Flexible Solutions International Inc. — Form 10-Q Summary
Business Context and Reporting Period
Flexible Solutions International develops, manufactures and markets specialty chemicals, including energy and water conservation products, biodegradable polymers and nitrogen conservation products. The report covers the unaudited three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The company reports two segments: Energy and Water Conservation Products (EWCP) and Biodegradable Chemical Products/TPAs (BCPA).
Key Financial Metrics
| U.S. dollars | Three months ended September 30, 2023 | Three months ended September 30, 2022 | Nine months ended September 30, 2023 | Nine months ended September 30, 2022 |
|---|---|---|---|---|
| Sales | $8.72 million | $11.69 million | $28.90 million | $33.63 million |
| Gross profit | $1.47 million | $3.18 million | $7.60 million | $10.86 million |
| Gross margin | 16.9% | 27.2% | 26.3% | 32.3% |
| Operating income (loss) | $(0.39) million | $1.63 million | $1.85 million | $5.81 million |
| Net income attributable to controlling interest | $(0.72) million | $1.11 million | $0.98 million | $4.30 million |
| Basic earnings per share | $(0.06) | $0.09 | $0.08 | $0.35 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $10.13 million | $(0.66) million |
At September 30, 2023, total assets were $53.09 million, total liabilities were $16.61 million and total stockholders’ equity was $36.49 million. Cash and cash equivalents were $8.94 million, with an additional $1.01 million of term deposits. Working capital was $19.24 million, compared with $20.69 million at December 31, 2022.
Total long-term debt, including the current portion, was $7.86 million, compared with $6.15 million at year-end 2022. No amounts were outstanding under the short-term revolving credit facilities at September 30, 2023. Lease liabilities totaled $0.13 million. Management stated that the company was in compliance with all loan covenants and had sufficient cash resources for its expected commitments and cash flow requirements over the following year.
Material Changes Versus the Prior Comparable Period
- Nine-month sales declined 14.1%, while third-quarter sales declined 25.4%. Management attributed the decline primarily to lower TPA customer orders and pricing; third-quarter EWCP orders also decreased.
- Gross margin fell to 26.3% for the nine-month period from 32.3% in 2022 and to 16.9% for the third quarter from 27.2%. Management cited higher raw-material costs, increased manufacturing wages and costs associated with new certifications.
- Nine-month operating income declined 68.2% to $1.85 million. Third-quarter results shifted to an operating loss of $0.39 million from operating income of $1.63 million.
- Operating expenses increased 14.0% for the nine-month period, including higher administrative salaries and benefits, insurance, interest expense, advertising, investor relations and stock-based compensation. Interest expense increased to $0.37 million from $0.19 million.
- Operating cash flow improved substantially to $10.13 million from a use of $0.66 million, supported by a $4.52 million reduction in inventory and a $2.54 million reduction in accounts receivable.
- Capital expenditures increased to $4.33 million from $0.65 million, principally reflecting investment in property, equipment and leaseholds. Property, equipment and leaseholds increased to $12.94 million from $9.71 million.
- The company purchased the remaining 8.33% of ENP Peru in 2023 and became its sole owner. It also acquired an 80% interest in 317 Mendota, which purchased a manufacturing building; the transaction added $2.25 million of debt and $0.20 million of non-controlling interest.
- The company paid a special dividend of $0.05 per share, or $0.63 million in aggregate, in May 2023.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management identified crude-oil prices, which affect the cost of imported aspartic acid, oil and gas industry activity, and drought conditions affecting agricultural demand as important factors influencing future results.
- Customer concentration remains significant: three customers represented 49% of nine-month sales and 67% of third-quarter sales. The three largest customers accounted for 68% of accounts receivable at September 30, 2023.
- The company is exposed to competition, economic conditions, customer and sales weakness, regulatory changes, interest-rate increases, debt covenant risk, operational inefficiencies and potential tariffs on raw materials imported from China.
- The company does not hedge its foreign-currency exposure and is exposed to changes in exchange rates and interest rates.
- Debt increased in connection with equipment purchases and the 317 Mendota building acquisition. The 317 Mendota loan includes interest-only payments for the first 12 months and a lump-sum payment due in June 2028.
- The filing reports no known contingencies and no impairment charges for the periods presented. It also reports no material changes in internal control over financial reporting, and management concluded that disclosure controls were effective as of September 30, 2023.
- In October 2023, the company received $0.20 million to settle its Applied Holdings promissory note. On November 2, 2023, the board voted to cancel all stock options granted to Dan O’Brien on December 14, 2022.
Important Facts for Investors to Verify
- Whether lower TPA orders and pricing pressure persist and whether EWCP demand recovers.
- Whether gross margins improve despite raw-material, labor and certification costs.
- The sustainability of the $10.13 million nine-month operating cash flow, particularly after inventory and receivables reductions.
- Debt repayment requirements, variable interest-rate exposure, covenant compliance and the June 2028 317 Mendota lump-sum obligation.
- Customer concentration and collectability of significant receivables, including balances with related or strategically important customers.
- Execution and expected returns from the expanded manufacturing capacity, property investments and the 317 Mendota building.
- The effect of potential tariffs or supply-chain disruption involving aspartic acid and other China-sourced raw materials.