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united states

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 001-31540

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Alberta   71-1630889
(State or other jurisdiction of incorporation or organization)   (Employer Identification No.)
     
6001 54 Ave.    
Taber, Alberta, Canada   T1G 1X4
(Address of Principal Executive Office)   Zip Code

 

Registrant’s telephone number, including Area Code: (403) 223-2995

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol   Name of each exchange on which registered
Common Stock, $0.001 par value   FSI   NYSE American

 

Securities registered pursuant to Section 12(g) of the Act: None

 

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

Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
   
Non-accelerated filer Smaller reporting company
   
  Emerging growth company

 

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report. ☐ Yes ☒ No

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): ☐ Yes No

 

As of June 30, 2023 the aggregate market value of the Company’s common stock held by non-affiliates was $19,343,103 based on the closing price for shares of the Company’s common stock on the NYSE American for that date.

 

As of March 29, 2024, the Company had 12,450,532 issued and outstanding shares of common stock.

 

Documents incorporated by reference: None

 

The terms “Flexible”, “Company”, “we”, “us”, and “our” are used to refer to Flexible Solutions International, Inc. and its subsidiaries, unless the context otherwise requires.

 

 

 

 
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K for the year ended December 31, 2023 (“Annual Report”), including the Audited Consolidated Financial Statements, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, those statements relating to development of new products, our financial condition and our ability to increase distribution of our products. Forward-looking statements can be identified by the use of forward-looking terminology, such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “continue,” “plans,” “intends,” or other similar terminology. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is anticipated or forecasted in these forward-looking statements due to numerous factors, including, but not limited to, our ability to generate or obtain sufficient working capital to continue our operations, changes in demand for our products, the timing of customer orders and deliveries and the impact of competitive products and pricing. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions.

 

Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, such statements involve risks and uncertainties and no assurance can be given that our actual results will be consistent with these forward-looking statements. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason, after the date this Annual Report is filed with the Securities and Exchange Commission.

 

 
 

 

PART I

 

Item 1. Description of Business

 

We were incorporated as Flexible Solutions Ltd., a British Columbia corporation on January 26, 1991. On May 12, 1998, we merged Flexible Solutions Ltd. into Flexible Solutions International, Inc., a Nevada corporation. In connection with this merger, we issued 7,000,000 shares of common stock to the former shareholders of Flexible Solutions Ltd. in exchange for all of the outstanding shares of Flexible Solutions Ltd.

 

In June 2004 we purchased 52 U.S. and 139 International Patents (“IP”), as well as a 56,780 sq. ft. manufacturing plant near Chicago, Illinois from the bankruptcy estate of Donlar Corporation (“Donlar”) for $6.15 million. The IP we acquired from Donlar relates to water-soluble chemicals (“TPAs”) which prevent corrosion and scaling in water pipes used in the petroleum, chemical, utility and mining industries. TPAs are also used to enhance fertilizers and improve crop yields and as additives for household laundry detergents, consumer care products and pesticides. These assets are held in our wholly owned subsidiary, NanoChem Solutions Inc. (“NanoChem”), which has become our largest revenue generator.

 

In October 2018, we purchased 65% of ENP Investments, LLC, a manufacturing and distribution company active in the areas of golf, turf and ornamental agriculture products.

 

In January 2019, we purchased 50% of a Florida based limited liability company engaged in international sales of fertilizer additives. This purchase is accounted for as an equity accounted investment.

 

In 2019, we changed our corporate domicile from Nevada to Alberta, Canada.

 

In January 2020, ENP Realty, LLC became a wholly owned subsidiary of ENP Investments, LLC and was renamed to ENP Mendota, LLC. ENP Mendota owns a building that the Company occupies.

 

In June 2022, ENP Peru Investments, LLC became a wholly owned subsidiary with NanoChem owning 91.67% and ENP Investments, LLC owning 8.33%. of ENP Peru. In 2023, NanoChem purchased the remaining 8.33% of shares to become sole owner. ENP Peru was previously accounted for under the equity method however, from 2022 it is consolidated into the financial statements from the date control was obtained. ENP Peru owns a building the Company occupies.

 

 2 
 

 

In June 2023, 317 Mendota LLC (“317 Mendota”) was created to purchase real estate and the Company has 80% ownership with an unrelated party (NCI) owning the remaining 20%. The Company occupies part of the building currently owned by 317 Mendota and intends to rent out the remaining portion of the building. For financial reporting purposes, the assets, liabilities and earnings of 317 Mendota are consolidated into these financial statements. The NCI’s ownership interest in 317 Mendota is recorded in non-controlling interests in these consolidated financial statements.

 

We operate through a number of wholly-owned subsidiaries which are further discussed in Note 1 to the consolidated financial statements included as part of this report. Unless otherwise indicated, all references to our business include the operations of these subsidiaries.

 

Our website is www.flexiblesolutions.com

 

Our Products

 

Thermal Polyaspartates (“TPAs”)

 

We manufacture TPAs in our Peru, Illinois plant using a thermal polymerizing process. The multiple variants produced are optimized for individual market verticals and sold for end use or through distribution.

 

TPAs for Oilfields. TPAs are used to reduce scale and corrosion in various “topside” water systems. They are used in place of traditional phosphonate and other products when biodegradability is required by environmental regulations. We have the ability to custom manufacture TPAs depending on the specific water conditions associated with any oil well. TPAs are also used in fracking fluids to reduce the toxicity while maintaining equal function.

 

TPAs for the Agricultural Industry. TPAs have the ability to reduce fertilizer crystallization before, during and after application and can also delay crystal formation between fertilizer and minerals present in the soil. Once crystallized, fertilizer and soil minerals are not able to provide plant nourishment. As a result, in select conditions the use of TPAs either blended with fertilizer or applied directly to crops can increase yields significantly. TPAs are designated for crop nutrient management programs and should not be confused with crop protection and pesticides or other agricultural chemical applications. Depending on the application, TPA products are marketed under a variety of brands including EX-10TM, AmisorbTM, LYNXTM, MAGNETTM, AmGroTM and VOLTTM. Markets of significance include corn, wheat, soybeans, rice, potatoes, sugar beets, cotton, tomatoes, almonds and other high value per acre crops.

 

TPAs for Irrigation. The crystallization prevention ability of TPAs can also be useful in select irrigation conditions. By reducing calcium carbonate scale propagation, TPAs can prevent early plugging of drip irrigation ports, reduce maintenance costs and lengthen the life of equipment. TPAs compete with acid type scale removers, but have the advantage of a positive yield effect on the plant, as well as an easier deployment formulation with liquid fertilizers when used as part of a “fertigation” program. Our TPAs for drip irrigation scale prevention are marketed and sold through the same channels as TPAs used by the agricultural industry.

 

TPAs in Cleaning Products. TPA can replace polyacrylates in cleaning products which is valuable because TPA is biodegradable while polyacrylates are not. In a cleaning product formulation, TPA prevents the re-deposition of dirt onto the surfaces to be cleaned allowing dirt to be rinsed away.

 

Nitrogen Conservation Products for Agriculture. We manufacture and sell two conservation products and mixtures used for slowing nitrogen loss from fields. One significant loss route for nitrogen fertilizer is enzymatic degradation by bacteria naturally present in soil. Our product, SUN 27TM inhibits the bacterial action and keeps the nitrogen fertilizer available for plant growth. The second significant nitrogen loss mechanism is de-nitrification. This is also caused by bacterial activity in soil resulting in oxygen being stripped from the fertilizer leaving nitrogen gas. The gas can’t be used by the plants and escapes into the atmosphere. Our N Savr 30TM product uses the most effective active ingredients available to combat this cause of fertilizer loss. We sell SUN 27TM and N Savr 30TM through distributors in North and South America under our trade names and under private labels.

