Flexible Solutions International, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Flexible Solutions International, Inc. develops, manufactures and markets specialty chemicals, including energy and water conservation products, biodegradable thermal polyaspartate polymers and nitrogen-conservation products. The company operates through two reportable segments: energy and water conservation products (EWCP) and biodegradable polymers (TPA). This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Amounts are in U.S. dollars.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Sales | $11.17 million | $8.54 million | $21.95 million | $16.16 million |
| Gross profit | $3.86 million | $2.96 million | $7.67 million | $5.67 million |
| Gross margin | 34.6% | 34.7% | 35.0% | 35.1% |
| Operating income | $1.85 million | $1.71 million | $4.18 million | $3.08 million |
| Net income attributable to controlling interest | $1.66 million | $1.18 million | $3.20 million | $2.63 million |
| Net margin attributable to controlling interest | 14.9% | 13.8% | 14.6% | 16.3% |
| Basic earnings per share | $0.13 | $0.10 | $0.26 | $0.21 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $0.79 million | $4.07 million |
Second-quarter sales increased 30.8% year over year, while net income attributable to the controlling interest increased 41.3%. For the first six months, sales increased 35.8% and controlling-interest net income increased 21.6%. TPA generated $10.98 million of second-quarter revenue and $21.71 million for the six-month period; EWCP generated $0.19 million and $0.24 million, respectively.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $4.49 million at June 30, 2022, down from $5.71 million at December 31, 2021. Including term deposits, cash, cash equivalents and restricted cash totaled $5.51 million.
- Total assets increased to $47.56 million from $39.55 million, primarily reflecting higher inventory, property and equipment, and the consolidation of ENP Peru.
- Inventory increased to $15.19 million from $9.50 million, while accounts receivable declined to $6.66 million from $7.13 million.
- Total debt, including current and non-current portions, was $6.61 million, consisting of $1.15 million of short-term line-of-credit borrowings and $5.46 million of long-term debt. Total debt was approximately $4.67 million at year-end 2021.
- Working capital was $16.81 million at June 30, 2022, compared with $13.99 million at December 31, 2021. Management stated that the company had sufficient cash resources for the coming year and no substantial near-term cash commitments beyond disclosed obligations.
- Operating cash flow declined substantially because inventory increased by $5.68 million. Investing cash use was $0.81 million, including $0.50 million for the ENP Peru acquisition and $0.42 million for property and equipment. Financing cash use was $1.24 million after debt repayments, distributions to non-controlling interests and new loan proceeds.
Material changes versus the prior comparable period
- Management attributed sales growth in both EWCP and TPA to increased customer orders.
- Operating expenses increased, including wages for employee retention, professional fees related to the planned Lygos merger, higher insurance costs and resumed travel. Second-quarter office and miscellaneous expense also included one-time charges associated with moving loans from Midland States Bank to Stock Yards Bank & Trust.
- The company acquired an additional 50% interest in ENP Peru in June 2022, increasing its effective ownership and resulting in consolidation. The transaction generated a $335,051 gain on acquisition and added property and debt to the balance sheet.
- Gross margin remained broadly stable at approximately 35%, while six-month net margin declined because the prior-year period included $537,960 of PPP loan forgiveness income.
- Three primary customers represented 53% of six-month sales, up from 43% in the comparable 2021 period, increasing customer concentration risk.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management identified crude oil prices, the cost of aspartic acid imported from China, oil and gas industry activity, drought conditions, customer demand, competition, interest rates, tariffs, regulation, operational efficiency and COVID-19 effects as factors that could materially affect future results.
On July 25, 2022, the company filed a Form S-4 for its proposed merger with Lygos, Inc. The transaction remains subject to shareholder approval and other customary closing conditions. If completed, Lygos shareholders are expected to own approximately 67% of the combined company and Lygos management is expected to become the new management.
The company disclosed that it was in compliance with all debt covenants at June 30, 2022. It suspended its annual dividend in March 2020 and had not reinstated it as of the filing. No impairment charges were recorded during the periods presented. Management reported that disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the proposed Lygos merger receives shareholder approval and closes on the expected terms, including the projected ownership and management changes.
- Whether elevated inventory converts into sales and cash without write-downs or materially weaker operating cash flow.
- The sustainability of revenue growth given that three customers generated 53% of six-month sales and one customer accounted for $5.45 million.
- The terms, interest-rate exposure, collateral and covenant requirements of the replacement Stock Yards credit facilities and the new ENP Peru-related mortgages.
- The effect of China-related raw-material costs, tariffs, oil and gas activity, drought conditions and foreign exchange movements on margins and demand.
- The accounting and future performance implications of the ENP Peru acquisition, including the recorded acquisition gain and newly consolidated debt and assets.