Flexible Solutions International Inc. — 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and six months ended June 30, 2019, compared with the same 2018 periods. The company develops, manufactures and markets water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable thermal polyaspartate polymers used in agriculture, oil and gas, mining, utilities and other industries. Results include the company’s 65% consolidated interest in EnP Investments, acquired in October 2018, with the remaining 35% reported as non-controlling interest.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sales | $6.77 million | $4.14 million | $15.24 million | $8.34 million |
| Gross profit | $2.15 million | $1.54 million | $4.93 million | $3.50 million |
| Gross margin | 31.8% | 37.1% | 32.3% | 42.0% |
| Operating income | $0.26 million | $0.57 million | $1.31 million | $1.58 million |
| Operating margin | 3.9% | 13.7% | 8.6% | 18.9% |
| Net income attributable to controlling interest | $(0.03) million | $2.14 million | $0.98 million | $2.84 million |
| EPS, basic and diluted | $0.00 | $0.18 | $0.08 | $0.24 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $2.36 million | $1.27 million |
Revenue increased approximately 64% in the quarter and 83% year to date, primarily from growth across product lines and the EnP acquisition. TPA/BCPA products represented approximately 98% of six-month sales, while energy and water conservation products represented approximately 2%.
At June 30, 2019, cash and cash equivalents were $5.37 million, compared with $7.86 million at December 31, 2018. Including restricted cash of $1.00 million, ending cash, cash equivalents and restricted cash were $6.37 million. Working capital was $11.61 million, down from $15.10 million at year-end.
Total liabilities were $12.15 million and stockholders’ equity was $20.08 million. Debt included a $2.50 million short-term line of credit, $4.37 million of long-term debt including the current portion, and $0.50 million of remaining convertible notes. Operating lease liabilities totaled approximately $0.95 million. The company reported compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales rose substantially, driven by increased customer orders, growth in most product lines and the EnP acquisition.
- Gross margins contracted because of higher raw-material costs, new tariffs and an inability to pass all additional costs to customers.
- Operating expenses increased, including wages, advertising, interest, consulting, professional fees, travel and bad-debt expense. Interest expense increased to $247,472 for the six-month period from $14,487.
- Q2 controlling-interest earnings declined to a loss of $27,733 from income of $2.14 million. The 2018 period included a $1.72 million after-tax gain related to the prior fire and insurance recovery; no comparable gain was recorded in 2019.
- Six-month controlling-interest earnings declined to $983,417 from $2.84 million. The 2018 comparison also included a $1.71 million insurance-related gain.
- The company invested approximately $1.00 million in a Florida fertilizer-additives LLC and recorded a $1.00 million restricted-cash deposit tied to an EBITDA milestone. The investment had a June 30 carrying value of approximately $1.10 million, including a $247,016 equity-method gain.
- Capital expenditures increased to $1.32 million from $24,680, primarily reflecting new manufacturing equipment.
- The company paid $1.48 million of dividends during the first six months, including a special dividend and the first tranche of the annual dividend.
- In June, $500,000 of convertible debt was converted into 200,000 common shares. Shares outstanding were 12,017,545 at June 30 and 12,114,545 as of August 14, 2019.
- The company adopted ASC 842 and recognized operating lease right-of-use assets and liabilities. The filing states that adoption did not materially affect operations or cash flows.
Outlook, Risks, Contingencies and Unusual Items
Management stated that available cash resources were sufficient for anticipated commitments and cash-flow requirements for the following year and that no significant additional capital requirements were expected for 2019 beyond those disclosed. The filing does not provide quantitative revenue or earnings guidance.
- Key operating exposures include raw-material and aspartic-acid costs, tariffs, oil and gas activity, drought conditions, customer concentration, foreign-exchange movements and the ability to pass cost increases through to customers.
- Three customers accounted for 43% of six-month sales and 27% of accounts receivable at June 30, 2019, creating concentration and collection risk. A $231,696 bad-debt expense was recorded in the first six months.
- The Florida investment requires additional payments of up to $1.5 million if specified future milestones are achieved.
- Five operating leases have remaining payments with a present value of approximately $949,467; lease commitments extend through 2023.
- The filing states that disclosure controls and procedures were not effective as of June 30, 2019. Management identified a material weakness related to the premature release of 2018 financial statements before completion of auditor review and approval. Remediation was in progress but had not been fully completed or tested.
- No impairment charges were recorded for goodwill, intangible assets or other long-lived assets during the periods presented.
- Forward-looking results remain subject to competition, borrowing costs, economic conditions, regulation, tariffs, customer losses, operating inefficiencies and the availability of funds for capital expenditures.
Facts Investors Should Verify
- Whether the revenue growth from EnP and other TPA/BCPA products is sustainable and whether customer concentration remains elevated.
- Whether tariffs and raw-material costs continue to pressure gross margins and whether pricing actions can offset them.
- The repayment schedule, interest-rate exposure and covenant requirements for the company’s credit lines and term debt.
- The performance, milestone conditions and potential additional funding obligations associated with the Florida fertilizer-additives investment.
- Progress in remediating the disclosed material weakness in internal control over financial reporting.
- The effect of dividends, stock-option exercises and additional convertible-note conversions on liquidity and per-share results.
- Whether the company’s stated liquidity assessment remains adequate after capital expenditures, lease payments, debt service, dividends and potential investment commitments.