Flexible Solutions International Inc. — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. The company develops, manufactures and markets energy and water conservation products, biodegradable polymers and chemical additives. Operations are reported in two segments: energy and water conservation products (EWCP) and biodegradable polymers and chemical additives (TPA). The TPA segment generated approximately 99% of nine-month revenue.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales | $9.21 million | $8.11 million | $25.37 million | $24.25 million |
| Gross profit | $3.50 million | $2.52 million | $9.16 million | $7.89 million |
| Gross margin | 37.9% | 31.0% | 36.1% | 32.5% |
| Operating income | $2.24 million | $1.17 million | $5.32 million | $3.91 million |
| Operating margin | 24.3% | 14.4% | 21.0% | 16.1% |
| Net income attributable to controlling interest | $1.16 million | $0.58 million | $3.79 million | $2.98 million |
| Net margin attributable to controlling interest | 12.6% | 7.2% | 14.9% | 12.3% |
| Basic EPS | $0.09 | $0.05 | $0.31 | $0.24 |
- Nine-month cash provided by operating activities was $4.29 million, compared with $5.55 million in 2020. The decline primarily reflected a $2.37 million increase in inventory, partly offset by higher income taxes payable.
- Nine-month investing cash use was $0.86 million, including $0.61 million of capital expenditures and $0.50 million invested in an existing investment, partially offset by $0.25 million of investment proceeds.
- Nine-month financing cash use was $2.04 million, including debt repayments, lease payments and $0.53 million of distributions to non-controlling interests.
- Cash and cash equivalents, including term deposits, totaled $5.96 million at September 30, 2021; cash and cash equivalents excluding term deposits were $4.93 million. Working capital was $13.78 million, versus $11.15 million at December 31, 2020.
- Total assets were $39.37 million and total stockholders’ equity was $28.13 million at September 30, 2021.
- Inventory increased to $10.74 million from $8.37 million at December 31, 2020, primarily due to raw materials and supplies.
- Debt consisted of a $1.49 million short-term line of credit and $2.57 million of long-term debt, including the current portion. The company reported compliance with all debt covenants. The line of credit capacity was up to $3.0 million at September 30, 2021; a replacement facility was signed in October 2021 with capacity up to $3.5 million, subject to borrowing-base limitations.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 13.6%, while nine-month sales increased 4.6%. Management attributed the nine-month increase to higher customer orders for both EWCP and TPA products. Q3 EWCP sales declined, but TPA sales increased.
- Gross profit increased 39.0% in Q3 and 16.2% for the nine-month period. Gross-margin expansion reflected the relationship between sales and cost of sales; the filing does not provide a detailed quantitative bridge.
- Operating expenses decreased 7.0% in Q3 and 3.4% for the nine-month period. Lower lease, travel and certain promotional costs were partly offset by higher insurance and professional costs.
- Nine-month income before tax included $0.54 million of Paycheck Protection Program loan forgiveness. Nine-month gain on investment was $0.49 million, compared with $0.66 million in 2020.
- Long-term debt declined to $2.57 million from $3.85 million at year-end 2020, reflecting repayments and forgiveness of the PPP loans. The company also paid off a $0.20 million promissory note in May 2021.
- Shares outstanding increased to 12,327,246 from 12,260,545 at December 31, 2020, primarily from option exercises.
- The company suspended its annual dividend in March 2020 and had not reinstated it as of the filing.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal revenue, earnings or margin guidance. Management states that it expects existing cash resources to meet future commitments and cash-flow requirements for the coming year and identifies no substantial near-term cash commitments beyond disclosed debt, lease and operating requirements.
- Key operating drivers include crude-oil prices, the oil and gas industry, agricultural drought conditions, customer demand and the availability and cost of aspartic acid imported from China.
- Potential tariffs on Chinese raw materials could increase costs and customer prices. The company also faces competition, regulatory changes, interest-rate and borrowing risks, foreign-exchange exposure, customer concentration, operational inefficiencies and potential sales weakness.
- COVID-19 affected travel, trade shows and advertising activity and could continue to cause staff shortages, reduced demand, regulatory intervention or broader economic disruption.
- Three primary customers represented 44% of nine-month sales and 36% of accounts receivable at September 30, 2021. The company’s 35% non-controlling partner in ENP Investments was also a significant customer.
- The company recorded no impairment charges related to long-lived assets, goodwill or indefinite-lived intangible assets during the reported periods.
- In October 2021, the company sold three acres of vacant land in Taber, Canada, for $274,715, or C$350,000.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify whether gross-margin improvement is sustainable or was influenced by product mix, pricing, inventory timing or other temporary factors.
- Monitor inventory growth, raw-material availability and working-capital conversion, particularly the $2.37 million inventory cash use during the first nine months.
- Review customer concentration, related-party sales and collectability of accounts receivable.
- Confirm the terms, borrowing-base availability, interest rates and covenant requirements of the replacement credit facility signed in October 2021.
- Assess exposure to Chinese-input tariffs, oil and gas activity, agricultural demand, foreign-exchange movements and COVID-19 effects.
- Reconcile reported cash of $4.93 million with the $5.96 million cash-flow total that includes term deposits, and distinguish consolidated cash from cash held by subsidiaries and non-controlling interests.
- Review the treatment and nonrecurring impact of $0.54 million in PPP loan forgiveness and investment-related gains on comparable earnings.