Flexible Solutions International (FSI) - 2024 Q3 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section provides a disclaimer regarding forward-looking statements, highlighting inherent risks and uncertainties that may cause actual results to differ materially Forward-Looking Statements Disclaimer This section outlines the company's forward-looking statements, emphasizing that actual results may differ materially due to various risks and uncertainties, including competitive pressures, interest rate changes, economic conditions, regulatory changes, customer loss, and operational inefficiencies. The company does not undertake to update these statements - The document contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, covering projections of earnings, revenue, future operations, new services, economic conditions, and beliefs[5] - Actual results could differ materially from projections due to inherent risks and uncertainties, including increased competitive pressures, interest rate changes, economic deterioration, adverse legislation, loss of customers, inability to achieve sales levels, unavailability of funds, operational inefficiencies, and new tariffs[7] - The company does not intend or undertake any obligation to update forward-looking statements, except as required by federal securities laws[6] PART I. Financial Information This part presents the company's unaudited condensed interim consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed interim consolidated financial statements, including balance sheets, statements of operations and comprehensive income (loss), statements of cash flows, and statements of stockholders' equity, along with detailed notes explaining accounting policies and specific financial line items for the periods ended September 30, 2024 and December 31, 2023 Unaudited Condensed Interim Consolidated Balance Sheets The consolidated balance sheets show the company's financial position, with total assets increasing to $57.8 million as of September 30, 2024, from $55.5 million at December 31, 2023, driven primarily by an increase in cash and property, equipment, and leaseholds Unaudited Condensed Interim Consolidated Balance Sheets | Metric | Sep 30, 2024 ($) (Unaudited) | Dec 31, 2023 ($) | |:---|:---|:---| | Assets | | | | Cash | $10,619,841 | $5,017,583 | | Total current assets | $32,305,519 | $30,226,692 | | Property, equipment and leaseholds, net | $14,741,025 | $13,171,787 | | Total Assets | $57,828,165 | $55,471,055 | | Liabilities | | | | Total current liabilities | $10,186,862 | $10,053,859 | | Total Liabilities | $17,499,891 | $17,202,983 | | Stockholders' Equity | | | | Total Stockholders' Equity | $40,328,274 | $38,268,072 | - Cash significantly increased by $5.6 million from December 31, 2023, to September 30, 2024[9] - Total assets grew by approximately $2.3 million, while total liabilities saw a modest increase of about $0.3 million[9] Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income (Loss) (Three Months) For the three months ended September 30, 2024, the company reported a significant turnaround, moving from a net loss of $718,161 in 2023 to a net income of $611,858, primarily driven by increased sales and gross profit, despite higher operating expenses Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income (Loss) (Three Months) | Metric | Three Months Ended Sep 30, 2024 ($) | Three Months Ended Sep 30, 2023 ($) | Change (YoY) | |:---|:---|:---|:---|\ | Sales | $9,314,937 | $8,720,621 | +6.82% | | Cost of sales | $5,508,121 | $7,248,266 | -24.01% | | Gross profit | $3,806,816 | $1,472,355 | +158.55% | | Total operating expenses | $2,025,607 | $1,859,028 | +8.96% | | Operating income (loss) | $1,781,209 | ($386,673) | N/A | | Net income (loss) attributable to controlling interest | $611,858 | ($718,161) | N/A | | Income per share (basic and diluted) | $0.05 | ($0.06) | N/A | - Gross profit increased significantly by 158.55% due to a substantial decrease in cost of sales, despite a modest increase in sales[10] - Operating income saw a dramatic improvement, turning a loss of $386,673 in Q3 2023 into an income of $1,781,209 in Q3 2024[10] Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income (Loss) (Nine Months) For the nine months