 

 3 
 

 

Food and Nutritional Materials

 

We have installed custom equipment used to produce food and nutritional materials. All the ingredients we produce are custom products for specific clients and are confidential. We anticipate that this market vertical will grow over time.

 

HEATSAVR®

 

Our studies indicate that approximately 70% of the energy lost from a swimming pool occurs through water evaporation. HEATSAVR® is a chemical product for use in swimming pools and spas that forms a thin, transparent layer on the water’s surface. The transparent layer slows the evaporation of water, allowing the water to retain a higher temperature for a longer period of time and thereby reducing the energy required to maintain the desired temperature of the water. We have received reports from our commercial customers documenting energy savings of between $2,400 and $6,000 per year when using HEATSAVR®.

 

In outdoor pools, the HEATSAVR® also provides convenience compared to pool blankets. It is often inconvenient to use conventional pool blankets since a pool blanket must be removed and stored before the pool can be used. Pool blankets do not provide any energy savings when not on the pool. Conversely, HEATSAVR® eliminates the need to install, remove and store the blanket and works 24 hours a day. In addition, the use of HEATSAVR® in an indoor pool results in even greater energy savings since indoor pool locations use energy not only to heat the pool water, but also to air condition the pool environment. By slowing the transfer of heat and water vapor from the pool to the atmosphere of the pool enclosure, less energy is required to maintain a pool at the desired temperature and there is a reduced load on the air-conditioning system. We also manufacture and sell products which automatically dispense HEATSAVR® into commercial size swimming pools or spas at the rate of one ounce per 400 sq. ft. of water surface per day.

 

WATERSAVR®

 

This product utilizes a patented variation of our HEATSAVR technology to reduce water evaporation in reservoirs, potable water storage tanks, livestock watering ponds, aqueducts, canals and irrigation ditches. WATERSAVR may also be used for lawn and turf care and potted and bedding plants.

 

WATERSAVR® is sold in granulated form and can be applied by hand, by fully automated scheduled metering, or by an automatic dispenser.

 

Tests have indicated that WATERSAVR®:

 

  Reduces daily water evaporation as much as 54%;
  Reduces monthly water evaporation as much as 37%;
  Is odorless;
  Has no effect on invertebrates or vertebrates;
  Has no anticipated effect on any current drinking water treatment processes; and
  Is biodegradable.

 

We have one part-time employee involved in the sales and marketing of WATERSAVR®.

 

Principal Customers

 

The table below presents our revenue resulting from purchases by our major customers for the periods presented.

 

   Year Ended December 31, 
   2023   2022 
         
Company A  $6,811,083   $6,677,815 
Company B  $10,260,870   $12,938,735 
Company C  $3,410,845   $8,159,066 

 

 4 
 

 

Customers with balances greater than 10% of our receivable balances as of each of the fiscal year ends presented are shown in the following table:

 

   Year Ended December 31, 
   2023   2022 
         
Company A  $4,225,028   $3,634,083 
Company B  $2,073,813    2,423,285 

 

Competition

 

TPAs: Our TPA products have direct competition with Lanxess AG (spun out of Bayer AG) (“Lanxess”), a German manufacturer of TPAs, which uses a patented process different from ours. We have cross-licensed each other’s processes and either company can use either process for the term of the patents involved. We believe that Lanxess has approximately the same production capacity and product costs as we do. We believe that we can compete effectively with Lanxess by offering excellent customer service in oilfield sales, superior distributor support in the agricultural marketplace and flexibility due to our relative size. In addition, we intend to continue to seek market niches that are not the primary targets of Lanxess. There are other competitors based in Asia.

 

Our TPA products face indirect competition from other chemicals in every market in which we are active. For purposes of oilfield scale prevention, phosphonates, phosphates and molibdonates provide the same effect. For crop enhancement, increased fertilizer levels can serve as a substitute for TPAs. In irrigation scale control, acid washes are our prime competitor. Notwithstanding the above, we believe our competitive advantages include:

 

  Biodegradability compared to competing oil field chemicals;
  Cost-effectiveness for crop enhancement compared to increased fertilizer use; and
  Environmental considerations, ease of formulation and increased crop yield opportunities in irrigation scale markets.

 

HEATSAVR®: Although we are aware of two other companies that manufacture products that compete with HEATSAVR®, we believe our products are more effective and safer. We maintain fair pricing equal to or lower than our competitors and protect our intellectual property carefully. Our products are expected to maintain market share in the competitive pool market. HEATSAVR® also competes with plastic pool blanket products. However, we believe that HEATSAVR® is more effective and convenient than pool blankets.

 

WATERSAVR®: WATERSAVR® competes with solid and floating covers. We believe our WATERSAVR® product is superior for the following reasons: it is less expensive, requires little capital expenditure to deploy and can be started and stopped as water scarcity escalates or declines. As water conservation is an important priority throughout the world, numerous researchers are working to develop solutions that may compete with, or be superior to, WATERSAVR.

 

Manufacturing

 

Our 56,780 sq. ft. facility in Peru, Illinois manufactures our TPA products. Raw materials for TPA production are sourced from various manufacturers throughout the world and we believe they are available in sufficient quantities for any increase in sales. Raw materials are, however, derived from crude oil and are subject to price fluctuations related to world oil prices.

 

Our HEATSAVR® products and dispensers are made from chemicals, plastics and other materials and parts that are readily available from multiple suppliers. We have never experienced any shortage in the availability of raw materials and parts for these products and we do not have any long term supply contracts for any of these items. We have these products made by outside parties without long term contracts.

 

 5 
 

 

Our WATERSAVR® products are manufactured by a third party. We are not required to purchase any minimum quantity of this product.

 

In January 2020, ENP Investments, LLC acquired a 100% interest in ENP Realty, LLC and the 14,000 sq. ft. manufacturing facility in Mendota, Illinois owned by this entity.

 

Government Regulations

 

TPAs: In the industrial oil field and agricultural markets, we have received government approval for all TPAs currently sold.

 

Nitrogen Conservation Products: We have obtained all government approvals for the markets in which we sell these products.

 

HEATSAVR®: Chemical products for use in swimming pools are covered by a variety of governmental regulations in all countries where we sell these products. These regulations cover packaging, labeling, and product safety. We believe our products are in compliance with these regulations.

 

WATERSAVR®: Our WATERSAVR® product is subject to regulation in most countries, particularly for agricultural and drinking water uses. We do not anticipate that governmental regulations will be an impediment to marketing WATERSAVR® because the components in WATERSAVR® have historically been used in agriculture for many years for other purposes. Nevertheless, we may require county or state approval on a case by case basis to sell WATERSAVR® in the United States for agricultural and drinking water uses. We have received National Sanitation Foundation approval for the use of WATERSAVR® in drinking water in the United States.

 

Proprietary Rights

 

Our success is dependent, in part, upon our proprietary technology. We rely on a combination of patent, copyright, trademarks, trade secrets and nondisclosure agreements to protect our proprietary technology. We hold several US patents with various expiry dates. We have applied for additional patents in new areas of invention and may extend these patents, if granted to other jurisdictions. There can be no assurance that our patent applications will be granted or that any issued patent will be upheld as valid or prevent the development of competitive products, which may be equivalent to or superior to our products. We have not received any claims alleging infringement of the intellectual property rights of others, but there can be no assurance that we may not be subject to such claims in the future.

 

Research and Development

 

We spent $158,246 during the year ended December 31, 2023 and $99,275 during year ended December 31, 2022 on research and development. This work relates primarily to the development of our water and energy conservation products, as well as new research in connection with our TPA products.

 

Employees

 

As of December 31, 2023, we had 46 employees, including one officer, 15 sales and customer support personnel, and 30 manufacturing personnel. None of our employees are represented by a labor union and we have not experienced any work stoppages to date.

