Business Context and Reporting Period
Flexible Solutions International Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2018. The company develops and sells energy and water conservation products and biodegradable thermal polyaspartate polymers used in industrial, agricultural, petroleum, chemical, utility and mining applications. The company operates through Energy and Water Conservation Products and TPA product segments.
Financial Performance and Position
- Sales: $4.20 million, down from $4.66 million in the prior-year quarter, primarily due to lower customer orders in both product lines.
- Gross profit: $1.97 million versus $2.09 million. Gross margin improved to approximately 46.8% from 44.9%, primarily because lower oil prices reduced aspartic acid costs.
- Operating expenses: $956 thousand versus $1.04 million. Lower legal fees, commissions and certain other costs more than offset higher wages and research spending.
- Income before other items and taxes: $1.01 million versus $1.05 million.
- Net income: $704 thousand, or $0.06 per basic and diluted share, versus $3.25 million, or $0.28 per share. The prior-year period included a $2.57 million after-tax gain related to insurance proceeds from the 2017 plant fire.
- Comprehensive income: $585 thousand versus $3.29 million, including a $119 thousand foreign-currency translation loss in 2018.
- Cash flow: Operating activities used $182 thousand, compared with $1.89 million used in the prior-year quarter. Investing activities used $1 thousand, while financing activities used $14 thousand.
- Cash: $6.61 million at March 31, 2018, down from $6.91 million at December 31, 2017 and up from $4.87 million at March 31, 2017.
- Liquidity: Working capital was $11.93 million, compared with $11.26 million at December 31, 2017. Management stated that existing cash resources were sufficient for the coming year’s commitments and cash-flow requirements.
- Debt: The company had a $250 thousand revolving line-of-credit balance and $302 thousand of long-term debt, of which $201 thousand was current. The line of credit permits borrowings up to the lesser of $3.0 million or a borrowing-base formula and bears interest at 5%; it was scheduled for renewal on June 30, 2018. The final payment on the long-term debt was scheduled for September 2019.
- Balance sheet: Total assets were $17.88 million and total liabilities were $2.31 million. Stockholders’ equity was $15.57 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined approximately 9.9%, with EWCP revenue falling to $76 thousand from $248 thousand and TPA revenue declining to $4.13 million from $4.42 million.
- Three customers represented 47% of quarterly sales, compared with 57% in the prior-year quarter. The three largest customers’ receivable balances represented 44% of accounts receivable at March 31, 2018, compared with 65% at year-end 2017.
- Net income and earnings per share declined substantially because the prior-year period benefited from a large insurance-related gain associated with the February 2017 Taber plant fire.
- Wages increased to $421 thousand from $358 thousand as the company sought to retain employees. Research expense increased to $37 thousand from $11 thousand due to new projects.
- Commissions fell to zero from $41 thousand because all current-period sales were uncommissioned. Professional fees fell to $43 thousand from $58 thousand.
- Accounts receivable increased to $2.57 million from $2.11 million at December 31, 2017, while taxes payable increased to $1.40 million from $1.10 million.
- The company issued 33,000 common shares upon stock-option exercises during the quarter. Shares outstanding were 11,630,991 as of May 15, 2018.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- The filing provides no formal revenue or earnings guidance. Management stated that results for the quarter are not necessarily indicative of the full fiscal year.
- Future results are expected to be affected by crude-oil prices, the level of oil and gas industry activity and drought conditions affecting agricultural demand.
- The company remains exposed to customer concentration, competitive pressures, economic conditions, regulatory changes, interest-rate and borrowing risks, foreign-exchange fluctuations, sales weakness and the availability of funds for capital expenditures.
- The company does not hedge foreign-currency exposure. A $101 thousand exchange-rate effect reduced cash during the quarter, and other comprehensive income included a $119 thousand foreign-currency loss.
- The Taber plant fire remains material to period comparisons. Subsequent to March 31, 2018, the company received a final insurance payment of C$3.13 million, or approximately US$2.43 million. The prior-year quarter included US$4.05 million of insurance proceeds in investing cash flow.
- The company had approximately $685 thousand of remaining minimum lease commitments through October 2021, including $151 thousand due in 2018.
- Management reported compliance with all revolving-credit covenants. Disclosure controls and procedures were concluded to be effective, with no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether lower customer orders, particularly in the EWCP segment, persist beyond the quarter.
- The timing and accounting treatment of the final fire-insurance proceeds received after quarter-end.
- The June 30, 2018 renewal of the revolving credit facility and compliance with its borrowing-base and financial covenants.
- Customer concentration, including the effect of changes in sales to major TPA customers.
- Whether improved gross margins from lower aspartic acid costs are sustainable if oil prices rise.
- The company’s ability to generate positive operating cash flow while managing higher receivables, inventory and tax liabilities.
- The effect of foreign-currency movements and the company’s lack of hedging arrangements.