FLEXIBLE SOLUTIONS INTERNATIONAL INC quarterly report, Q2 FY2021

Flexible Solutions International Inc. — Q2 2021 Form 10-Q Summary

Business Context and Reporting Period

Flexible Solutions International Inc. develops, manufactures and markets specialty chemicals that reduce water evaporation and biodegradable polymers used in agriculture, oil and gas, chemical, utility and mining applications. The company reports two segments: energy and water conservation products (EWCP) and biodegradable polymers, including TPA and nitrogen-conservation products. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, with U.S. dollar reporting.

Financial Performance and Position

Metric	Three months ended June 30, 2021	Three months ended June 30, 2020	Six months ended June 30, 2021	Six months ended June 30, 2020
Sales	$8.535 million	$7.710 million	$16.160 million	$16.139 million
Gross profit	$2.960 million	$2.421 million	$5.668 million	$5.371 million
Gross margin	34.7%	31.4%	35.1%	33.3%
Operating income	$1.712 million	$1.173 million	$3.077 million	$2.739 million
Operating margin	20.0%	15.2%	19.0%	17.0%
Net income attributable to controlling interest	$1.177 million	$1.133 million	$2.627 million	$2.398 million
EPS attributable to controlling interest	$0.10 basic; $0.09 diluted	$0.09 basic and diluted	$0.21 basic and diluted	$0.20 basic and diluted

Six-month income before tax was $4.046 million, including $537,960 of PPP loan forgiveness and $399,236 of investment gains. The filing does not separately identify the PPP forgiveness in the quarterly income statement because it occurred during the first quarter.
Cash provided by operating activities increased to $4.065 million for the six months, compared with $3.145 million in the prior-year period.
Investing cash use was $831,729, including $500,000 invested and $451,728 of property and equipment purchases. Financing cash use was $1.557 million, primarily debt repayments, lease payments and distributions to non-controlling interests.
Cash, cash equivalents and term deposits totaled $6.270 million at June 30, 2021, including $5.270 million of cash and $1.000 million of term deposits.
Total assets were $37.032 million versus $35.087 million at December 31, 2020. Total stockholders’ equity increased to $26.816 million from $23.768 million.
Working capital was $12.554 million, compared with $11.146 million at year-end 2020.
Accounts receivable declined to $4.150 million from $5.890 million, while inventories increased to $9.721 million from $8.372 million.
Short-term line-of-credit borrowings were $1.489 million. Long-term debt totaled $2.779 million, including the current portion, compared with $3.848 million at December 31, 2020. Lease liabilities totaled $331,563.

Material Changes Versus the Prior Comparable Period

Second-quarter sales increased 10.7%, driven by higher EWCP and TPA customer orders. Six-month sales were broadly flat, increasing only 0.1%, as lower EWCP sales offset higher TPA sales.
Six-month EWCP revenue decreased to $205,853 from $210,161, while TPA revenue increased to $15.954 million from $15.929 million. In the second quarter, EWCP revenue increased to $134,502 from $120,233 and TPA revenue increased to $8.401 million from $7.589 million.
Gross profit and margins improved in both periods, reflecting the sales mix and operating performance. Six-month operating income increased 12.3% despite slightly lower revenue.
Operating expenses declined modestly for the six months to $2.591 million from $2.631 million. Lower advertising, interest, lease and travel costs were partly offset by higher administrative salaries, commissions and currency-exchange expense.
Interest expense decreased to $113,329 from $156,075 as debt declined. Lease expense decreased to $130,243 from $235,244 following the acquisition of ENP Realty by ENP Investments.
The company received forgiveness of both PPP loans totaling $537,960 during the first quarter of 2021. This nonrecurring item increased six-month income before tax and operating cash-flow reconciliation.
The company paid $500,000 in June 2021 for an additional investment in Lygos Inc. after a predetermined milestone was reached.
During the first six months, 55,201 common shares were issued upon stock-option exercises. The company had 12,315,746 common shares outstanding at June 30, 2021 and 12,327,246 shares outstanding as of August 13, 2021.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide quantitative revenue or earnings guidance. Management stated that existing cash resources are sufficient for commitments and cash-flow requirements for the coming year and that no significant capital requirements are expected beyond disclosed commitments. Minimum rental payments under four leases aggregate approximately $632,340 through the final expiration date of December 31, 2025.

Key operating drivers include crude-oil prices, the cost of imported aspartic acid from China, activity in the oil and gas industry, drought conditions affecting agricultural demand and the continuing impact of COVID-19.
Potential tariffs on raw materials imported from China could increase costs or customer prices and reduce demand.
Three primary customers represented 43% of six-month sales and 41% of accounts receivable at June 30, 2021, creating customer-concentration and credit-collection risk.
The company is exposed to foreign-currency movements because certain Canadian subsidiaries hold U.S.-dollar cash balances and payables; it does not hedge this exposure.
The company remained in compliance with all debt covenants at June 30, 2021. Its revolving credit facilities are secured by specified assets and subject to borrowing-base and other covenant requirements.
COVID-19 reduced trade-show activity and travel during the period and could continue to affect staffing, customer demand, regulations and operations.
No impairment charges were recorded for goodwill, indefinite-lived intangible assets or other long-lived assets during the periods presented. The annual dividend remained suspended because of COVID-19 uncertainty.
Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting.

Important Facts for Investors to Verify

Whether the improvement in gross margin and operating income is sustainable after excluding the $537,960 PPP loan forgiveness and other investment-related gains.
The composition, valuation and turnover of the $9.721 million inventory balance, which increased materially from year-end.
The sustainability of TPA growth and the continued weakness or recovery of EWCP demand.
Customer concentration, including the extent to which sales depend on the three largest customers and the effect of changes in individual customer orders.
Debt repayment schedules, borrowing-base availability, interest-rate exposure and compliance with all revolving-credit covenants.
Potential effects of Chinese raw-material tariffs, crude-oil prices, foreign-exchange movements and COVID-19 developments.
The company’s future dividend policy, as the annual dividend remains suspended.