Flexible Solutions International, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The financial statements are unaudited and presented in U.S. dollars.
Business Context
The company develops, manufactures and markets water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable thermal polyaspartate polymers used in petroleum, chemical, utility, mining, agriculture and consumer products. Reportable segments are Energy and Water Conservation Products and biodegradable polymer products.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Sales | $3.269 million | $3.117 million | $12.655 million | $12.163 million |
| Gross profit | $0.995 million | $1.119 million | $4.971 million | $5.341 million |
| Gross margin | 30.4% | 35.9% | 39.3% | 43.9% |
| Income before other items and tax | $(0.182) million | $0.171 million | $1.605 million | $2.400 million |
| Net income (loss) | $(0.279) million | $0.086 million | $3.247 million | $1.389 million |
| Net income (loss) per share | $(0.02) | $0.01 | $0.28 | $0.12 |
| Comprehensive income | $0.027 million | $0.282 million | $3.779 million | $1.520 million |
- Q3 sales increased approximately 4.9%, while nine-month sales increased approximately 4.0% year over year.
- Nine-month biodegradable polymer revenue increased to $12.049 million from $11.412 million, while Energy and Water Conservation Products revenue declined to $0.606 million from $0.750 million.
- The nine-month net income increase primarily reflects a $1.938 million after-tax gain on involuntary disposition related to the Taber plant fire.
- Nine-month operating expenses increased to $3.366 million from $2.941 million, including higher wages, administrative compensation, rent, professional fees and currency exchange expense.
Cash Flow, Liquidity and Debt
- Cash provided by operating activities was $39,386 for the first nine months of 2017, down from $2.183 million in 2016.
- Investing cash flow was $3.380 million, including $3.420 million of insurance proceeds related to the Taber plant fire.
- Financing cash flow was $(95,315), including $150,895 of loan repayments and $55,580 of common-stock issuance proceeds.
- Cash and cash equivalents increased to $6.318 million at September 30, 2017 from $2.470 million at December 31, 2016.
- Working capital was $12.075 million, compared with $7.151 million at December 31, 2016. Management stated that available cash resources were sufficient for expected commitments and cash-flow requirements over the following year.
- The revolving line of credit had $250,000 outstanding and provides borrowing capacity of up to the lesser of $3.0 million or specified percentages of eligible receivables and inventory. The stated interest rate is 4.75%.
- Long-term debt totaled $402,387, including a $201,193 current portion. The company reported compliance with all debt covenants.
- Lease commitments total approximately $777,775 through October 2021. In October 2017, the company purchased a Taber, Alberta building and one acre of land for approximately $219,560.
Material Changes, Outlook and Risks
- On February 11, 2017, the Taber manufacturing plant was destroyed by fire. The destroyed building and contents had a carrying value of $1.937 million. Insurance proceeds of $3.420 million were received, producing the reported $1.938 million after-tax gain.
- The fire reduced Energy and Water Conservation Products sales and temporarily increased costs. Gross margins also declined because of replacement manufacturing costs and higher aspartic acid costs.
- Biodegradable polymer sales increased across market verticals, which management attributed to improved sales activity. Additional rent was incurred for storage and capacity.
- Management did not provide quantitative earnings or revenue guidance. It stated that future results may be affected by crude oil prices, activity in the oil and gas industry, drought conditions, competition, customer and sales weakness, regulatory changes, borrowing costs, capital availability and operational inefficiencies.
- Three customers represented 59% of nine-month sales and 67% of accounts receivable at September 30, 2017, indicating material customer concentration.
- The company has foreign-currency exposure, primarily from Canadian subsidiaries, and does not hedge currency fluctuations. Q3 other comprehensive income included a $305,428 foreign-exchange-related gain; the nine-month amount was $531,857.
- Future results may not be indicative of full-year performance. The filing states that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Investor Verification Priorities
- Verify the sustainability of biodegradable polymer sales growth and whether Energy and Water Conservation Products operations have been fully restored after the Taber fire.
- Separate recurring operating performance from the nonrecurring $1.938 million insurance-related gain.
- Assess the effect of higher aspartic acid costs, replacement production costs and customer concentration on future gross margins and cash flow.
- Confirm insurance recoveries, replacement manufacturing arrangements and the use of proceeds from the Taber loss.
- Review debt covenants, borrowing capacity, repayment obligations and the company’s ability to generate operating cash without additional insurance proceeds.
- Evaluate exposure to crude oil prices, oil-and-gas activity, drought conditions, foreign exchange and regulatory requirements.
- Review the October 2017 Taber property acquisition and associated future capital, operating and lease commitments.