,000. The pro-forma consolidated
statements of income and comprehensive income for the year ended December 31,
2017 eliminates sales to the subsidiary, ENP, and includes additional interest
expense, net of tax, as a result of the acquisition.
3. SIGNIFICANT ACCOUNTING POLICIES
The unaudited pro-forma consolidated statements of income and comprehensive
income have been compiled using the significant accounting policies as set out
in the audited consolidated financial statements of FSI as at and for the year
ended December 31,2017. Management has determined that no material pro-forma
adjustments are necessary to conform ENP's accounting policies to the accounting
policies used by FSI in the preparation of its financial statements. The annual
and interim consolidated financial statements of ENP and FSI were presented
using the US dollar as its presentation currency.
These unaudited pro-forma consolidated statements of income and comprehensive
income should be read in conjunction with FSI's December 31, 2017 audited annual
financial statements and the September 30, 2018 interim financial statements,
together with ENP's audited financial statements as at and for the year ended
December 31, 2017.
4. PRO-FORMA ADJUSTMENTS
The pro-forma adjustments are based on preliminary estimates and assumptions
that are subject to change. The following adjustments have been reflected in the
unaudited pro-forma consolidated statements of income and comprehensive income:
28
a. Reflects the elimination of sales from the parent company to the subsidiary
and the related cost of goods sold in the subsidiary;
b. Reflects the elimination of unrealized profits in inventory that had been
sold from the parent company to the subsidiary;
c. Reflects the additional interest expense that would have been incurred by
the parent company on the debt incurred to finance the acquisition. The
interest expense is based on the principal outstanding throughout the
periods with interest only payments at 5% and 5.5% per annum;
d. Reflects the tax effects to the consolidated entity as a result of the
additional interest expense and the reduction in the profits for inventory
sold from the parent to the subsidiary not yet sold at the period ends. The
statutory tax rate of 28% has been applied to the pro-forma adjustments;
Reflects the allocation of income of ENP to the non-controlling interests.