 

Item 1A. Risk Factors

 

This Form 10-K contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by us, this section includes a discussion of important factors that could affect our future operations and result in a decline in the market price of our common stock.

 

 6 
 

 

We have in the past incurred significant operating losses and may not sustain profitability in the future.

 

We have in the past experienced operating losses and negative cash flow from operations. If our revenues decline, our results of operations and liquidity may be materially and adversely affected. If we experience slower than anticipated revenue growth or if our operating expenses exceed our expectations, we may not be profitable. We may not remain profitable in future periods.

 

Fluctuations in our operating results may cause our stock price to decline.

 

Given the nature of the markets in which we operate, we cannot reliably predict future revenues and profitability. Changes in competitive, market and economic conditions may cause us to adjust our operations. A high proportion of our costs are fixed, due in part to our sales, research and development and manufacturing costs. Thus, small declines in revenue could disproportionately affect our operating results. Factors that may affect our operating results and the market price of our common stock include:

 

  Demand for and market acceptance of our products;
     
  Competitive pressures resulting in lower selling prices;
     
  Adverse changes in the level of economic activity in regions in which we do business;
     
  Adverse changes in the oil and gas industry on which we are particularly dependent;

 

  Changes in the portions of our revenue represented by various products and customers;
     
  Delays or problems in the introduction of new products;
     
  The announcement or introduction of new products, services or technological innovations by our competitors;
     
  Variations in our product mix;
     
  The timing and amount of our expenditures in anticipation of future sales;
     
  Increased costs of raw materials or supplies; and
     
  Changes in the volume or timing of product orders.

 

Our operations are subject to seasonal fluctuation.

 

Our TPA business is the least seasonal, however there is a small increase in the spring related to inventory building for the crop season in the United States and a small slowdown in December as oilfield customers run down stock in advance of year end, but otherwise, there is little seasonal variation. We believe we are able to adequately respond to these seasonal fluctuations by reducing or increasing production as needed. The foregoing is equally true of our nitrogen conservation products. The use of our swimming pool products increases in summer months in most markets and results in our sales from January to June being greater than in July through December. Markets for our WATERSAVR® product are also seasonal, depending on the wet versus dry seasons in particular countries. We attempt to sell into a variety of countries with different seasons on both sides of the equator in order to minimize seasonality.

 

 7 
 

 

Interruptions in our ability to purchase raw materials and components may adversely affect our profitability.

 

We purchase certain raw materials and components from third parties pursuant to purchase orders placed from time to time. Because we do not have guaranteed long-term supply arrangements with our suppliers, any material interruption in our ability to purchase necessary raw materials or components could have a material adverse effect on our business, financial condition and results of operations.

 

Our WATERSAVR® product has not proven to be a revenue producing product and we may never recoup the cost associated with its development.

 

The marketing efforts of our WATERSAVR® product may result in continued losses. We introduced our WATERSAVR® product in June 2002 and, to date, we have delivered quantities for testing by potential customers, but only a few customers have ordered the product for commercial use. This product can achieve success only if it is ordered in substantial quantities by commercial customers who have determined that the water saving benefits of the product exceed the costs of purchase and deployment of the product. We can offer no assurance that we will receive sufficient orders of this product to achieve profits or cover the expenses incurred to manufacture and market this product. We have received National Sanitation Foundation approval for the use of WATERSAVR® in drinking water in the United States. Nevertheless, we may require county or state approval on a case by case basis. We expect to spend $50,000 on the marketing and production of our WATERSAVR® product in fiscal 2024.

 

If we do not introduce new products in a timely manner, our products could become obsolete and our operating results would suffer.

 

Without the timely introduction of new products and enhancements, our products could become obsolete over time, in which case our revenue and operating results would suffer. The success of our new product offerings will depend upon several factors, including our ability to:

 

  Accurately anticipate customer needs;
     
  Innovate and develop new products and applications;
     
  Successfully commercialize new products in a timely manner;
     
  Price our products competitively and manufacture and deliver our products in sufficient volumes and on time; and
     
  Differentiate our products from our competitors’ products.

 

In developing any new product, we may be required to make a substantial investment before we can determine the commercial viability of the new product. If we fail to accurately foresee our customers’ needs and future activities, we may invest heavily in research and development of products that do not lead to significant revenues.

 

We are dependent upon certain customers.

 

Among our current customers, we have identified three that are sizable enough that the loss of any one would be significant. Any loss of one or more of these customers could result in a substantial reduction in our revenues. See “Principal Customers” in Item 1 of this report for further details.

 

Economic, political and other risks associated with international sales and operations could adversely affect our sales.

 

Revenues from shipments made outside of the United States accounted for approximately 21% of our revenues in the year ended December 31, 2023, 20% in the year ended December 31, 2022 and 32% in the year ended December 31, 2021. Since we sell our products worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenues from international operations will continue to represent a sizable portion of our total revenue. Accordingly, our future results could be harmed by a variety of factors, including:

 

  Changes in foreign currency exchange rates;

 

 8 
 

 

  Changes in a country’s or region’s political or economic conditions, particularly in developing or emerging markets;
     
  Longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions;
     
  Trade protection measures and import or export licensing requirements;
     
  Differing tax laws and changes in those laws;
     
  Difficulty in staffing and managing widespread operations;
     
  Differing laws regarding protection of intellectual property; and
     
  Differing regulatory requirements and changes in those requirements.

 

We are subject to credit risk and may be subject to substantial write-offs if one or more of our significant customers default on their payment obligations to us.

 

We currently allow our major customers between 30 and 90 days to pay for each sale. This practice, while customary, presents an accounts receivable write-off risk if one or more of our significant customers defaulted on their payment obligations to us. Any such write-off, if substantial, would have a material adverse effect on our business and results of operations. See above principal customer information.

 

Our products can be hazardous if not handled, stored and used properly; litigation related to the handling, storage and safety of our products would have a material adverse effect on our business and results of operations.

 

Some of our products are flammable and must be stored properly to avoid fire risk. Additionally, some of our products may cause irritation to a person’s eyes if they are exposed to the concentrated product. Although we label our products to warn of such risks, our sales could be reduced if our products were considered dangerous to use or if they are implicated in causing personal injury or property damage. We are not currently aware of any circumstances in which our products have caused harm or property damage to consumers. Nevertheless, litigation regarding the handling, storage and safety of our products would have a material adverse effect on our business and results of operations.

 

Our failure to comply with environmental regulations may create significant environmental liabilities and force us to modify our manufacturing processes.

 

We are subject to various federal, state and local environmental laws, ordinances and regulations relating to the use, storage, handling and disposal of chemicals. Under such laws, we may become liable for the costs of removal or remediation of these substances that have been used by our consumers or in our operations. Such laws may impose liability without regard to whether we knew of, or caused, the release of such substances. Any failure by us to comply with present or future regulations could subject us to substantial fines, suspension of production, alteration of manufacturing processes or cessation of operations, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

Our failure to protect our intellectual property could impair our competitive position.

 

While we own certain patents and trademarks, some aspects of our business cannot be protected by patents or trademarks. Accordingly, in these areas there are few legal barriers that prevent potential competitors from copying certain of our products, processes and technologies or from otherwise entering into operations in direct competition with us..

 

 9 
 

 

Our products may infringe on the intellectual property rights of others, and resulting claims against us could be costly and prevent us from making or selling certain products.

 

Third parties may seek to claim that our products and operations infringe on their patents or other intellectual property rights. We may incur significant expense in any legal proceedings to protect our proprietary rights or to defend infringement claims by third parties. In addition, claims of third parties against us could result in awards of substantial damages or court orders that could effectively prevent us from making, using or selling our products in the United States or internationally.

 

A product liability claim for damages could materially and adversely affect our financial condition and results of operations.

