10-Q: Flexible Solutions Reports Q3 Loss Amid Rising Costs

Flexible Solutions International Inc. reported a net loss attributable to shareholders in Q3 2025, driven by increased costs and a decline in gross profit margin, despite a slight increase in overall sales.

Summary

• Flexible Solutions International Inc. reported a net loss attributable to its shareholders of $503,358 for the three months ended September 30, 2025, a significant decline from a net income of $611,858 in the same period of 2024.
• Total sales for Q3 2025 increased by 13.3% to $10,556,291 from $9,314,937 in Q3 2024, primarily due to increased TPA product orders, offsetting decreased EWCP product orders.
• Gross profit for Q3 2025 decreased by 33.7% to $2,523,775 from $3,806,816 in Q3 2024, with gross profit as a percentage of sales declining due to increased costs associated with scaling up new products.
• Operating income for Q3 2025 plummeted by 83.7% to $311,303 from $1,913,950 in Q3 2024.
• For the nine months ended September 30, 2025, net income attributable to Flexible Solutions International Inc. decreased by 47.1% to $1,247,820 from $2,358,880 in the prior year period.
• Year-to-date sales for the nine months ended September 30, 2025, saw a modest increase of 1.1% to $29,397,115, bolstered by $2,500,000 in research and development services revenue, which was not present in 2024.
• Cash provided by operating activities decreased to $6,757,198 for the nine months ended September 30, 2025, from $7,787,989 in the prior year period.
• The company completed the sale of a manufacturing building and land owned by 317 Mendota in October 2025 for $3,750,000, using the proceeds to pay off a $2,184,591 mortgage.
• Customer concentration remains high, with three primary customers accounting for 65% of product sales in Q3 2025 (up from 60% in Q3 2024) and 54% year-to-date (up from 52% year-to-date 2024).

Sentiment

Score: 3

Explanation: The sentiment is negative due to a significant decline in profitability, with the company reporting a net loss attributable to shareholders in Q3 2025 and a substantial drop in year-to-date net income. While sales increased slightly and debt was reduced, the core operating performance and gross profit margin compression are concerning. The strategic asset sale and R&D investments offer some long-term potential but do not offset the immediate financial deterioration.

Positives

• Total sales increased by 13.3% in Q3 2025 compared to Q3 2024, reaching $10,556,291.
• Year-to-date sales for the nine months ended September 30, 2025, increased by 1.1% to $29,397,115, supported by new research and development services revenue of $2,500,000.
• Cash balance increased to $8,481,652 at September 30, 2025, from $7,631,055 at December 31, 2024.
• Long-term debt decreased significantly to $4,146,792 at September 30, 2025, from $6,618,867 at December 31, 2024.
• The post-period sale of the 317 Mendota building for $3,750,000 and subsequent mortgage payoff of $2,184,591 improves liquidity and reduces debt further.
• Interest income increased to $61,292 in Q3 2025 from $31,565 in Q3 2024, and to $137,532 year-to-date from $141,202 in the prior year, reflecting higher interest rates.
• Short-term lines of credit outstanding decreased to $557,113 at September 30, 2025, from $2,052,159 at December 31, 2024.

Negatives

• The company reported a net loss attributable to Flexible Solutions International Inc. of $503,358 in Q3 2025, a substantial decline from a net income of $611,858 in Q3 2024.
• Net income attributable to Flexible Solutions International Inc. for the nine months ended September 30, 2025, decreased by 47.1% to $1,247,820 from $2,358,880 in the prior year period.
• Gross profit decreased by 33.7% in Q3 2025, and gross profit as a percentage of sales declined due to increased costs associated with scaling up new products.
• Operating income decreased by 83.7% in Q3 2025 and by 23.9% year-to-date, indicating significant pressure on core operations.
• Cost of sales increased by 45.8% in Q3 2025, outpacing sales growth.
• Cash provided by operating activities decreased by $1,030,791 for the nine months ended September 30, 2025, compared to the prior year.
• Cash used in investing activities increased significantly to $1,795,402 for the nine months ended September 30, 2025, from $125,801 in the prior year, partly due to higher capital expenditures.
• Working capital decreased to $21,780,752 at September 30, 2025, from $22,714,190 at December 31, 2024.
• Accounts receivable and inventories both decreased, potentially indicating slower sales or inventory management changes.

Risks

• Increased competitive pressures from existing competitors and new entrants could impact market share and pricing.
• Increases in interest rates or the cost of borrowing, or a default under any material debt agreement, could negatively affect financial performance.
• Deterioration in general or regional economic conditions could reduce demand for products.
• Adverse state or federal legislation or regulation that increases compliance costs, or adverse findings by a regulator, could impact operations.
• Loss of customers or sales weakness, particularly given the high customer concentration, could severely affect revenue.
• Inability to achieve future sales levels or other operating results could hinder growth and profitability.
• The unavailability of funds for capital expenditures could limit expansion or maintenance of operations.
• Operational inefficiencies in distribution or other systems could increase costs and reduce profitability.
• New tariffs relating to raw materials imported from China could increase input costs, particularly for aspartic acid, a key ingredient in TPA products.
• Fluctuations in the sale price of crude oil, which is used in the manufacture of aspartic acid, could impact cost of goods sold.
• Activity in the oil and gas industry directly affects sales of TPA products to that sector.
• Drought conditions can impact sales of TPA products to farmers, which are used to enhance fertilizers.

