Flexible Solutions International Inc. — Q3 2020 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020. The interim financial statements are unaudited and presented in U.S. dollars. The company develops and manufactures specialty chemicals, including water- and energy-conservation products and biodegradable polymers and chemical additives. Its reportable segments are Energy and Water Conservation Products (EWCP) and Thermal Polyaspartates and related products (TPA).
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Sales | $8.1 million, versus $7.4 million | $24.3 million, versus $22.6 million |
| Gross profit | $2.5 million, versus $2.4 million | $7.9 million, versus $7.3 million |
| Gross margin | 31.0%, versus 32.1% | 32.5%, versus 32.3% |
| Operating income | $1.2 million, versus $0.8 million | $3.9 million, versus $2.1 million |
| Net income attributable to controlling interest | $582,369, versus $412,048 | $2.98 million, versus $1.40 million |
| Basic and diluted EPS | $0.05, versus $0.03 | $0.24, versus $0.12 |
- Profitability: Nine-month operating margin increased to approximately 16.1% from 9.4%, while net margin attributable to the controlling interest increased to approximately 12.3% from 6.2%. Third-quarter operating margin was approximately 14.4%, compared with 11.1% in the prior-year quarter.
- Cash flow: Nine-month cash provided by operating activities was $5.25 million, compared with $3.48 million in 2019. Investing activities used $1.32 million, primarily for investments and $826,515 of property and equipment purchases. Financing activities used $2.34 million.
- Cash and liquidity: Cash and cash equivalents were $6.24 million at September 30, 2020, compared with $3.63 million at December 31, 2019. Current assets were $19.31 million and current liabilities were $6.69 million. Management reported working capital of $11.62 million; the balance-sheet amounts mathematically imply approximately $12.62 million, so this figure should be verified.
- Debt: Short-term line-of-credit borrowings were $1.64 million, down from $2.39 million at year-end. Long-term debt, including the current portion, was $3.56 million, down from $4.38 million. The $500,000 convertible note was paid off in April 2020. The company also received two Paycheck Protection Program loans totaling $537,960; management expects forgiveness but stated that forgiveness had not been proven and recorded the loans as debt.
- Equity: Total stockholders’ equity was $23.84 million, compared with $20.46 million at December 31, 2019. The company had 12,240,545 common shares outstanding as of November 14, 2020.
Material changes versus the prior comparable period
- Nine-month sales increased 7.1%, driven by increased EWCP customer orders and growth across most TPA product lines. Third-quarter sales increased 9.6%; TPA growth more than offset lower EWCP orders.
- Nine-month operating expenses declined to $3.98 million from $5.18 million. Key factors included lower interest expense from reduced debt, lower professional fees, lower travel costs related to COVID-19, no bad-debt expense compared with $231,696 in 2019, and favorable currency effects.
- Nine-month gain on investment increased to $660,601 from $342,248. The gain was primarily associated with the company’s equity-method investment in a Florida fertilizer-additives LLC.
- Inventory declined to $6.94 million from $9.18 million, while accounts receivable increased to $5.79 million from $4.47 million.
- The annual dividend was suspended on March 19, 2020, until further notice because of uncertainty related to COVID-19. No dividends were paid during the first nine months of 2020, compared with $1.48 million in 2019.
Guidance, outlook, risks and unusual items
- Management stated that it has sufficient cash resources for the coming year and does not anticipate significant capital requirements for the twelve months ending September 30, 2021, other than disclosed commitments. No formal revenue or earnings guidance was provided.
- Management identified crude-oil prices and potential tariffs on aspartic acid imported from China, oil and gas industry activity, drought conditions, and COVID-19 as factors that could materially affect future results.
- COVID-19 reduced travel and may cause staff shortages, lower customer demand, additional regulation or other disruptions. The duration and severity of its effects were described as unknown.
- Three customers represented 49% of third-quarter sales and 45% of nine-month sales. The three primary customers represented 53% of accounts receivable at September 30, 2020, creating customer-concentration and collection risk.
- Potential additional payments of $1.0 million and $500,000 may become due under the Florida LLC investment if subsequent EBITDA milestones are achieved.
- All reported debt covenants were stated to be in compliance as of September 30, 2020. The company reported no impairment charges and no subsequent events.
- The company’s disclosure controls and procedures were concluded to be effective, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Reconcile the MD&A working-capital figure of $11.62 million to the balance-sheet current assets and current liabilities, which imply approximately $12.62 million.
- Verify forgiveness status and accounting treatment of the $537,960 in Paycheck Protection Program loans.
- Assess sustainability of the nine-month earnings improvement, particularly the contribution from the $660,601 investment gain and lower nonrecurring expenses.
- Monitor customer concentration, accounts-receivable growth, and the collectability of balances from the three major customers.
- Evaluate exposure to China-related tariffs, raw-material costs, oil and gas activity, agricultural demand, drought conditions, foreign-exchange movements, and COVID-19 effects.
- Review the Florida LLC investment for milestone-based additional funding obligations of up to $1.5 million.