Flexible Solutions International Inc. — Form 10-Q Summary
Business Context and Reporting Period
Flexible Solutions International develops, manufactures and markets specialty chemicals, including energy and water conservation products, biodegradable polymers and nitrogen conservation products. The company reports two segments: energy and water conservation products and biodegradable polymers. This filing covers the unaudited three months ended March 31, 2021, with comparisons to the three months ended March 31, 2020. Amounts are in U.S. dollars.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $7.625 million | $8.429 million | Down 9.6% |
| Gross profit | $2.708 million | $2.950 million | Down 8.2% |
| Gross margin | 35.5% | 35.0% | Up approximately 50 bps |
| Operating income | $1.365 million | $1.567 million | Down 12.9% |
| Income before tax | $2.123 million | $1.767 million | Up 20.1% |
| Net income attributable to controlling interest | $1.451 million | $1.265 million | Up 14.7% |
| Basic and diluted EPS | $0.12 | $0.10 | Increased |
| Cash used in operating activities | $2.357 million | $1.154 million | Greater use of cash |
Net income benefited from $537,960 of Paycheck Protection Program loan forgiveness and a $208,968 gain on investments. Excluding these disclosed items, reported income would have been materially lower; the filing does not present a non-GAAP adjusted earnings figure.
At March 31, 2021, cash and cash equivalents were $1.854 million, term deposits were $1.000 million and total current assets were $20.625 million. Working capital was reported at $12.093 million, compared with $11.146 million at December 31, 2020.
Total debt consisted of $3.229 million under short-term lines of credit and $3.101 million of long-term debt, including the current portion. The company reported compliance with all loan covenants. The short-term lines had stated interest rates of 4.5% and 3.75% at quarter-end.
Total assets were $36.660 million and total liabilities were $11.214 million at March 31, 2021. Accounts receivable increased to $7.539 million from $5.890 million at year-end 2020, while inventories increased to $9.989 million from $8.372 million.
Material Changes Versus the Prior Comparable Period
- Sales declined by $804,789, reflecting decreased customer orders for both EWCP and TPA products. EWCP revenue declined to $71,351 from $89,928, while TPA revenue declined to $7.553 million from $8.340 million.
- Operating income declined despite lower total operating expenses, primarily because of lower sales and gross profit.
- Gross margin improved modestly to 35.5% from 35.0%.
- Reported pretax and net income increased because of PPP loan forgiveness and investment gains.
- Operating cash flow deteriorated to a use of $2.357 million, driven principally by increases in accounts receivable and inventory and a decrease in accounts payable and accrued liabilities.
- Cash, cash equivalents and term deposits declined to $2.854 million from $4.473 million at December 31, 2020.
- Short-term line-of-credit borrowings increased to $3.229 million from $2.116 million at year-end, while long-term debt declined to $3.101 million from $3.848 million, primarily reflecting PPP forgiveness and scheduled repayments.
- Interest expense declined to $62,274 from $101,425, and lease expense declined following ENP Investments’ acquisition of ENP Realty. Travel and advertising expenses also declined because of COVID-19 restrictions.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal financial guidance or quantified revenue or earnings targets. Management stated that it expects to have sufficient cash resources for commitments and cash-flow requirements over the following year and does not anticipate material capital requirements other than disclosed commitments.
Management identified crude oil prices, the cost of aspartic acid imported from China, oil and gas industry activity, drought conditions and COVID-19 as factors likely to affect future results. Other risks include customer concentration, competition, tariffs, foreign exchange movements, interest rates, regulatory changes, supply-chain or operational inefficiencies and the availability of funds for capital expenditures.
Three primary customers represented 41% of Q1 2021 sales and 55% of accounts receivable at March 31, 2021. The company has no currency hedges and maintains cash balances that may exceed federally insured limits.
The company suspended its annual dividend in March 2020 because of COVID-19 uncertainty. No material contingencies or subsequent events were reported, and management concluded that disclosure controls were effective as of March 31, 2021.
Important Facts for Investors to Verify
- Assess the sustainability of earnings after removing the $537,960 PPP forgiveness and $208,968 investment gain.
- Review the cause and recoverability of the $1.65 million increase in accounts receivable and $1.62 million increase in inventory during the quarter.
- Monitor liquidity, as operating activities used $2.357 million of cash and short-term borrowings increased materially.
- Evaluate customer concentration and dependence on TPA demand from the oil, gas and agricultural markets.
- Review exposure to Chinese raw-material costs, tariffs, crude oil prices, foreign exchange and COVID-19 effects.
- Confirm debt maturities, borrowing-base availability and compliance with the covenants governing the revolving credit facilities.
- Reconcile the filing’s equity totals: the balance sheet reports total stockholders’ equity of $25.456 million, while the statement of stockholders’ equity reports $25.446 million at March 31, 2021.