Flexible Solutions International Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
The unaudited quarterly report covers the three and nine months ended September 30, 2022, with U.S. dollar reporting under U.S. GAAP. The company develops, manufactures and markets energy and water conservation products, biodegradable polymers and nitrogen conservation products. Its reportable segments are energy and water conservation products (EWCP) and thermal polyaspartate biopolymers (TPA).
At September 30, 2022, the company had 12,384,746 common shares outstanding. The filing was signed November 14, 2022.
Financial performance and position
| Metric | Three months ended September 30 | Change | Nine months ended September 30 | Change |
|---|---|---|---|---|
| Sales | $11.69 million | +26.8% | $33.63 million | +32.5% |
| Gross profit | $3.18 million | -9.0% | $10.86 million | +18.5% |
| Operating income | $1.63 million | -27.2% | $5.81 million | +9.3% |
| Net income attributable to controlling interest | $1.11 million | -4.7% | $4.30 million | +13.5% |
| Basic EPS | $0.09 | Flat | $0.35 | +12.9% |
Gross margin was approximately 27.2% in the third quarter and 32.3% for the nine-month period, compared with approximately 37.9% and 36.1%, respectively, in the prior-year periods. Operating margin was approximately 14.0% in the quarter and 17.3% year to date, versus approximately 24.3% and 21.0% in the comparable periods.
- Third-quarter revenue increased in both EWCP and TPA products, but cost of sales rose faster than sales because of higher raw material costs and increased wages intended to retain manufacturing employees.
- Third-quarter operating expenses increased to $1.55 million from $1.25 million, including higher wages, professional fees, office expenses and interest expense.
- Nine-month results included a $335,051 gain on the acquisition of ENP Peru and a $213,865 investment gain. The prior-year period included $537,960 of PPP loan forgiveness and a $491,681 investment gain.
- Three primary customers represented 64% of third-quarter sales and 57% of nine-month sales, compared with 47% and 44%, respectively, in the prior-year periods.
Cash flow, liquidity and debt
- Cash and cash equivalents were $4.34 million at September 30, 2022, down from $5.71 million at December 31, 2021. Term deposits declined from $1.03 million to zero.
- Working capital was $17.94 million, compared with $13.99 million at December 31, 2021.
- Operating activities used $658,538 during the first nine months of 2022, compared with $4.29 million provided in the prior-year period. The deterioration primarily reflected increases of $2.64 million in accounts receivable and $5.20 million in inventory.
- Investing activities used $1.04 million, including $499,329 for the ENP Peru acquisition and $647,232 for property and equipment.
- Financing activities used $670,211. Loan repayments of $2.12 million were partly offset by $2.19 million of new loan proceeds.
- Total debt was $5.29 million at September 30, 2022, including $701,069 current debt and $4.59 million long-term debt, compared with total debt of $2.37 million at December 31, 2021. Short-term revolving borrowings totaled $2.02 million, consisting of $875,086 and $1,149,654 under two Stock Yards Bank facilities.
- The company stated that it was in compliance with all loan covenants and believed it had sufficient cash resources for the coming year. The filing states that no substantial cash commitments were expected during the following twelve months.
Material changes, outlook and risks
- In June 2022, the company acquired an additional 50% of ENP Peru, increasing its direct ownership to 91.67%; ENP Peru is now consolidated. The acquisition added property and debt and generated a $335,051 gain.
- Existing credit facilities and term loans were refinanced or replaced with Stock Yards Bank facilities during 2022. Interest rates on certain revolving facilities were 6.25% at September 30, 2022.
- The company incurred additional professional and investor-relations costs related to a now-cancelled merger with Lygos.
- Management identified crude oil prices, the cost of aspartic acid imported from China, oil and gas industry activity, drought conditions, customer demand, competition, interest rates, regulation, tariffs on Chinese raw materials, operational inefficiencies and COVID-19 impacts as factors that could affect future results.
- The company has no formal revenue or earnings guidance disclosed in the filing. Management stated that increased customer orders supported sales growth and that it expected to have sufficient liquidity for future commitments.
- The annual dividend remained suspended due to uncertainty surrounding COVID-19.
- No subsequent events were reported, no impairment charges were recorded, and management concluded that disclosure controls were effective as of September 30, 2022.
Important facts for investors to verify
- Whether the sharp increase in receivables and inventory converts into operating cash flow and does not result in working-capital or credit losses.
- The sustainability of gross margins given higher raw material and labor costs.
- Customer concentration, particularly the 57% of nine-month sales attributable to three customers.
- The effect of ENP Peru consolidation, additional mortgage debt and variable-rate borrowings on future earnings and liquidity.
- The terms, availability and covenant requirements of the Stock Yards revolving credit facilities.
- The status and financial performance of the cancelled Lygos transaction and related professional fees.
- The filing’s three-month diluted EPS presentation, which displays a dash rather than a clear value; investors should verify the intended diluted EPS amount.