 

Our business exposes us to potential product liability risks. There are many factors beyond our control that could lead to liability claims, including the failure of our products to work properly and the chance that consumers will use our products incorrectly or for purposes for which they were not intended. There can be no assurance that the amount of product liability insurance that we carry will be sufficient to protect us from product liability claims. A product liability claim in excess of the amount of insurance we carry could have a material adverse effect on our business, financial condition and results of operations.

 

Our ongoing success is dependent upon the continued availability of certain key employees.

 

Our business would be adversely affected if the services of Daniel B. O’Brien ceased to be available to us since we currently do not have any other employee with an equivalent level of expertise in and knowledge of our industry. If Mr. O’Brien no longer served as our President and Chief Executive Officer, we would have to recruit one or more new executives, with no real assurance that we would be able to engage a replacement executive with the required skills on satisfactory terms. The market for skilled employees is highly competitive, especially for employees in the fields in which we operate. While our compensation programs are intended to attract and retain qualified employees, there can be no assurance that we will be able to retain the services of all our key employees or a sufficient number to execute our plans, nor can there be any assurances that we will be able to continue to attract new employees as required.

 

Item 1B. Unresolved Staff Comments.

 

Not applicable.

 

Item 1C. Cybersecurity.

 

Companies such as ours face a variety of risks, including financial reporting, legal, credit, liquidity, operational, health, safety and cybersecurity risks. The Board believes an effective risk management system will (1) identify the material risks that we face in a timely manner, (2) communicate necessary information with respect to material risks to senior executives and, as appropriate, to our directors (3) implement or oversee implementation of appropriate and responsive risk management and mitigation strategies consistent with our risk profile, and (4) integrate risk management into our decision-making.

 

Our Board oversees risk management after receiving briefings from advisors and also based on its own analysis and conclusions regarding the adequacy of our risk management processes. The Board continuously evaluates and manages material risks including geopolitical and enterprise risks, financial risks, environmental risks, health and safety risks and cybersecurity risks.

 

George Murray, our Operations Manager, is responsible for assessing and managing cybersecurity risks. Mr. Murray is experienced in assessing and managing cybersecurity risks due to his direct oversight of our internet and digital communications contractors.

 

To date we have not experienced any cybersecurity threats and any risks from cybersecurity threats have not materially affected, and are not reasonably likely to materially affect, our business strategy, results of operations, or financial condition.

 

Item 2. Properties.

 

We lease a 6,400 sq. ft. facility in Naperville, Illinois which we use for offices and laboratories at a cost of $5,670 per month with a lease effective to December 2025. We also lease a 1,300 sq. ft. facility in Mendota, Illinois used for offices at a cost of $880 per month on a month by month basis. We own a 61,200 sq. ft. facility and a 56,780 sq. ft. facility in Peru, Illinois along with a 14,000 sq. ft facility in Mendota, Illinois which is used to manufacture our TPA line of products. In 2017, we purchased a 3,000 sq ft building on 1 acre of land in Taber, Alberta. In 2023, the Company purchased an 80% share in 317 Mendota, a real estate company that was set up to purchase a manufacturing building in Mendota, IL. ENP Investments now occupies part of this space.

 

Item 3. Legal Proceedings.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

 10 
 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.

 

Our common stock is traded on the NYSE American under the symbol “FSI”. The following is the range of high and low closing prices for our common stock for the periods indicated:

 

   High   Low 
         
Year Ended December 31, 2023          
First Quarter  $3.35   $2.86 
Second Quarter   3.32    2.60 
Third Quarter   2.96    3.51 
Fourth Quarter   2.69    1.37 

 

   High   Low 
         
Year Ended December 31, 2022          
First Quarter  $4.44   $3.01 
Second Quarter   3.96    2.23 
Third Quarter   2.68    1.56 
Fourth Quarter   3.24    2.38 

 

As of March 29, 2024, we had approximately 3,400 shareholders.

 

The Company declared a special dividend of $0.05 per share on April 14, 2023, paid on May 16, 2023 to shareholders of record on April 28, 2023.

 

None of our officers or directors, nor any of our principal shareholders purchased, on our behalf, any shares of our common stock from third parties either in a private transaction or as a result of purchases in the open market during the years ended December 31, 2023 and 2022.

 

As of March 29, 2024, we had 12,450,532 outstanding shares of common stock. The following table lists additional shares of our common stock, including shares issuable upon the exercise of options which have not yet vested, which may be issued as of March 29, 2024:

 

   Number   Note 
   Of Shares   Reference 
Shares issuable upon exercise of options granted to our officers, directors, employees, consultants, and third parties   1,649,000    A 

 

A. Options are exercisable at prices ranging from $1.75 to $3.61 per share. See Item 11 of this report for more information concerning these options.

 

Item 6. Selected Financial Data.

 

Not applicable.

 

 11 
 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

Results of Operations

 

We have three product lines.

 

The first is a chemical (“EWCP”) used in swimming pools and spas. The product forms a thin, transparent layer on the water’s surface. The transparent layer slows the evaporation of water, allowing the water to retain a higher temperature for a longer period of time thereby reducing the energy required to maintain the desired temperature of the water. A modified version of EWCP can also be used in reservoirs, potable water storage tanks, livestock watering pods, canals, and irrigation ditches for the purpose of reducing evaporation.

 

The second product, biodegradable polymers (“TPAs”), is used by the petroleum, chemical, utility and mining industries to prevent corrosion and scaling in water piping. TPAs can also be used to increase biodegradability in detergents and in the agriculture industry to increase crop yields by enhancing fertilizer uptake.

 

The third product line is nitrogen conservation products used for the agriculture industry. These products decrease the loss of nitrogen fertilizer after initial application and allows less fertilizer to be used. These products are made and sold by the Company’s TPA division.

 

Material changes in the line items in our Statement of Income and Comprehensive Income for the year ended December 31, 2023 as compared to the same period last year, are discussed below:

 

Item   Increase (I) or Decrease (D)   Reason
         
Sales        
TPA products   D   Decreased customer orders along with decrease in pricing.
         
Cost of goods sold, as a percentage of sales   I   Increased raw material costs and increased wages to add and retain manufacturing employees along with added costs associated with obtaining new certifications.
         
Wages   I   Increased wages for employee retention.
         
Administrative salaries   I   Increased wages for employee retention.
         
Insurance   I   Prior year increase in assets and in sales resulted in higher insurance costs.
         
Interest expense   I   Increased debt resulted in increased interest expense.
         
Office and miscellaneous   I   Increase in property tax associated with more properties along with various other one time costs.
         
Travel   I   Travel has resumed as COVID-19 has become an endemic.
         
Professional fees   D   Decreased due to one time costs associated with the planned merger with Lygos in 2022.
         
Lease expense   D   Purchases of ENP Mendota and ENP Peru, the businesses we were renting from, reduced our lease expense.

 

The factors that will most significantly affect future operating results will be:

 

  The sale price of crude oil which is used in the manufacture of aspartic acid we import from China. Aspartic acid is a key ingredient in our TPA product. If tariffs increase and if relief is not available, some customers may experience price increases;
     
  Activity in the oil and gas industry, as we sell our TPA product to oil and gas companies; and
     
  Drought conditions, since we also sell our TPA product to farmers.

 

Other than the foregoing we do not know of any trends, events or uncertainties that have had, or are reasonably expected to have, a material impact on our revenues or expenses.

