Flexible Solutions International Inc. — Q2 2020 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 chemical additives, and nitrogen conservation products. The company reports two segments: Energy and Water Conservation Products (EWCP) and Thermal Polyaspartate polymers and related products (TPA). This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. The company is incorporated in Alberta, Canada, and its common stock trades on NYSE American under FSI.
Financial results and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sales | $7.71 million, up 13.9% | $16.14 million, up 5.9% |
| Gross profit | $2.42 million; 31.4% margin | $5.37 million; 33.3% margin |
| Operating income | $1.17 million; 15.2% margin | $2.74 million; 17.0% margin |
| Net income attributable to controlling interest | $1.13 million, versus a $27,733 loss | $2.40 million, versus $983,417 |
| Basic earnings per share | $0.09 | $0.20 |
| Cash provided by operating activities | Not separately provided | $2.94 million, versus $2.16 million |
Six-month net income including non-controlling interests was $2.60 million, compared with $1.22 million in 2019. The six-month improvement included a $539,417 gain on investments, compared with $259,514 in the prior-year period. Second-quarter results also included a $339,888 investment gain.
At June 30, 2020, cash and cash equivalents were $4.82 million, compared with $3.63 million at December 31, 2019. Working capital was $12.42 million, compared with $10.71 million at year-end. Total assets were $33.58 million and total stockholders’ equity was $22.91 million.
Total debt, including the short-term line of credit, current debt and long-term debt, was approximately $9.83 million at June 30, 2020. This included $1.64 million under a short-term revolving line, $990,083 of current long-term debt and $3.20 million of non-current long-term debt; the filing separately reports the current line and debt balances. The company also had operating lease liabilities totaling $635,045. A $500,000 convertible note was repaid in April 2020.
Cash flow, liquidity and capital resources
- Operating cash flow was $2.94 million for the first six months of 2020.
- Investing cash outflows were $1.17 million, including $633,437 of investment funding and $561,136 of property and equipment purchases.
- Financing cash outflows were $1.61 million, including $749,600 of short-term credit repayments, $500,000 repayment of the convertible note and $197,239 of distributions to non-controlling interests.
- Cash increased by $185,382 during the first six months, after the effect of exchange-rate changes.
- Management stated that the company has sufficient cash resources for its commitments and cash-flow requirements for the coming year and does not anticipate material capital requirements for the twelve months ending December 31, 2020.
Material changes versus the prior comparable period
- TPA revenue increased, reflecting growth in most product lines. EWCP revenue declined because of decreased customer orders.
- Operating expenses declined to $1.25 million in the second quarter from $1.89 million and to $2.63 million for the six months from $3.62 million.
- Lower expenses reflected reduced wages and professional fees, no bad-debt expense compared with $231,696 in 2019, lower travel and lower interest expense. Travel reductions were attributed partly to COVID-19.
- Six-month debt declined from $4.38 million of long-term debt at year-end to $4.19 million, while the company received two Paycheck Protection Program loans totaling $537,960.
- The annual dividend was suspended on March 19, 2020 because of uncertainty related to COVID-19. No dividends were paid in the first six months of 2020, compared with $1.48 million in 2019.
- The company invested an additional $1.0 million in a Florida-based fertilizer-additives LLC. A previously restricted $1.0 million deposit was released in January 2020. Additional payments of $1.0 million and $500,000 may become due if specified EBITDA milestones are achieved.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management identified oil and gas activity, drought conditions, the price of crude oil used in imported aspartic acid, potential tariffs on Chinese raw materials and COVID-19 as factors that may materially affect future results. Management stated that the duration and severity of COVID-19 effects cannot be reliably estimated and may result in staff shortages, reduced demand and additional government intervention.
Three customers represented 45% of sales for both the quarter and the six-month period. The three primary customers accounted for 53% of accounts receivable at June 30, 2020. This concentration increases exposure to customer loss, delayed payment and credit risk.
Management expected the two PPP loans to be forgiven but stated that forgiveness could not yet be proven; the loans were therefore recorded as long-term debt. The company reported compliance with all debt covenants. No impairment charges were recorded for goodwill, intangible assets or other long-lived assets during the periods presented.
The company has five operating leases with remaining payments of approximately $742,438 through September 2023. The filing states that disclosure controls and procedures were effective as of June 30, 2020 and that no material change occurred in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether TPA growth offsets continued weakness in EWCP demand and whether customer concentration changes.
- The collectability of the $5.60 million accounts receivable balance and the exposure represented by the three largest customers.
- Whether the $537,960 of PPP loans qualifies for forgiveness and the resulting effect on debt and earnings.
- The timing and likelihood of the potential $1.5 million of additional milestone payments related to the Florida investment.
- The effect of COVID-19, oil and gas activity, drought conditions, foreign exchange movements and tariffs on sales, margins and liquidity.
- The sustainability of investment gains, which materially contributed to reported pre-tax income.
- Whether the suspended dividend will be reinstated and how future distributions affect cash available for debt repayment and investment.