Flexible Solutions International Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Flexible Solutions International Inc. develops, manufactures and markets specialty chemicals, including energy and water conservation products, biodegradable polymers and nitrogen conservation products. The company operates through two reportable segments: energy and water conservation products (EWCP) and biodegradable polymers and related agricultural products (BCPA/TPA). This unaudited report covers the three months ended March 31, 2023, with comparisons to March 31, 2022. Amounts are in U.S. dollars.
Financial Performance and Position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $9.848 million | $10.783 million | Down 8.7% |
| Gross profit | $3.085 million | $3.812 million | Down 19.1% |
| Gross margin | 31.3% | 35.3% | Down 4.0 percentage points |
| Operating income | $1.182 million | $2.331 million | Down 49.3% |
| Operating margin | 12.0% | 21.6% | Down 9.6 percentage points |
| Net income attributable to controlling interest | $884,369 | $1.533 million | Down 42.3% |
| Basic and diluted EPS | $0.07 | $0.12 | Down $0.05 |
| Cash used in operating activities | $(228,229) | $(2.425 million) | Improved by $2.197 million |
- EWCP revenue increased to $80,660 from $47,253, while BCPA revenue declined to $9.777 million from $10.736 million.
- Q1 2023 income before tax was $1.264 million versus $2.390 million in the prior-year quarter. Current income tax expense was $299,777 versus $712,446.
- Interest expense increased to $134,870 from $57,618, primarily reflecting higher debt balances and higher interest rates.
- Gain on investments was $69,995 versus $36,764. The company also reported $167,239 of unfavorable foreign-currency translation adjustment, compared with a $42,543 favorable adjustment in Q1 2022.
- Total assets were $52.938 million at March 31, 2023, compared with $51.587 million at December 31, 2022. Stockholders’ equity increased to $36.235 million from $35.239 million.
- Cash and cash equivalents were $5.530 million, and term deposits were $1.000 million. Total reported cash resources were $6.530 million, compared with $6.397 million at March 31, 2022.
- Working capital was $21.226 million at March 31, 2023, compared with $20.693 million at December 31, 2022.
- Accounts receivable increased to $10.834 million from $9.450 million at year-end 2022. Inventory was $14.380 million, broadly unchanged from $14.419 million.
- Short-term line-of-credit borrowings were $3.664 million. Total long-term debt was $5.976 million, including $719,607 classified as current; total debt including the line of credit was approximately $9.640 million.
- The company spent $213,060 on property, equipment and leaseholds and placed $342,747 into long-term deposits during the quarter.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of lower TPA customer orders and pricing, partially offset by increased EWCP orders.
- Gross margin contracted as revenue declined while operating and production cost structures remained relatively less flexible.
- Operating expenses increased to $1.903 million from $1.481 million. The largest cited drivers were employee retention-related wages and administrative salaries, higher interest expense, building maintenance and resumed travel.
- Operating cash use improved substantially because the prior-year period included a larger inventory build and greater working-capital investment. Q1 2023 still experienced a $1.384 million increase in accounts receivable.
- Customer concentration decreased: the three largest customers represented 44% of Q1 2023 sales versus 58% in Q1 2022. However, the three largest customers represented 59% of accounts receivable at March 31, 2023.
- Depreciation and amortization increased to $342,810 from $232,488, reflecting the company’s expanded asset base and acquired operations.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue, earnings or margin guidance. Management states that it has sufficient cash resources to meet commitments and cash-flow requirements for the coming year.
- Future results may be affected by crude-oil prices, the cost of aspartic acid imported from China, tariffs, oil and gas industry activity, drought conditions and agricultural demand.
- Additional risks include competition, higher interest rates, economic deterioration, regulatory changes, customer losses, operational inefficiencies, availability of capital expenditures and potential tariffs on Chinese raw materials. COVID-19 remains identified as a potential risk, although management states travel has resumed as the virus has become endemic.
- The company was in compliance with all reported debt covenants as of March 31, 2023. Its revolving credit facilities carried an 8.0% interest rate at quarter-end and are secured by substantially all assets of the relevant subsidiaries, excluding intellectual property.
- No material legal contingencies were known to management at the reporting date, and no impairment charges were recorded for goodwill, indefinite-lived intangible assets or other long-lived assets.
- Subsequent events included the purchase in April 2023 of an additional 47,000 Trio shares for $470,000, a temporary $500,000 increase in ENP Investments’ credit-line limit through July 2023, and declaration of a $0.05-per-share special dividend payable May 16, 2023.
- Disclosure controls and procedures were assessed as effective as of March 31, 2023, with no material change in internal control over financial reporting.
Key Facts Investors Should Verify
- Whether TPA order volumes and pricing recover after the Q1 decline and whether EWCP growth is commercially meaningful given its small revenue base.
- Customer concentration and collectability of receivables, particularly the 59% concentration among the three largest customers.
- Liquidity after the declared special dividend, continued working-capital investment and reliance on revolving credit borrowings.
- Exposure to 8.0% revolving-credit rates, other variable-rate debt and potential refinancing or covenant risks.
- The effect of Chinese raw-material tariffs and aspartic-acid costs on future gross margins.
- Whether management’s statement of sufficient liquidity remains valid if operating cash flow remains negative or demand weakens.