 

 12 
 

 

Capital Resources and Liquidity

 

Our sources and (uses) of cash for the years ended December 31, 2023 and 2022 are shown below:

 

   2023   2022 
Cash provided by operations  $6,989,966   $1,476,903 
Purchase of investments   (470,000)   - 
Redemption of investments   200,000      
Distributions from equity investments   201,034    265,001 
Acquisition of ENP Peru, LLC   -    (499,329)
Non-Controlling Interest of 317 Mendota LLC   200,000    - 
Long-term deposits   815,714    - 
Sale of property and equipment   5,411    - 
Purchases of property and equipment   (4,990,675)   (1,981,307)
Advances (repayment) of short term line of credit   (1,008,112)   517,772 
Repayment of long term debt   (725,824)   (2,292,819)
Proceeds of long term debt   2,686,682    3,230,798 
Dividends paid   (626,777)   - 
Lease payments   (58,080)   (58,611)
Distributions to non-controlling interests   (719,439)   (689,434)
Sale of common stock   13,600    140,620 
Impact of foreign exchange rates   10,653    (30,069)

 

We have sufficient cash resources to meets our future commitments and cash flow requirements for the coming year. As of December 31, 2023, our working capital was $20,172,833 (2022 - $20,692,527) and we have no substantial commitments or capital requirements that require significant outlays of cash over the coming fiscal year.

 

We are committed to minimum rental payments for property and premises aggregating approximately $142,380 over the term of two leases, the last expiring on December 31, 2025.

 

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

 

2024  $70,440 
2025  $71,940 

 

Other than as disclosed above, we do not know of any trends, demands, commitments, events or uncertainties that will result in, or that are reasonable likely to result in, our liquidity increasing or decreasing in any material way.

 

Other than as disclosed above, we do not know of any significant changes in our expected sources and uses of cash.

 

We do not have any commitments or arrangements from any person to provide us with any equity capital.

 

Critical Accounting Policies and Estimates

 

Allowances for Product Returns. We grant certain of our customers the right to return product which they are unable to sell. Upon sale, we evaluate the need to record a provision for product returns based on our historical experience, economic trends and changes in customer demand.

 

Allowances for Doubtful Accounts Receivable. We evaluate our accounts receivable to determine if they will ultimately be collected. This evaluation includes significant judgments and estimates, including an analysis of receivables aging and a review of large accounts. If, for example, the financial condition of a customer deteriorates resulting in an impairment of its ability to pay or a pattern of late payment develops, an allowance may be required.

 

 13 
 

 

Provisions for Inventory Obsolescence. We may need to record a provision for estimated obsolescence and shrinkage of inventory. Our estimates consider the cost of inventory, the estimated market value, the shelf life of the inventory and our historical experience. If there are changes to these estimates, provisions for inventory obsolescence may be necessary.

 

Valuation of Goodwill and Intangible Assets. We review goodwill and intangible assets to determine if there are qualitative factors which exist which may indicate that the carrying value exceeds the fair value. Our estimates are based upon an assessment of market conditions and expected future cash flows to be generated by the reporting units and related assets. If factors exist which indicate that the carrying value exceeds the fair value, an impairment charge against the goodwill and intangible assets could be required.

 

Useful Lives of Property, Equipment and Leaseholds and Intangible Assets. We amortize and depreciate our property, equipment and leaseholds and intangible assets based on their estimated useful lives. We estimate the expected useful lives based on the expected term over which the asset is expected to continue to generate economic benefit for our company. If there are differences between the expected useful lives and the actual useful lives of the asset, impairment of property, equipment and leaseholds or intangible assets could be necessary.

 

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 fulfill our performance obligations when control of product 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, we have elected to account for shipping and handling activities as a fulfillment cost rather than as an additional promised service and performance obligation.

 

Stock Based Compensation The fair value of share-based payments are subject to the limitations of the Black-Scholes option pricing model that incorporates market data and involves uncertainty in estimates used by management in the assumptions. Because the Black-Scholes option pricing model requires the inputs of highly subjective assumptions, including the volatility of share prices, changes in subjective input assumptions can materially affect the estimate.

 

Income Taxes Tax interpretations, regulations and legislation in the various jurisdictions in which the Company operates are subject to change and interpretation. As such, income taxes are subject to measurement uncertainty. Assessing the recoverability of deferred tax assets requires the Company to make estimates related to the expectations of future taxable income and the application of existing tax laws. To the extent that future taxable income differs significantly from estimates, the ability of the Company to realize deferred tax assets could be impacted.

 

Privately Held Equity Investments The recoverability of privately held equity investments requires management to make certain assumptions and estimates. Changes in these assumptions and estimates could result in materially different results.

 

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

 

Recent Accounting Pronouncements

 

We have evaluated recent accounting pronouncements issued since January 1, 2023 and determined that the adoption of these recent accounting pronouncements will not have a material effect on our consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

 14 
 

 

Item 8. Financial Statements and Supplementary Data.

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Report of Independent Registered Public Accounting Firm, Smythe LLP (PCAOB ID NO: 995) F-1
Consolidated Balance Sheets as of December 31, 2023 and 2022 F-3
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2023 and 2022 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023 and 2022 F-6
Notes to Consolidated Financial Statements F-7

 

 15 
 

 

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, 2023 and 2022, 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, 2023 and 2022, 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.

 

 F-1 
 

 

Valuation of inventory

 

At December 31, 2023, the Company’s inventory balance was $11,134,889. 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 primary procedures we performed to address this critical audit matter included:

 

  Obtained an understanding and reviewed the appropriateness of the Company’s costing methodology of inventory, including the allocation of overhead costs to inventory.
  Performed substantive procedures over the inputs of costing of inventory, including overhead costs by agreeing inputs to third party source documentation.
  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.
  Tested the reliability of reports used by management in inventory costing by agreeing the report inputs to underlying records.
  Performed observations of inventory held at year-end for any signs of obsolescence and held discussions with management and operational personnel to identify any slow-moving inventory.

 

Chartered Professional Accountants

 

Vancouver, Canada

April 1, 2024

 

We have served as the Company’s auditor since 2019.

 

 

 F-2 
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

Consolidated Balance Sheets

As at December 31

(U.S. Dollars)

 

  

December 31, 2023

  

December 31, 2022

 
Assets          
Current          
Cash  $5,017,583   $6,115,099 
Term deposits (Note 2)   2,690,241    700,000 
Accounts receivable, net (Note 4)   9,843,056    9,449,857 
Inventories (Note 5)   11,134,889    14,419,430 
Prepaid expenses and deposits   1,540,923    310,297 
Total current assets   30,226,692    30,994,683 
Property, equipment and leaseholds, net (Note 6)   13,171,787    9,709,288 
Right of use assets (Note 3)   115,293    167,222 
Intangible assets (Note 8)   2,280,000    2,440,000 
Long term deposits (Note 9)   824,254    8,540 
Investments (Note 10)   6,033,960    5,458,895 
Goodwill (Note 8)   2,534,275    2,534,275 
Deferred tax asset (Note 13)   284,794    274,289 
Total Assets  $55,471,055   $51,587,192 
           
Liabilities          
Current          
Accounts payable  $1,984,592   $873,904 
Accrued liabilities   284,131    959,856 
Deferred revenue   148,292    387,763 
Income taxes payable   4,485,213    4,486,350 
Short term line of credit (Note 11)   1,810,479    2,818,591 
Current portion of lease liability (Note 3)   59,520    58,080 
Current portion of long term debt (Note 12)   1,281,632    717,612 
Total current liabilities   10,053,859    10,302,156 
Lease liability (Note 3)   55,773    109,142 
Deferred income tax liability (Note 13)   260,047    500,459 
Long term debt (Note 12)   6,833,304    5,436,465 
Total Liabilities   17,202,983    16,348,222 
           
Stockholders’ Equity          
Capital stock (Note 16)          
Authorized: 50,000,000 common shares with a par value of $0.001 each; 1,000,000 preferred shares with a par value of $0.01 each          
Issued and outstanding:          
12,435,532 (December 31, 2022: 12,426,260) common shares   12,436    12,426 
           
Capital in excess of par value   17,932,015    17,523,345 
Other comprehensive loss   (795,146)   (805,799)
Accumulated earnings   18,053,051    15,903,964 
Total stockholders’ equity – controlling interest   35,202,356    32,633,936 
Non-controlling interests (Note 17)   3,065,716    2,605,034 
Total Stockholders’ Equity   38,268,072    35,238,970 
Total Liabilities and Stockholders’ Equity  $55,471,055   $51,587,192 

 

See Notes to Consolidated Financial Statements.

