Flexible Solutions International Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
The unaudited report covers the three and six months ended June 30, 2023, compared with the same periods in 2022. The company develops, manufactures and markets energy and water conservation products, biodegradable thermal polyaspartate polymers, and nitrogen conservation products. Reportable segments are energy and water conservation products (EWCP) and biodegradable polymers/TPA products.
During June 2023, the company acquired an 80% interest in 317 Mendota LLC, which purchased a manufacturing building. The company also acquired the remaining interest in ENP Peru and now owns it fully.
Financial performance and key metrics
| U.S. dollars | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $10.331 million | $11.165 million | $20.179 million | $21.948 million |
| Gross profit | $3.039 million | $3.862 million | $6.124 million | $7.674 million |
| Gross margin | 29.4% | 34.6% | 30.4% | 35.0% |
| Operating income | $1.051 million | $1.849 million | $2.233 million | $4.180 million |
| Net income attributable to controlling interest | $0.810 million | $1.662 million | $1.694 million | $3.196 million |
| Basic EPS | $0.07 | $0.13 | $0.14 | $0.26 |
| Cash provided by operations | Not separately provided | Not separately provided | $7.927 million | $0.793 million |
Q2 sales declined 7.5% year over year, while six-month sales declined 8.1%. Q2 net income attributable to the controlling interest fell 51.3%, and six-month net income fell 47.0%. The six-month effective income tax rate was approximately 25.0%, compared with 26.4% in the prior-year period.
EWCP revenue increased to $0.221 million in Q2 and $0.301 million for the six months, while TPA revenue declined to $10.101 million in Q2 and $19.878 million for the six months. TPA products generated approximately 97% of total six-month revenue. Three primary customers represented 50% of Q2 sales and 53% of six-month sales.
Cash flow, liquidity, debt and balance sheet
- Cash and cash equivalents were $7.414 million at June 30, 2023, supplemented by $1.010 million of term deposits, for total cash resources of $8.424 million, compared with $5.514 million at June 30, 2022.
- Working capital was $19.951 million at June 30, 2023, versus $20.693 million at December 31, 2022.
- Operating cash flow of $7.927 million was supported by reductions in accounts receivable and inventory. Inventory declined to $11.316 million from $14.419 million at year-end 2022, and accounts receivable declined to $7.435 million from $9.450 million.
- Investing cash outflows were $4.416 million, principally $3.784 million for property, equipment and leaseholds and $0.362 million in equipment deposits. The company also invested $0.470 million in Trio.
- Financing cash outflows were $1.961 million, including repayment of the short-term lines of credit, debt repayments, the $0.627 million special dividend and $0.388 million of distributions to non-controlling interests.
- Total debt was $8.041 million, including $0.739 million current and $7.302 million long term, compared with $6.154 million at December 31, 2022. The increase primarily reflects $2.248 million borrowed by 317 Mendota for the building acquisition.
- Both revolving lines of credit had zero outstanding borrowings at June 30, 2023. The stated interest rate was 8.25%, and the company reported compliance with all loan covenants.
- Total assets were $52.802 million and total stockholders’ equity was $36.823 million at June 30, 2023. Property, equipment and leaseholds increased to $12.822 million from $9.709 million at year-end 2022.
Material changes versus the prior comparable period
- Management attributed the revenue decline to lower TPA customer orders and pricing. EWCP sales increased due to higher customer orders.
- Gross margin contracted by approximately 5.2 percentage points in Q2 and 4.6 percentage points for the six months.
- Operating expenses increased 8.2% for the six months, driven principally by wages, administrative salaries and benefits, insurance, interest expense, investor relations costs and travel. Interest expense increased with higher debt.
- The prior-year periods included a $0.335 million gain on the ENP Peru acquisition; no comparable gain was recognized in 2023.
- Gain on investment increased to $0.327 million for the six months from $0.214 million, partially offsetting the operating decline.
- Stock-based compensation increased to $0.367 million for the six months from $0.109 million. Approximately $1.071 million of compensation expense related to non-vested awards remained to be recognized over an expected weighted-average period of 2.2 years.
- The company paid a special dividend of $0.05 per share on May 16, 2023.
Guidance, outlook, commentary and risks
The filing does not provide formal revenue, earnings or margin guidance. Management stated that the company has sufficient cash resources to meet commitments and cash-flow requirements for the coming year. Minimum disclosed rent commitments total approximately $211,380 through December 31, 2025.
Key operating factors identified by management include crude oil prices because aspartic acid imported from China is a key TPA input, oil and gas industry activity, drought conditions affecting agricultural demand, customer concentration, foreign exchange movements, interest rates and potential tariffs on raw materials imported from China. The company does not hedge its foreign-currency exposure.
Three customers accounted for 53% of six-month sales, and the company reported significant receivable concentration among major customers. Cash balances may exceed federally insured limits. The filing states that no legal contingencies were known at June 30, 2023, no impairment charges were recorded, and no subsequent events were identified.
Management concluded that disclosure controls and procedures were effective as of June 30, 2023, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether TPA order volumes and pricing stabilize after the six-month decline and whether customer concentration increases or decreases.
- Whether the lower gross margin persists and how raw-material, freight, labor and insurance costs develop.
- The repayment schedule, interest-rate exposure and covenant requirements associated with the $8.041 million of debt, including the 317 Mendota building loan and the 2028 lump-sum maturity.
- Whether operating cash flow remains strong after the working-capital benefit from lower receivables and inventory reverses.
- The utilization and collateral requirements of the two 8.25% revolving credit facilities.
- The recoverability and valuation of investments, goodwill, intangible assets and the newly acquired manufacturing building.
- Exposure to China-related tariffs, foreign exchange movements, customer credit risk, oil and gas activity, agricultural conditions and any continuing COVID-19 effects.