Business Context and Reporting Period
Company: Flexible Solutions International Inc. (FSI)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2024
Business Overview: FSI develops, manufactures, and markets specialty chemicals to slow water evaporation (HEATSAVR, WATERSAVR) and biodegradable polymers (TPAs) for corrosion control, agriculture, and detergents. The company operates two primary segments: Energy and Water Conservation Products (EWCP) and Biodegradable Polymers (TPA).
Key Financial Metrics
| Metric (USD) | Three Months Ended June 30, 2024 |
Six Months Ended June 30, 2024 |
Six Months Ended June 30, 2023 |
|---|---|---|---|
| Sales | $10,528,739 | $19,753,611 | $20,178,808 |
| Gross Profit | $3,939,095 | $6,759,462 | $6,123,845 |
| Gross Margin | 37.4% | 34.2% | 30.3% |
| Operating Income | $1,813,781 | $2,404,346 | $2,233,482 |
| Net Income (Controlling Interest) | $1,289,796 | $1,747,022 | $1,694,234 |
| Diluted EPS | $0.10 | $0.14 | $0.14 |
| Cash from Operations | N/A | $7,063,736 | $7,926,775 |
| Cash & Term Deposits | $9,209,438 | $9,209,438 | $8,423,994 |
| Total Debt (Current + Long Term) | $8,885,977 | $8,885,977 | $10,053,859 |
Note: Total Debt includes Short-term line of credit ($619,844), Current portion of long-term debt ($2,163,602), and Long-term debt ($6,102,531).
Material Changes vs. Prior Period
- Revenue: Six-month sales decreased 2.1% to $19.75M due to decreased customer orders in both EWCP and TPA segments. However, the three-month period saw a slight increase in TPA orders.
- Profitability: Gross margin improved significantly (34.2% vs 30.3% YoY) as raw material costs declined to align with prior price reductions. Net income attributable to controlling interest increased 3.1% YoY for the six-month period.
- Operating Expenses: Wages decreased due to increased reliance on consultants. Conversely, consulting fees, interest expense, and utilities increased. A one-time loss of $41,350 was recorded for the early termination of a lease in Naperville, IL.
- Debt: The company reduced its short-term line of credit balance from $1.81M to $619k but increased long-term debt borrowings to fund equipment purchases and real estate.
- Dividends: A special dividend of $0.10 per share was paid in May 2024, totaling $1.26M, compared to $0.05 per share in the prior year.
Outlook, Risks, and Unusual Items
- Subsequent Event: On August 9, 2024, the company sold its position in a Florida-based LLC for a total selling price of $6.0M ($2.0M received at closing, $800k annually for five years).
- Capital Allocation: Management stated the company has sufficient cash resources to meet future commitments. Working capital stands at $18.0M.
- Risks: Key risks include dependence on crude oil prices (for aspartic acid raw materials), activity levels in the oil and gas industry, drought conditions affecting agricultural sales, and foreign exchange fluctuations between USD and CAD.
- Customer Concentration: Three primary customers accounted for 50% of sales in the six months ended June 30, 2024. One customer (Company B) accounts for a significant portion of accounts receivable.
Investor Verification Checklist
- Customer Concentration: Verify the stability of the top three customers representing 50% of revenue.
- Debt Covenants: Confirm continued compliance with loan covenants, particularly regarding the Stock Yards Bank & Trust lines of credit and mortgages.
- Raw Material Costs: Monitor crude oil prices and their impact on the cost of aspartic acid, a key ingredient for TPA products.
- Subsequent Sale Proceeds: Track the receipt of the remaining $4.0M from the Florida LLC sale over the next five years.
- Inventory Levels: Review inventory turnover given the $10.3M inventory balance and recent sales declines.