 

 F-3 
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

Consolidated Statements of Income and Comprehensive Income

For the Years Ended December 31

(U.S. Dollars)

 

   2023   2022 
Sales  $38,324,806   $45,840,469 
Cost of sales (Note 6, 7 & 8)   27,987,451    31,971,596 
           
Gross profit   10,337,355    13,868,873 
           
Operating expenses          
Wages   2,659,654    2,537,783 
Administrative salaries and benefits   1,205,007    1,032,394 
Insurance   861,501    683,272 
Office and miscellaneous   508,376    350,126 
Interest expense   498,666    292,949 
Consulting   324,327    312,171 
Travel   264,563    171,369 
Professional fees   238,466    660,821 
Investor relations and transfer agent fee   222,650    179,505 
Advertising and promotion   194,308    182,609 
Research   158,246    99,275 
Lease expense   97,806    149,446 
Telecommunications   55,093    42,098 
Commissions   35,623    30,732 
Utilities   26,854    29,517 
Shipping   24,060    23,469 
Currency exchange   (37,632)   23,091 
Bad debt expense   -    17,869 
Total operating expenses   7,337,568    6,818,496 
Operating income   2,999,787    7,050,377 
Gain on sale of asset (Note 6)   4,589    - 
Gain on investments (Note 10)   505,065    341,424 
Gain on previously held equity interest (Note 10)   -    335,051 
Interest income   113,809    132,233 
Income before income tax   3,623,250    7,859,085 
Income taxes (Note 13)          
Deferred income tax recovery   250,917    71,295 
Current income tax expense   (118,182)   (217,151)
Net income for the year   3,755,985    7,713,229 
Net income attributable to non-controlling interests   (980,121)   (691,625)
Net income attributable to controlling interest  $2,775,864   $7,021,604 
           
Income per share (basic) (Note 14)  $0.22   $0.57 
Income per share (diluted) (Note 14)  $0.22   $0.56 
Weighted average number of common shares (basic)   12,434,886    12,379,316 
Weighted average number of common shares (diluted)   12,489,467    12,466,415 
           
Other comprehensive income:          
Net income  $3,755,985   $7,713,229 
Unrealized gain (loss) on foreign currency transactions   10,653    (30,069)
Total comprehensive income   3,766,638    7,683,160 
Comprehensive income – non-controlling interest   (980,121)   (691,625)
Comprehensive income attributable to controlling interests  $2,786,517   $6,991,535 

 

See Notes to Consolidated Financial Statements.

 

 F-4 
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

For Years Ended December 31

(U.S. Dollars)

 

   2023   2022 
Operating activities          
Net income for the year  $3,755,985   $7,713,229 
Adjustments to reconcile net income to net cash:          
Stock based compensation   395,080    399,148 
Depreciation and amortization   1,686,319    1,277,431 
Lease right of use financing   6,151    8,566 
Lease right of use amortization   51,929    50,045 
Gain on investments   (505,065)   (341,424)
Gain on sale of asset   (4,589)   - 
Bad debt expense   -    17,869 
Deferred income tax recovery   (250,917)   (71,295)
Gain on acquisition of ENP Peru, LLC   -    (335,051)
Changes in non-cash working capital items:          
Increase in accounts receivable   (393,199)   (2,338,397)
Decrease (increase) in inventories   3,284,541    (4,124,022)
Decrease (increase) in prepaid expenses and deposits   (1,230,626)   131,864 
Increase (decrease) in accounts payable and accrued liabilities   434,964    (700,191)
Decrease in income taxes payable   (1,137)   (249,628)
(Decrease) increase in deferred revenue   (239,471)   38,759 
Cash provided by operating activities   6,989,965    1,476,903 
           
Investing activities          
Purchase of investments   (470,000)   - 
Redemption of investments   200,000    - 
Distributions received from equity investments   201,034    265,001 
Non-controlling interest of 317 Mendota   200,000    - 
Long term deposits   (815,714)   - 
Proceeds from sale of asset   5,411    - 
Purchase of property and equipment   (4,990,675)   (1,981,307)
Acquisition of ENP Peru, LLC   -    (499,329)
Cash used in investing activities   (5,669,944)   (2,215,635)
           
Financing activities          
(Repayment) advance of short term line of credit   (1,008,112)   517,772 
Repayment of long term debt   (725,823)   (2,292,819)
Proceeds of long term debt   2,686,682    3,230,798 
Lease payments   (58,080)   (58,611)
Dividends paid   (626,777)   - 
Distribution to non-controlling interest   (719,439)   (689,434)
Common stock issued   13,600    140,620 
Cash provided by (used in) financing activities   (437,949)   848,326 
           
Effect of exchange rate changes on cash   10,653    (30,069)
           
Inflow of cash   892,725    79,525 
Cash resources, beginning   6,815,099    6,735,574 
           
Cash resources, ending  $7,707,824   $6,815,099 
Cash resources are comprised of:          
Cash  $5,017,583   $6,115,099 
Term deposits   2,690,241    700,000 
Cash resources  $7,707,824   $6,815,099 
Supplemental disclosure of cash flow information:          
Income taxes paid  $119,319   $158,966 
Interest paid   498,666    292,949 

 

See Notes to Consolidated Financial Statements.

 

 F-5 
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2023 and 2022

(U.S. Dollars)

 

   Shares   Par Value  

Capital in

Excess of

Par Value

  

Accumulated

Earnings

  

Other

Comprehensive

Income

   Total  

Non-

Controlling

Interests

  

Total

Stockholders’

Equity

 
                                 
Balance December 31, 2021   12,355,246   $12,355   $16,983,648   $8,882,360   $(775,730)  $25,102,633   $2,602,843   $27,705,476 
Translation adjustment                   (30,069)   (30,069)       (30,069)
Net income               7,021,604        7,021,604    691,625    7,713,229 
Common stock issued   71,014    71    140,549            140,620        140,620 
Distributions to noncontrolling interests                           (689,434)   (689,434)
Stock-based compensation           399,148            399,148        399,148 
Balance December 31, 2022   12,426,260   $12,426   $17,523,345   $15,903,964   $(805,799)  $32,633,936   $2,605,034   $35,238,970 
Translation adjustment                   10,653    10,653        10,653 
Dividends paid               (626,777)       (626,777)       (626,777)
Non-controlling interest of 317 Mendota LLC                           200,000    200,000 
Net income               2,775,864        2,775,864    980,121    3,755,985 
Common stock issued   9,272    10    13,590            13,600        13,600 
Distributions to noncontrolling interests                           (719,439)   (719,439)
Stock-based compensation           395,080            395,080        395,080 
Balance December 31, 2023   12,435,532   $12,436   $17,932,015   $18,053,051   $(795,146)  $35,202,356   $3,065,716   $38,268,072 

 

See Notes to Consolidated Financial Statements.

 

 F-6 
 

 

FLEXIBLE SOLUTIONS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023 and 2022

(U.S. Dollars)

 

1. 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., InnFlex Holdings Inc., ENP Peru Investments LLC (“ENP Peru”), its 80% controlling interest in 317 Mendota LLC (“317 Mendota”), and its 65% controlling 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 in 2019, the Company redomiciled into Alberta, Canada.

 

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. In 2023, NanoChem purchased the remaining 8.33% of shares to become sole owner. ENP Peru was previously accounted for under the equity method however, it is now consolidated into the financial statements from the date control was obtained.

