Flexible Solutions International Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Flexible Solutions International develops, manufactures and markets biodegradable polymers, nitrogen conservation products, and energy and water conservation chemicals. The report covers the three months ended March 31, 2024. The company reports two segments: energy and water conservation products and biodegradable polymers, with the latter generating nearly all reported sales.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Sales | $9.225 million | $9.848 million | Down 6.3% |
| Gross profit | $2.820 million | $3.085 million | Down 8.6% |
| Gross margin | 30.6% | 31.3% | Down approximately 70 bps |
| Operating income | $0.591 million | $1.182 million | Down 50.0% |
| Net income attributable to controlling interest | $0.457 million | $0.884 million | Down 48.3% |
| EPS, basic and diluted | $0.04 | $0.07 | Down |
| Total comprehensive income attributable to the company | $0.484 million | $0.717 million | Down 32.5% |
Operating margin declined to approximately 6.4% from 12.0%, while net margin attributable to the controlling interest declined to approximately 5.0% from 9.0%. The company recorded a $182,975 investment gain, $48,197 of interest income and a $41,350 loss on terminating the Naperville, Illinois lease.
Cash used in operating activities was $532,251, compared with $228,229 used in the prior-year quarter. The principal working-capital use was a $3.149 million increase in accounts receivable. Investing cash use was $172,901, including $478,123 of property and equipment purchases, partly offset by $327,000 received from an equity investment. Financing cash inflow was $1.297 million, primarily from a $1.449 million draw on the short-term line of credit.
Cash and term deposits totaled $8.327 million at March 31, 2024, including $5.303 million of cash and $3.024 million of term deposits. Working capital was $20.616 million, compared with $20.173 million at December 31, 2023. Total assets were $57.576 million and total stockholders’ equity was $39.091 million.
Short-term line-of-credit borrowings were $3.260 million, up from $1.810 million at year-end. Total long-term debt was $7.987 million, including $1.665 million classified as current, compared with $8.115 million at December 31, 2023. Total debt, including the line of credit, was approximately $11.246 million. The company reported compliance with all loan covenants. Interest rates on the revolving credit facilities were 8.5% at quarter-end.
Material changes versus the prior comparable period
- Sales declined primarily because of decreased customer orders for both EWCP and TPA products. EWCP sales fell to $41,608 from $80,660, while biodegradable polymer segment sales fell to $9.183 million from $9.777 million.
- Three primary customers represented 55% of sales, up from 44% in the prior-year quarter, increasing customer-concentration risk. Two customers each represented more than 10% of accounts receivable at quarter-end.
- Operating expenses increased to $2.230 million from $1.903 million. Notable increases included insurance, interest expense, research, consulting, utilities and advertising.
- Interest expense increased to $175,266 from $134,870, reflecting higher debt levels. Stock-based compensation increased to $253,357 from $185,298.
- Accounts receivable increased to $12.993 million from $9.843 million, while inventory decreased to $10.459 million from $11.135 million.
- The company consolidated NanoChem operations into its Peril, Illinois location and terminated the Naperville lease, recognizing a one-time $41,350 loss. A January winter storm caused frozen-pipe damage at two locations; insurance was in place and repairs were underway.
- Research spending increased for new product development. The company granted 950,000 stock options during the quarter, and 1.946 million options were outstanding at March 31, 2024.
Outlook, commentary, risks and unusual items
Management stated that it has sufficient cash resources to meet commitments and cash-flow requirements for the coming year and does not anticipate material additional capital requirements for the twelve months ending December 31, 2024, other than items disclosed in the filing. No formal revenue or earnings guidance was provided.
Future results are expected to be affected by the price of crude oil, which is used in producing imported aspartic acid; activity in the oil and gas industry; drought conditions affecting agricultural demand; customer orders; and potential tariffs on raw materials imported from China. Other disclosed risks include competition, interest rates and borrowing costs, economic conditions, regulation, customer losses, operating inefficiencies, capital availability and foreign-currency exposure.
The company announced a special dividend of $0.10 per share in April 2024, payable May 16, 2024 to shareholders of record on April 30, 2024. The filing states that disclosure controls and procedures were effective as of March 31, 2024, with no material change in internal control over financial reporting.
Facts investors should verify
- Whether customer orders and sales recover, given the 6.3% quarterly revenue decline and 55% concentration among three customers.
- Whether the sharp increase in accounts receivable converts to cash and whether operating cash flow improves from the $532,251 quarterly use.
- The sustainability of liquidity after the $1.449 million line-of-credit draw and the effect of 8.5% revolving debt rates.
- Whether gross-margin pressure and higher operating expenses persist, particularly insurance, research, consulting, utilities and stock-based compensation.
- The status and insurance recovery related to winter-storm property damage and the operational impact of the Naperville consolidation.
- The effect of crude-oil prices, China-related tariffs, oil-and-gas activity, agricultural demand and drought conditions on TPA sales and costs.
- The cash impact of the announced $0.10-per-share special dividend and compliance with debt covenants.