Flexible Solutions International Inc. — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The company develops, manufactures and markets specialty chemicals, including energy and water conservation products, biodegradable polymers and nitrogen-conservation products. Operations are reported in two segments: energy and water conservation products (EWCP) and biodegradable polymers/TPAs. The company owns 65% of ENP Investments, which is consolidated.
Financial Highlights
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales | $10.783 million | $7.625 million | +41.4% |
| Gross profit | $3.812 million | $2.708 million | +40.8% |
| Gross margin | 35.3% | 35.5% | Down approximately 0.2 percentage points |
| Operating income | $2.331 million | $1.365 million | +70.7% |
| Income before tax | $2.390 million | $2.123 million | +12.6% |
| Net income attributable to controlling interest | $1.533 million | $1.451 million | +5.7% |
| Basic and diluted EPS | $0.12 | $0.12 | Unchanged as reported |
| Comprehensive income attributable to the company | $1.576 million | $1.533 million | +2.8% |
Operating margin increased to approximately 21.6% from 17.9%. Net income attributable to the controlling interest represented approximately 14.2% of sales, compared with 19.0% in the prior-year quarter; the comparison was affected by $537,960 of PPP loan forgiveness recorded in Q1 2021.
- TPA revenue was $10.736 million, up from $7.553 million. EWCP revenue declined to $47,253 from $71,351.
- Three primary customers represented 58% of sales, compared with 41% in the prior-year quarter, increasing customer-concentration risk.
- Cash used in operating activities was $2.425 million, compared with $2.357 million used in Q1 2021. Working-capital investment included increases of $2.814 million in accounts receivable and $2.713 million in inventories.
- Capital expenditures were $176,684, compared with $96,136 in Q1 2021.
- Financing activities provided $2.213 million, primarily from $2.648 million of short-term line-of-credit borrowings.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $5.372 million at March 31, 2022; cash, term deposits and restricted cash totaled $6.397 million, compared with $2.854 million at March 31, 2021.
- Working capital was $15.517 million, up from $13.986 million at December 31, 2021.
- Total assets were $45.117 million, versus $39.551 million at December 31, 2021. Accounts receivable increased to $9.943 million and inventory increased to $12.215 million.
- Short-term line-of-credit borrowings totaled $4.949 million, up from $2.301 million at year-end. The reported outstanding borrowings consisted of $3.459 million under ENP Investments’ line and $1.489 million under the company’s line. Applicable interest rates were 4.50% at quarter-end.
- Total long-term debt was $2.157 million, including $665,614 classified as current. Total lease liabilities were $203,721.
- Total stockholders’ equity was $29.271 million, compared with $27.705 million at December 31, 2021.
- Management stated that the company had sufficient cash resources for the coming year and was in compliance with applicable debt covenants at March 31, 2022.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven by increased TPA customer orders and higher pricing. EWCP sales decreased because of lower customer orders.
- Operating income benefited from the higher sales base and increased operating leverage. Insurance expense rose with higher assets and sales.
- Interest expense declined to $57,618 from $62,274, primarily due to lower debt. Lease expense also declined following ENP Investments’ purchase of ENP Realty.
- Travel expense increased as travel resumed after COVID-19 restrictions eased. Currency-exchange expense increased because of movements in the U.S./Canadian dollar exchange rate and related balances.
- Q1 2021 included $537,960 of PPP loan forgiveness; no comparable forgiveness was recorded in Q1 2022.
- Accounts receivable and inventory increased substantially, contributing to negative operating cash flow and requiring additional revolver borrowings.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide numerical revenue, earnings or margin guidance. Management identified crude-oil prices, the cost of aspartic acid imported from China, oil-and-gas activity, drought conditions, customer demand and COVID-19 effects as factors that could materially affect future results. The company also highlighted competition, interest rates, debt compliance, economic conditions, regulation, tariffs, customer concentration, access to capital expenditures and operational inefficiencies as risks.
On April 17, 2022, after quarter-end, the company entered into a merger agreement under which Lygos would become a wholly owned subsidiary. Closing is subject to conditions including shareholder approvals. The proposed transaction includes issuing company shares to Lygos holders, purchasing 1,000,000 company shares from Daniel O’Brien for $7.50 per share, a potential 500,000-share option grant, and two future 1,000,000-share stock grants under Mr. O’Brien’s employment agreement. The filing does not provide a definitive closing date or a clear total share count to be issued in the merger.
The filing states that no material impairment charges were recorded. Goodwill and indefinite-lived intangible assets totaled approximately $3.304 million at March 31, 2022. The company disclosed no material changes in internal control over financial reporting, and management concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Verify the sustainability of TPA-driven sales growth and whether the sharp increase in customer concentration persists.
- Monitor accounts receivable collection, inventory levels and operating cash flow, which remained negative despite reported profitability.
- Review revolver availability, borrowing-base requirements, interest-rate exposure and compliance with debt covenants.
- Assess the potential dilution, cash requirements and accounting consequences of the proposed Lygos merger and related executive compensation arrangements.
- Evaluate exposure to Chinese raw-material tariffs, aspartic-acid pricing, oil-and-gas activity, drought conditions, foreign-exchange movements and COVID-19-related disruptions.
- Confirm the impact of the prior-year PPP loan forgiveness when comparing recurring earnings and cash generation.