 

In 2023, the Company purchased an 80% interest in 317 Mendota, a newly incorporated company established to purchase a large manufacturing building. ENP Investments will occupy part of this building, freeing up more space in the building owned by ENP Peru for NanoChem. The Company intends to rent the remainder of the space to suitable tenants. The remaining 20% non-controlling interest is held by unrelated parties.

 

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.

 

 F-7 
 

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

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

 

(a) Cash and Cash Equivalents.

 

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

 

(b) Term Deposits.

 

The Company has four term deposits that are maintained by commercials banks. The first term deposit is for $680,000 and matures in January 2024. This deposit pays 5.0% interest and if withdrawn before maturity, the greater of the loss of accrued interest or $150, plus 1% of the principal shall be levied. The second term deposit is for $300,000 and matures in February 2024. Paying 1.3% interest, it can be withdrawn by the Company at any point without prior notice or penalty. The third term deposit is for $710,241, matures in May 2024 and pays interest at a rate of 3.00%. If withdrawn before maturity, the greater of the loss of accrued interest or $150, plus 1% of the principal shall be levied. The fourth term deposit is for $1,000,000 and matures in May 2024. This deposit pays 3.85% and if withdrawn before maturity, the greater of the loss of accrued interest or $150, plus 1% of the principal shall be levied.

 

(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 (2023 - $522,033; 2022 - $433,015). Shipping and handling costs incurred are included in cost of goods sold (2023 - $944,811; 2022 - $913,890).

 

(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:

 

     
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-8 
 

 

(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.

 

 F-9 
 

 

(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 (loss) per share have been excluded from the calculation of diluted weighted average shares outstanding for the years ended December 31, 2023 and 2022.

 

(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, valuation of assets acquired at fair value, asset impairment analysis, 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, discount rates for right of use assets and the costing and recoverable value 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.

 

 F-10 
 

 

  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 and lease liabilities 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 financial 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, 2023, the Company believes it has appropriately accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be affected. Interest and penalties associated with the Company’s tax positions are recorded as interest expense in the consolidated statements of income and comprehensive income.

 

 F-11 
 

 

(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 $20,482,798 (53%) for the year ended December 31, 2023 (2022 - $27,775,616 or 61%). Accounts receivable for the Company’s three primary customers totaled $6,561,164 (67%) at December 31, 2023 (2022 - $6,124,424 or 65%).

 

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 risk to the extent that market value rate fluctuations materially differ for financial assets and liabilities denominated in foreign currencies.

 

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 subject to fixed long-term interest rates.

 

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 operations and comprehensive income (loss).

 

(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.

 

 F-12 
 

 

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 2023 and 2022. 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, 2023.

 

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 are 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%.

 

 F-13 
 

 

The table below summarizes the right-of-use asset and lease liability for the years ended December 31, 2023 and 2022:

 

Right of Use Assets    
Balance at December 31, 2021  $217,267 
Depreciation   (50,045)
Balance at December 31, 2022  $167,222 
Depreciation   (51,929)
Balance at December 31, 2023  $115,293 
      
Lease Liability     
Balance at December 31, 2021  $217,267 
Lease interest expense   8,566 
Payments   (58,611)
Balance at December 31, 2022  $167,222 
Lease interest expense   6,151 
Payments   (58,080)
Balance at December 31, 2023  $115,293 
      
Short-term portion  $59,520 
Long-term portion   55,773 
Total  $115,293 

 

Undiscounted rent payments are as follows:

 

      
2024   59,520 
2025   61,020 
Total  $120,540 
Impact of discounting   (5,247)
Lease liability, December 31, 2023  $115,293 

 

4. ACCOUNTS RECEIVABLE

 

   2023   2022 
         
Accounts receivable  $10,133,249   $9,739,150 
Allowances for doubtful accounts   (290,193)   (289,293)
Total accounts receivable  $9,843,056   $9,449,857 

 

5. INVENTORIES

 

   2023   2022 
         
Completed goods  $2,682,158   $3,806,646 
Raw materials and supplies   8,452,731    10,612,784 
Total inventory  $11,134,889   $14,419,430 

 

6. PROPERTY, EQUIPMENT AND LEASEHOLDS

 

   2023   Accumulated   2023 
   Cost   Depreciation   Net 
Buildings and improvements  $12,341,605   $3,896,887   $8,444,718 
Automobiles   196,255    140,040    56,215 
Computer hardware   43,493    43,123    370 
Office equipment   134,130    121,925    12,205 
Manufacturing equipment   10,008,395    5,791,615    4,216,780 
Trailers   9,071    8,164    907 
Land   440,592        440,592 
Leasehold improvements   88,872    88,872     
Technology   103,292    103,292     
   $23,365,705   $10,193,918   $13,171,787 

 

 F-14 
 

 

   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 

 

Amount of depreciation expense for 2023 was: $1,526,319 (2022 - $1,103,732) and is included in cost of sales in the consolidated statements of income and comprehensive income.

 

In 2023, the Company sold the boat and $4,589 was recognized as a gain on sales of asset in the consolidated statements of income and comprehensive income.

 

7. PATENTS

 

  

2023

Cost

   Accumulated
Amortization
  

2023

Net

 
Patents  $200,444   $200,444   $- 

 

  

2022

Cost

   Accumulated
Amortization
  

2022

Net

 
Patents  $195,725   $195,725   $- 

 

The amount of amortization for 2023 was $nil (2022 - $13,699) and was included in cost of sales in the consolidated statements of income and comprehensive income. The movement in cost relates solely to foreign exchange differences.

 

8. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill    
Balance as of December 31, 2022 and 2023  $2,534,275 
      
Indefinite Lived Intangible Assets     
Balance as of December 31, 2022 and 2023  $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, 2021  $1,830,000 
Amortization   (160,000)
Balance as of December 31, 2022   1,670,000 
Amortization   (160,000)
Balances as of December 31, 2023  $1,510,000 

 

The amount of amortization for 2023 was $160,000 (2022 - $160,000) and was included in cost of sales in the consolidated statements of income and comprehensive income.

 

 F-15 
 

 

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:

 

2024  $160,000 
2025   160,000 
2026   160,000 
2027   160,000 
2028   160,000 

 

9. LONG TERM DEPOSITS

 

The Company has security deposits that are long term in nature which consist of damage deposits held by landlords and deposits held by various vendors for equipment purchases.

 

   2023   2022 
           
Long term deposits  $824,254   $8,540 

 

10. 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 to other entities in the Company. 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, it is now consolidated into the consolidated financial statements from the date control was obtained. In June 2023, NanoChem purchased the remaining 8.33% of ENP Peru from ENP Investments to become full owner.

 

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.

 

      
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 

 

 F-16 
 

 

A summary of the Company’s investment follows:

 

Balance, December 31, 2021  $3,822 
Return of equity   (3,822)
Gain in equity method investment   22,642 
Balance, December 31, 2022   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, 2023  $- 

 

(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 2023. In October 2023, the Company received the payment of $200,000 to settle the promissory note and the balance of this investment at December 31, 2023 is $nil (2022 - $200,000). In accordance with FASB Codification Topic 321, Investments – Equity Securities (ASC 321), 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 and a further $470,000 was invested in April 2023. Trio is a real estate investment vehicle and the Company received 97,000 non-voting Class B shares at $10.00/share. In accordance with 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:

 

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 
Gain in equity method investment   505,065 
Return of equity   (200,000)
Balance, December 31, 2023  $4,063,960 

 

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

 

   2023   2022 
         
Net sales  $16,043,468   $18,103,070 
Gross profit   4,668,177    4,204,311 
Net income  $1,010,128   $615,055 

 

During the year ended December 31, 2023, the Company had sales of $10,260,870 (2022 - $12,938,735) to the Florida Based LLC, of which $2,073,813 is included within Accounts Receivable as at December 31, 2023 (2022 - $2,423,285).

 

(e)        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 for a total of $1,000,000. In accordance with ASC 321, the Company has elected to account for this investment at cost.