ended September 30, 2024, the company achieved a substantial increase in net income attributable to controlling interest, rising to $2,358,880 from $976,073 in the prior year, primarily driven by higher gross profit and operating income Unaudited Condensed Interim Consolidated Statements of Operations and Comprehensive Income (Loss) (Nine Months) | Metric | Nine Months Ended Sep 30, 2024 ($) | Nine Months Ended Sep 30, 2023 ($) | Change (YoY) | |:---|:---|:---|:---|\ | Sales | $29,068,548 | $28,899,429 | +0.58% | | Cost of sales | $18,502,270 | $21,303,229 | -13.05% | | Gross profit | $10,566,278 | $7,596,200 | +39.10% | | Total operating expenses | $6,380,723 | $5,749,391 | +10.98% | | Operating income | $4,185,555 | $1,846,809 | +126.64% | | Net income attributable to controlling interest | $2,358,880 | $976,073 | +141.67% | | Income per share (basic and diluted) | $0.19 | $0.08 | +137.50% | - Gross profit increased by 39.10% despite only a marginal increase in sales, indicating improved cost management or pricing strategies[12] - Operating income more than doubled, reflecting strong operational performance over the nine-month period[12] Unaudited Condensed Interim Consolidated Statements of Cash Flows For the nine months ended September 30, 2024, cash provided by operating activities decreased slightly, while cash used in investing activities significantly reduced, and cash used in financing activities remained relatively stable. The company ended the period with a higher cash and term deposits balance Unaudited Condensed Interim Consolidated Statements of Cash Flows | Metric | Nine Months Ended Sep 30, 2024 ($) | Nine Months Ended Sep 30, 2023 ($) | Change (YoY) | |:---|:---|:---|:---|\ | Cash provided by operating activities | $9,274,106 | $10,128,066 | -8.43% | | Cash (used in) investing activities | ($1,881,044) | ($4,882,788) | +61.46% | | Cash (used in) financing activities | ($2,210,996) | ($2,306,498) | +4.14% | | Inflow (outflow) of cash | $5,282,342 | $3,139,114 | +68.29% | | Cash and term deposits, ending | $12,990,166 | $9,954,213 | +30.50% | - The significant reduction in cash used in investing activities was partly due to proceeds from the sale of an investment ($2,000,000) in 2024, which was not present in 2023[13] - Cash and term deposits increased by over $3 million, indicating improved overall cash generation and management[13] Unaudited Condensed Interim Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $40,328,274 as of September 30, 2024, from $38,268,072 at December 31, 2023, primarily driven by net income and stock-based compensation, partially offset by dividends paid Unaudited Condensed Interim Consolidated Statements of Stockholders' Equity | Metric | Sep 30, 2024 ($) | Dec 31, 2023 ($) | |:---|:---|:---|\ | Total Stockholders' Equity | $40,328,274 | $38,268,072 | | Accumulated Earnings | $19,156,878 | $18,053,051 | | Capital in Excess of Par Value | $18,471,633 | $17,932,015 | | Net income attributable to controlling interest (9 months) | $2,358,880 | $976,073 | | Dividends paid (9 months) | ($1,255,053) | ($626,777) | - Accumulated earnings increased by over $1.1 million, reflecting the company's profitability during the period[14] - The company issued 15,000 common shares upon the exercise of employee stock options during the nine months ended September 30, 2024[14][106] Notes to Unaudited Condensed Interim Consolidated Financial Statements These notes provide detailed information on the company's basis of presentation, significant accounting policies, and specific financial statement line items, offering context and breakdown for the reported figures 1. Basis of Presentation This note describes the company's corporate structure, including its subsidiaries and controlling interests, and outlines its primary business activities, which involve developing, manufacturing, and marketing specialty chemicals for water conservation (HEATSAVR®, WATERSAVR®) and thermal polyaspartate biopolymers (TPAs) for various industrial and agricultural applications - Flexible Solutions International, Inc. was redomiciled to Alberta, Canada in 2019 and consolidates several subsidiaries, including NanoChem Solutions Inc. and controlling interests in 317 Mendota LLC (80%) and ENP Investments, LLC (65%)[17] - The company's product lines include water conservation chemicals (HEATSAVR®, WATERSAVR®) and thermal polyaspartate biopolymers (TPAs) used for corrosion/scaling prevention, fertilizer enhancement, and as additives in detergents and pesticides[18] 2. Significant Accounting Policies This note details the accounting principles used in preparing the financial statements, covering areas such as cash and cash equivalents, term deposits, inventory valuation, allowance for credit losses, depreciation of property and equipment, impairment of long-lived assets, foreign currency translation, revenue recognition, stock-based compensation, income per share, use of estimates, fair value measurements, contingencies, income taxes, risk management, equity method investments, and goodwill and intangible assets - Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out or weighted average basis, including direct raw material costs, inbound freight, warehousing, handling, utilities, and overhead[24] - Revenue is recognized when control transfers to the customer, typically at the time of product shipment, with shipping and handling activities accounted for as fulfillment costs[30] - Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment annually or more frequently if indicators arise, using qualitative and quantitative assessments[57][58][59] 3. Leases The company accounts for leases with terms over 12 months by recording right-of-use (ROU) assets and lease obligations. In March 2024, NanoChem operations were consolidated, leading to the termination of a lease in Naperville, IL, resulting in a $41,350 loss - In March 2024, the company terminated a lease in Naperville, IL, incurring a loss of $41,350 due to a penalty and forfeited security deposit[64] Leases | Metric | Sep 30, 2024 ($) | Dec 31, 2023 ($) | |:---|:---|:---|\ | Right of Use Assets | $0 | $115,293 | | Lease Liability | $0 | $115,293 | 4. Accounts Receivable Accounts receivable, net of allowances for expected credit loss, decreased to $8,071,431 as of September 30, 2024, from $9,843,056 at December 31, 2023 Accounts Receivable | Metric | Sep 30, 2024 ($) | Dec 31, 2023 ($) | |:---|:---|:---|\ | Accounts receivable | $8,360,850 | $10,133,249 | | Allowances for expected credit loss | ($289,419) | ($290,193) | | Net Accounts Receivable | $8,071,431 | $9,843,056 | - Net accounts receivable decreased by approximately $1.77 million from December 31, 2023, to September 30, 2024[66] 5. Inventories Total inventories decreased to $9,719,759 as of September 30, 2024, from $11,134,889 at December 31, 2023, primarily due to a reduction in raw materials and supplies Inventories | Metric | Sep 30, 2024 ($) | Dec 31, 2023 ($) | |:---|:---|:---|\ | Completed goods | $3,670,960 | $2,682,158 | | Raw materials and supplies | $6,048,799 | $8,452,731 | | Total Inventories | $9,719,759 | $11,134,889 | - Raw materials and supplies decreased by approximately $2.4 million, while completed goods increased by nearly $1 million[67] 6. Property, Equipment and Leaseholds Net property, equipment, and leaseholds increased to $14,741,025 as of September 30, 2024, from $13,171,787 at December 31, 2023, primarily due to additions in manufacturing equipment and buildings. The company also accrued $423,823 for storm damage repairs Property, Equipment and Leaseholds | Category | Sep 30, 2024 Net ($) | Dec 31, 2023 Net ($) | |:---|:---|:---|\ | Buildings and improvements | $8,431,202 | $8,444,718 | | Manufacturing equipment | $5,828,645 | $4,217,687 | | Total Net Property, Equipment and Leaseholds | $14,741,025 | $13,171,787 | - Depreciation expense for the nine months ended September 30, 2024, was $1,307,655, up from $1,095,171 in the prior year[68] - The company accrued $423,823 for funds received for winter storm damage repairs that are not yet completed[69] 7. Goodwill and Intangible Assets Goodwill remained stable at $2,534,275, and indefinite-lived intangible assets at $770,000. Definite-lived intangible assets, primarily customer relationships and software, decreased to $1,390,000 due to amortization Goodwill and Intangible Assets | Category | Sep 30, 2024 ($) | Dec 31, 2023 ($) | |:---|:---|:---|\ | Goodwill | $2,534,275 | $2,534,275 | | Indefinite Lived Intangible Assets | $770,000 | $770,000 | | Definite Life Intangible Assets | $1,390,000 | $1,510,000 | - Amortization expense for definite-lived intangible assets was $120,000 for both the nine months ended September 30, 2024, and 2023[71] - No impairment charges related to goodwill or indefinite-lived intangibles were recognized during the three or nine months ended September 30, 2024[59] 8. Long Term Deposits Long-term deposits, consisting of security deposits and vendor deposits, significantly increased to $2,254,141 as of September 30, 2024, from $824,254 at December 31, 2023 Long Term Deposits | Metric | Sep 30, 2024 ($) | Dec 31, 2023 ($) | |:---|:---|:---|\ | Long term deposits | $2,254,141 | $824,254 | - The increase of over $1.4 million in long-term deposits reflects new security deposits held by landlords and deposits for equipment purchases[73] 9. Investments The company's investment portfolio saw significant changes, including the full acquisition and consolidation of ENP Peru, the settlement of a promissory note from Applied Holding Corp., and the sale of a 30.1% interest in a Florida-based LLC, resulting in a loss on sale but future proceeds - NanoChem acquired the remaining 8.33% of ENP Peru in June 2023, making it a full owner, and the investment was consolidated, resulting in a gain on acquisition of $335,051[73][75] - In August 2024, the company sold a 30.1% interest in a Florida-based LLC for $2,000,000, with an agreement to sell the remaining 19.9% for an additional $4,000,000 over five years[80] Investments | Metric | Sep 30, 2024 ($) | Dec 31, 2023 ($) | |:---|:---|:---|\ | Investment in Florida based LLC | $1,578,411 | $4,063,960 | | Sales to Florida based LLC (9 months) | $6,606,882 | $7,116,232 | 10. Short-Term Line of Credit The company renewed two revolving lines of credit with Stock Yards Bank and Trust in June and August 2024. As of September 30, 2024, there were no outstanding borrowings on either line, indicating strong liquidity management - ENP Investments renewed a revolving line of credit for up to $4,500,000 (or 50-80% of eligible AR plus 50% of inventory, capped at $2,000,000) with an 8% interest rate as of September 30, 2024[85] - The company renewed a separate revolving line of credit for up to $2,000,000 (or 80% of eligible AR plus 50% of inventory, capped at $1,000,000) with an 8% interest rate as of September 30, 2024[88] - Both lines of credit had $nil outstanding borrowings as of September 30, 2024, compared to $1,810,479 for ENP Investments' line at December 31, 2023[87][90] 11. Long Term Debt The company has various long-term debt obligations, primarily mortgages and loans with Stock Yards Bank & Trust, totaling $9,359,656 as of September 30, 2024. New loans were secured for manufacturing equipment and building purchases Long Term Debt | Loan Description | Sep 30, 2024 Balance ($) | Dec 31, 2023 Balance ($) | |:---|:---|:---|\ | ENP Mendota mortgage (4.35%) | $390,572 | $399,269 | | NanoChem loan (4.90%) | $513,078 | $1,004,748 | | ENP Peru first mortgage (4.35%) | $2,678,581 | $2,737,232 | | ENP Peru second mortgage (5.4%) | $245,570 | $250,207 | | NanoChem equipment loan (6.5%) | $1,680,424 | $1,475,188 | | 317 Mendota building loan | $2,236,386 | $2,248,292 | | NanoChem equipment loan (7%) | $1,615,045 | $0 | | Total Long-term debt | $9,359,656 | $8,114,936 | | Less: current portion | ($2,306,674) | ($1,281,632) | | Long-term debt, net of current portion | $7,052,982 | $6,833,304 | - A new five-year loan for $1,637,600 at 7% interest was signed in August 2024 by NanoChem to purchase new manufacturing equipment[99] - Total long-term debt increased by over $1.2 million from December 31, 2023, to September 30, 2024, reflecting new borrowings for capital expenditures[100] 12. Stock Options The company's stock option plan saw 1,000,000 options granted during the nine months ended September 30, 2024, increasing the total outstanding options to 1,991,000. Stock-based compensation expense for employees and consultants totaled $513,383 for the period Stock Options | Metric | Sep 30, 2024 (Options) | Dec 31, 2023 (Options) | |:---|:---|:---|\ | Balance, outstanding options | 1,991,000 | 1,114,000 | | Granted options (9 months) | 1,000,000 | 0 | | Exercised options (9 