Future Outlook

The company anticipates that its market vertical for custom food and nutritional materials will grow over time. Management believes it has sufficient cash resources to meet future commitments and cash flow requirements for the coming year and does not anticipate any substantial capital requirements for the twelve months ending September 30, 2026. The company will continue to sell its remaining 19.9% interest in the Florida-based LLC over the next five years for an additional $4,000,000, with annual payments of $800,000 starting in 2025. The company is currently evaluating the impact of ASU 2024-03 on its consolidated financial statements and disclosures, which will be effective for annual periods beginning after December 15, 2026.

Management Comments

• Gross profit as a percentage of sales decreased due to increased costs associated with scaling up new products.
• The increase in office and miscellaneous expenses is related to building repair and maintenance.
• Professional fees increased due to accounting fees related to tax filings and increased audit fees related to the growth of the company.
• Research and development expenses increased due to new product development.
• Utilities increased related to an increase in production hours.
• The decrease in gain on investment is due to the sale of 30.1% of the Florida-based LLC in 2024, which reduced the company's portion of the profits.
• Interest income increased due to increased interest rates.
• Interest expense increased due to an increase in the interest rate on one of the mortgages.
• The company has sufficient cash resources to meet its future commitments and cash flow requirements for the coming year.
• The company does not anticipate any capital requirements for the twelve months ending September 30, 2026.

Industry Context

The company operates in the specialty chemicals sector, with products spanning energy and water conservation, biodegradable polymers (TPAs) for industrial and agricultural use, and nitrogen conservation products. The TPA division also produces food-grade products and engages in R&D services. The industry is influenced by factors such as crude oil prices (for aspartic acid), activity in the oil and gas sector, and agricultural conditions (droughts). The increase in R&D expenses and new product scaling costs suggest an industry trend towards innovation and product diversification, while the high customer concentration highlights potential vulnerability to shifts in key client demand.

Comparison to Industry Standards

• NA

Corporate Governance

Related Party Transactions

• Sales to ENP Investments' non-controlling interest (Company A) were $5,116,815 in Q3 2025 (up from $2,812,736 in Q3 2024) and $7,041,541 year-to-date (up from $5,238,881 year-to-date 2024).
• Sales to the Florida-based LLC (Company B), in which the company holds a 19.9% equity interest, were $1,253,034 in Q3 2025 (down from $1,794,263 in Q3 2024) and $5,181,609 year-to-date (down from $6,606,882 year-to-date 2024).
• Accounts receivable from ENP Investments' non-controlling interest (Company A) were $4,898,789 at September 30, 2025 ($5,377,088 at December 31, 2024).
• Accounts receivable from the Florida-based LLC (Company B) were $1,557,505 at September 30, 2025 ($1,866,645 at December 31, 2024).
• ENP Investments will continue to rent from the new owners of the 317 Mendota building after its sale in October 2025.

Stakeholder Impact

• Shareholders: Experienced a net loss attributable to FSI in Q3 2025 and a significant reduction in year-to-date net income, impacting shareholder value. However, debt reduction and a special dividend payment provide some return and balance sheet strength.
• Employees: Stock-based compensation was recognized, providing incentives. Increased wages, administrative salaries, and benefits in Q3 2025 suggest continued investment in human capital.
• Customers: Mixed impact, with decreased orders for EWCP products but increased orders for TPA products. High customer concentration means changes in key customer relationships could have a substantial impact.
• Creditors: The company's debt reduction and improved cash position, along with the sale of the 317 Mendota building and payoff of its mortgage, strengthen its financial position relative to creditors.
• Suppliers: Increased cost of sales and inventory levels suggest continued purchasing activity, but potential tariffs on raw materials from China could affect supplier relationships and costs.

Next Steps

• Continue to sell the remaining 19.9% interest in the Florida-based LLC over the next five years, receiving $800,000 annually.
• Monitor and assess uncertain tax positions and adjust estimates as new information becomes available.
• Evaluate the impact of ASU 2024-03 on consolidated financial statements and disclosures, with implementation for annual periods beginning after December 15, 2026.

Key Dates

Recommendation

The company's Q3 2025 results show a concerning swing to a net loss attributable to shareholders and a significant decline in operating income, primarily due to increased costs associated with scaling new products and higher operating expenses. This immediate financial performance is a negative signal. However, the company has made strategic moves such as the sale of the 317 Mendota building, which significantly reduced long-term debt and improved liquidity. The increase in R&D expenses suggests investment in future growth, and the new R&D services revenue stream is a positive diversification. Given the mixed signals – poor short-term profitability but strategic balance sheet improvements and future growth investments – a 'hold' recommendation is appropriate. Investors should monitor the company's ability to improve gross margins, control operating costs, and realize returns on its R&D investments in upcoming quarters.

Keywords

Specialty Chemicals, Biodegradable Polymers, TPAs, Water Conservation, Energy Conservation, Agriculture, Oil and Gas, SEC Filing, Quarterly Report, Financial Results, Gross Profit Margin, Operating Income, Net Loss, Debt Reduction, Asset Sale