Flexible Solutions International, Inc. — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The company develops, manufactures and markets water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable thermal polyaspartate polymers used in industrial, agricultural and consumer applications. The filing was signed November 14, 2016.
Financial metrics
| Metric | Three months ended September 30, 2016 | Three months ended September 30, 2015 | Nine months ended September 30, 2016 | Nine months ended September 30, 2015 |
|---|---|---|---|---|
| Sales | $3.117 million | $3.303 million | $12.163 million | $12.168 million |
| Gross profit | $1.119 million | $1.209 million | $5.341 million | $4.735 million |
| Gross margin | 35.9% | 36.6% | 43.9% | 38.9% |
| Income before tax | $178,201 | $314,856 | $2.409 million | $1.810 million |
| Net income | $85,964 | $237,202 | $1.389 million | $1.060 million |
| Net margin | 2.8% | 7.2% | 11.4% | 8.7% |
| Basic diluted EPS | $0.01 | $0.02 | $0.12 | $0.08 |
Nine-month operating cash flow was $2.183 million, compared with $1.575 million in 2015. Investing cash flow was negative $102,112, primarily due to property and equipment purchases. Financing cash flow was negative $1.650 million, including a $1.575 million common-stock repurchase and $150,895 of loan repayments. Ending cash was $2.922 million, up from $2.499 million at December 31, 2015.
At September 30, 2016, working capital was $6.570 million. Current assets were $8.503 million and current liabilities were $1.933 million. Total debt included a $250,000 short-term revolving-line balance and $603,580 of long-term debt, of which $201,193 was current. The company reported compliance with all loan covenants. The revolving line permits borrowings up to the lesser of $3.0 million or specified eligible receivables and inventory, at an annual interest rate of 4.0%.
Material changes versus the prior comparable period
- Third-quarter sales declined 5.6%, while nine-month sales were essentially flat year over year.
- Nine-month gross profit increased 12.8%, and gross margin expanded approximately 5.0 percentage points, primarily because lower oil prices reduced aspartic-acid costs.
- Third-quarter net income fell 63.8%, mainly reflecting lower sales and higher operating expenses, including administrative salaries and benefits and professional fees.
- Nine-month net income increased 31.0%, supported by improved gross profit and lower interest, rent and consulting costs.
- Energy and water conservation product revenue increased to $750,415 from $639,166 for the nine-month period, attributed to new customers. BPCA product revenue decreased to $11.412 million from $11.529 million because of lower customer orders.
- The company repurchased and cancelled 1.75 million common shares for $1.575 million in January 2016. Shares outstanding were 11,451,991 at September 30, 2016, compared with 13,177,991 at December 31, 2015.
- Accounts receivable increased to $2.222 million from $1.955 million, while inventory decreased to $3.075 million from $3.275 million.
Guidance, outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management stated that current cash resources are sufficient for commitments and cash-flow requirements for the coming year.
- The Taber, Alberta, aspartic-acid plant has been suspended since February 2014. Management is seeking a partner to complete process development and reach profitable production levels, but the company cannot fund the required equipment and personnel increases independently.
- Management expects the Taber suspension to save approximately $800,000 annually in plant operating and general and administrative costs.
- Future results are expected to be affected by crude-oil prices, oil-and-gas industry activity, drought conditions, customer orders and demand for agricultural products.
- Customer concentration remains significant: three customers represented 59% of nine-month sales and 64% of accounts receivable at September 30, 2016. The filing does not identify the customers by name.
- The company has foreign-exchange exposure and does not hedge currency fluctuations. Other comprehensive income included a $130,933 foreign-exchange-related gain for the nine-month period.
- Operating lease commitments total approximately $296,561 through 2020. The filing reports no impairment charges and states that disclosure controls were effective as of September 30, 2016.
- Principal risks include competition, economic conditions, interest rates and borrowing costs, regulation, customer losses, insufficient sales or capital expenditures, operational inefficiencies and potential debt-covenant or borrowing issues.
Important facts for investors to verify
- Whether the improved nine-month gross margin is sustainable if oil prices or raw-material costs rise.
- Customer concentration, order trends and the causes of the third-quarter sales decline.
- Progress toward finding a Taber plant partner and the plant’s future carrying value and funding requirements.
- Availability and borrowing-base capacity under the $3.0 million revolving credit facility, as well as ongoing covenant compliance.
- The effect of the large share repurchase and reduced share count on per-share results and liquidity.
- Exposure to foreign-currency movements, taxes payable of $727,682, and the concentration of receivables among three customers.