months) | (15,000) | (8,000) | | Weighted average exercise price | $2.63 | $3.13 | | Exercisable options | 810,000 | N/A | - Total stock-based compensation expense for the nine months ended September 30, 2024, was $513,383, including $29,820 for consultants and $483,563 for employees[103] - As of September 30, 2024, there was approximately $607,078 of compensation expense related to non-vested awards, expected to be recognized over a weighted average period of 1.74 years[104] 13. Capital Stock During the nine months ended September 30, 2024, the company issued 15,000 shares from employee stock option exercises and paid a special dividend of $0.10 per share, totaling $1,255,053 - 15,000 shares were issued upon the exercise of employee stock options during the nine months ended September 30, 2024[106] - A special dividend of $0.10 per share was paid on May 16, 2024, amounting to $1,255,053[106] - In the prior year, a special dividend of $0.05 per share was paid, totaling $626,777[107] 14. Non-Controlling Interests Non-controlling interests primarily relate to a 35% stake in ENP Investments and a 20% stake in 317 Mendota. The NCI share of income for ENP Investments was $762,806 for the nine months ended September 30, 2024, with distributions of $365,644 - The company owns a 65% interest in ENP Investments, which manufactures and distributes golf, turf, and ornamental agriculture products, with an unrelated party owning the remaining 35% NCI[108] - The company owns an 80% interest in 317 Mendota, a real estate LLC, with an unrelated party owning the remaining 20% NCI[111] Non-Controlling Interests | Metric | Sep 30, 2024 ($) | Dec 31, 2023 ($) | |:---|:---|:---|\ | NCI share of income (ENP Investments, 9 months) | $762,806 | $1,015,604 | | Distributions (ENP Investments, 9 months) | ($365,644) | ($719,439) | | NCI share of income (317 Mendota, 9 months) | ($80,696) | ($35,483) | 15. Segmented, Significant Customer Information and Economic Dependency The company operates in two segments: Energy and Water Conservation Products (EWCP) and Biodegradable Polymers (TPA). The TPA segment is the primary revenue driver and profit contributor. Sales are predominantly in the United States, with three primary customers accounting for 52% of total sales for the nine months ended September 30, 2024 - The company operates in two segments: Energy and Water Conservation Products (EWCP) and Biodegradable Polymers (TPA), with TPA also including nitrogen conservation products[114][116] Segment Information (9 Months Ended Sep 30, 2024) | Segment | Revenue ($) | Segment Profit (Loss) ($) | Segment Assets ($) | |:---|:---|:---|:---|\ | EWCP | $500,934 | ($91,290) | $3,359,017 | | TPA | $28,567,614 | $2,450,170 | $54,279,169 | | Total | $29,068,548 | $2,358,880 | $57,638,186 | - Three primary customers accounted for 52% of sales for the nine months ended September 30, 2024 ($15,245,382), up from 49% in the prior year[123] Sales by Territory (9 Months) | Territory | 2024 ($) | 2023 ($) | |:---|:---|:---|\ | Canada | $229,956 | $413,265 | | United States and abroad | $28,838,592 | $28,486,164 | | Total | $29,068,548 | $28,899,429 | 16. Subsequent Events In October 2024, subsequent to the reporting period, the company issued 5,000 shares upon the exercise of employee stock options - 5,000 shares were issued in October 2024 due to the exercise of employee stock options[124] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation This section provides management's perspective on the company's financial condition and results of operations, highlighting key performance drivers, changes in revenue and expenses, and factors affecting liquidity and capital resources for the three and nine months ended September 30, 2024 Overview The company manufactures and markets biodegradable polymers for the oil, gas, and agriculture industries, alongside specialty chemicals designed to reduce water evaporation in pools, spas, reservoirs, and irrigation systems. A third product line focuses on nitrogen conservation for agriculture - The company's core business involves biodegradable polymers for industrial and agricultural use, and specialty chemicals for water and energy conservation[124] - Product lines include EWCP (liquid swimming pool blankets, water