 

 F-17 
 

 

11. SHORT-TERM LINE OF CREDIT

 

(a)        In June 2023, ENP Investments renewed the line of credit with Stock Yards Bank and Trust (“Stock Yards”), increasing the limit by $500,000 from the previous line of credit. The revolving line of credit is for an aggregate amount of up to the lesser of (i) $4,500,000, 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 8.25%. The interest rate at December 31, 2023 is 8.5% (December 31, 2022 - 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 $2,925,000. The non-controlling interest is the guarantor of the remaining 35% of all the principal and other loan costs not to exceed $1,575,000. As of December 31, 2023, 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, 2023 were $1,810,479 (2022 - $2,477,794).

 

(b)        In June 2023, the Company renewed the line of credit with Stock Yards Bank and Trust (“Stock Yards”). 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 8.25%. The prime interest rate at December 31, 2023 was 8.5% (2022 - 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, 2023, the Company was in compliance with all loan covenants.

 

To secure 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, 2023 were $nil (2022 - $340,797). This amount was repaid in full during the year ended December 31, 2023.

 

12. LONG TERM DEBT

 

(a)        In October 2020, NanoChem signed a loan for $1,980,947 with Midland States Bank (“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 BMO Harris Bank (“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 ended December 31, 2023 was $nil (2022 - $30,334). The balance owing at December 31, 2023 was $nil (2022 - $nil).

 

(b)        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, 2023 was $nil (2022 - $5,816). The balance owing at December 31, 2023 was $nil (2022 - $nil)

 

 F-18 
 

 

(c)        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 4.5%. Interest expense for the year ended December 31, 2023 was $17,911 (2022 - $17,107). The balance owing at December 31, 2023 was $399,269 (2022 - $415,430).

 

To secure repayment of any amounts borrowed under the mortgage, the Company granted Stock Yards a security interest in real property under the mortgage and all rents on said property.

 

(d)        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, 2023 was $66,957 (2022 - $45,113). The balance owing at December 31, 2023 was $1,004,747 (2022 - $1,632,672).

 

(e)        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, 2023 was $122,544 (2022 - $62,679). The balance owing at December 31, 2023 was $2,737,232 (2022 - $2,813,015).

 

(f)        In June 2022, ENP Peru 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, 2023 was $13,877 (2022 - $7,077). The balance owing at December 31, 2023 was $250,207 (2022 - $256,162).

 

(g)        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, 2023 was $67,397 (2022 - $23,632). The balance owing at December 31, 2023 was $1,475,188 (2022 - $1,036,798).

 

(h)        In June 2023, 317 Mendota signed a five year loan for up to $3,240,000 with Stock Yards to purchase a building and any necessary renovations. Interest only payments are required for the first 12 months with interest and principal being paid the remaining four years and a lump sum due in June 2028. Interest expense for the year ended December 31, 2023 was $95,396 (2022 - $nil). The balance owing at December 31, 2023 was $2,248,292 (2022 - $nil).

 

As of December 31, 2023, Company was in compliance with all loan covenants.

 

 

Continuity  December 31, 2023   December 31, 2022 
Balance, January 1  $6,154,077   $2,366,598 
Plus: Proceeds from loans   2,686,682    3,230,798 
Plus: Loan acquired with acquisition of ENP Peru   -    2,849,500 
Less: Payments on loan   (725,823)   (2,292,819)
Balance, end of period  $8,114,936   $6,154,077 

 

 

Outstanding balance at December 31,  December 31, 2023   December 31, 2022 
a) Long term debt – Midland States Bank  $-   $- 
b) Long term debt – Midland States Bank   -    - 
c) Long term debt – Stock Yards Bank & Trust   399,269    415,430 
d) Long term debt – Stock Yards Bank & Trust   1,004,748    1,632,672 
e) Long term debt – Stock Yards Bank & Trust   2,737,232    2,813,015 
f) Long term debt – Stock Yards Bank & Trust   250,207    256,162 
g) Long term debt – Stock Yards Bank & Trust   1,475,188    1,036,798 
h) Long term debt – Stock Yards Bank & Trust   2,248,292     
Long-term debt   8,114,936    6,154,077 
Less: current portion   (1,281,632)   (717,612)
Long-term debt non current  $6,833,304   $5,436,465 

 

 F-19 
 

 

13. INCOME TAXES

 

The provision for income tax expense (benefit) is comprised of the following:

 

   2023   2022 
Current tax, federal  $753,683   $1,017,059 
Current tax, state   340,952    460,098 
Current tax, foreign   151,236    216,082 
Current tax   1,245,871    1,693,239 
Income tax recovery   (1,127,689)   (1,476,088)
Current tax, total   118,182    217,151 
           
Deferred income tax, federal   (172,763)   (49,088 
Deferred income tax, state   (78,154)   (22,207 
Deferred income tax, foreign   -    - 
Deferred income tax, total   (250,917)   (71,295 
Total  $(132,735)  $145,856 

 

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.

 

   2023   2022 
Income before tax  $3,623,250   $7,859,085 
US statutory tax rates   30.50%   30.50%
Expected income tax   1,105,091    2,397,021 
Non-deductible items   362,554    (243,167)
Change in estimates and other   (1,585,427)   (2,004,041)
Foreign tax rate difference   (92,379)   (226,611)
Change in valuation allowance   77,426    (222,654)
Total income taxes   (132,735)   145,856 
           
Current income tax expense   118,182    217,151 
Deferred tax recovery   (250,917)   (71,295)
Total income tax expense (recovery)  $(132,735)  $145,856 

 

Included in current income tax expense for the year ended December 31, 2023 is a recovery of $1,127,689 (2022 - $1,476,088) for a revision of estimated current taxes payable for previous years.

 

 20 
 

 

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, 2023 and 2022 are comprised of the following:

 

   2023   2022 
Canada          
Non capital loss carryforwards  $855,176   $891,954 
Intangible assets   -    - 
Property, equipment and leaseholds   30,916    47,279 
    886,092    939,233 
Valuation allowance   (886,092)   (939,233)
Net deferred tax asset  $-   $- 
           
US          
    2023    2022 
Net operating loss carryforwards  $-   $- 
Intangible assets   (11,346)   (6,070)
Investments   -    (7,676)
Property, equipment and leaseholds   (248,701)   (486,713)
Property, equipment and leaseholds   284,794    274,289 
Financial instruments   -    - 
Deferred tax asset not recognized   -    - 
Net deferred tax asset (liability)  $24,747   $(226,170)

 

The Company has non-capital loss carryforwards of approximately $3,718,155 (2022 - $3,878,060) 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:

 

   Loss 
2030   407,947 
2031   941,856 
2032   615,878 
2037   1,692,555 
2039   48,048 
2040   11,871 
Total   3,718,155 

 

As at December 31, 2023, the Company has no net operating loss carryforwards available for US tax purposes.

 

Accounting for Uncertainty for Income Tax

 

As at December 31, 2023 and 2022, the Company’s consolidated balance sheets did not reflect an asset for uncertain tax positions but did account for accrued penalties or interest associated with income taxes not yet filed. The Company has no income tax examinations in progress.

 

14. 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:

 

   2023   2022 
         
Net income attributable to controlling interest  $2,775,864   $7,021,604 
Weighted average common shares outstanding:          
Basic   12,434,886    12,379,316 
Diluted   12,489,467    12,466,415 
Net income per common share attributable to controlling interest:          
Basic  $0.22   $0.57 
Diluted  $0.22   $0.56 

 

 F-21 
 

 

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.

 

   2023   2022 
           
Anti-dilutive options   740,000    1,304,000 

 

There were no preferred shares issued and outstanding during the years ended December 31, 2023 and 2022.

 

15. 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 unless a executive employee is granted a multi-year stock option grant where an equal amount vests over the next 5 years. 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.