conservation in reservoirs), biodegradable polymers (TPAs for corrosion/scaling, fertilizer enhancement, detergents), and nitrogen conservation products for agriculture[126][127][128] Results of Operations For both the three and nine months ended September 30, 2024, the company experienced increased sales in both EWCP and TPA products, significantly improved gross profit due to declining raw material costs, and a shift towards consultants over full-time employees. Key expense changes included higher insurance, office/miscellaneous costs (due to moving), and interest expense, while administrative salaries and lease expenses decreased - Sales for both EWCP and TPA products increased due to higher customer orders for both the three and nine months ended September 30, 2024[129][131] - Gross profit increased due to declining raw material costs catching up with customer price reductions already in place[129][131] - Administrative salaries and benefits decreased due to a one-time salary reduction for Dan O'Brien, effective October 2023[129][131] - Interest expense increased due to higher debt levels, while lease expense decreased due to the termination of a lease in Naperville, IL[129][130][131] Customer Sales (9 Months) | Customer | 2024 ($) | 2023 ($) | |:---|:---|:---|\ | Company A | $5,238,881 | $4,728,562 | | Company B | $6,606,882 | $7,116,232 | | Company C | $3,399,619 | $2,035,666 | | Company D | $3,328,826 | $2,176,042 | Capital Resources and Liquidity The company's working capital increased to $22,118,657 as of September 30, 2024, from $20,172,833 at December 31, 2023, indicating sufficient cash resources to meet future commitments. Cash provided by operations decreased slightly, but investing activities used less cash, contributing to a higher ending cash balance Cash Flow Summary (9 Months) | Cash Flow Item | 2024 ($) | 2023 ($) | |:---|:---|:---|\ | Cash provided (used) by operations | $9,274,106 | $10,128,066 | | Proceeds from sale of investment | $2,000,000 | $0 | | Purchase of equipment | ($2,876,119) | ($4,326,208) | | Repayments of short term line of credit | ($1,810,479) | ($2,818,591) | | Proceeds of long term debt | $2,162,412 | $2,248,292 | | Dividends paid | ($1,255,053) | ($626,777) | - Working capital increased by approximately $1.9 million, demonstrating improved financial health and liquidity[134] - The company anticipates no substantial capital requirements or material changes to liquidity for the twelve months ending September 30, 2025, beyond what has been disclosed[134][135] Item 4. Controls and Procedures Management, including the Principal Executive and Financial Officer, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2024, concluding they were effective. No material changes to internal control over financial reporting occurred during the quarter - The Principal Executive and Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2024[139] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting during the three months ended September 30, 2024[139] PART II. Other Information This part includes disclosures on trading arrangements and a list of exhibits filed with the report Item 5. Other Information This section states that no directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the quarterly period ended September 30, 2024 - No directors or officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended September 30, 2024[140] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications, XBRL documents, and other incorporated by reference documents - Exhibits include certifications from the Principal Executive and Financial Officers (31.1, 31.2, 32.1) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[138] Signatures This section contains the official signatures for the report, confirming its submission by authorized officers Report Signatures The report was signed on November 14, 2024, by Daniel B. O'Brien, in his capacities as President and Principal Executive Officer, and Principal Financial and Accounting Officer, on behalf of Flexible Solutions International, Inc - The report was signed by Daniel B. O'Brien as President and Principal Executive Officer, and Principal Financial and Accounting Officer[143] - The signing date for the report was November 14, 2024[142]