Business Context and Reporting Period
Flexible Solutions International, Inc. develops, manufactures and markets specialty chemicals, including energy and water conservation products and biodegradable polymers used in petroleum, chemical, utility, mining, agriculture, detergent and related applications. This unaudited Form 10-Q covers the three months ended March 31, 2013, with comparisons to the three months ended March 31, 2012. The company is a smaller reporting company with 13,169,991 common shares outstanding as of April 30, 2013.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $4.505 million | $5.194 million | Down 13.3% |
| Gross profit | $1.346 million | $1.974 million | Down 31.8% |
| Gross margin | 29.9% | 38.0% | Down 8.1 percentage points |
| Operating income | $121,105 | $780,082 | Down 84.5% |
| Operating margin | 2.7% | 15.0% | Down 12.3 percentage points |
| Net income | $65,161 | $222,660 | Down 70.7% |
| Net margin | 1.4% | 4.3% | Down 2.9 percentage points |
| Net income per diluted share | $0.00 | $0.02 | Declined |
| Cash from operating activities | $(47,467) | $193,629 | Declined by $241,096 |
Other comprehensive loss was $77,057 in Q1 2013, compared with other comprehensive income of $111,008 in Q1 2012, resulting in comprehensive loss of $11,896 versus comprehensive income of $333,668.
Balance Sheet, Liquidity and Debt
- Cash and cash equivalents increased to $822,495 at March 31, 2013 from $361,867 at December 31, 2012.
- Working capital was $3.913 million, compared with $3.490 million at December 31, 2012.
- Total assets were $14.593 million and total liabilities were $4.755 million at March 31, 2013.
- Accounts receivable increased to $2.829 million from $2.199 million, and inventory increased to $3.553 million from $3.362 million.
- The revolving line of credit balance increased to $1.775 million from $1.205 million. The line bears interest at 3.75% and is subject to borrowing-base limitations and customary covenants.
- Total long-term debt, including the current portion, was $1.639 million, consisting of an AAFC loan and an AFSC loan. The loans are payable through 2015 and 2014, respectively.
- Financing activities provided $518,423, primarily from $570,000 of additional line-of-credit borrowings, partially offset by $51,577 of loan repayments.
Material Changes Versus the Prior Comparable Period
- Energy and water conservation product revenue increased to $288,939 from $274,822, while biodegradable polymer and chemical additive revenue declined to $4.216 million from $4.919 million.
- Management attributed the BPCA revenue decline primarily to slower adoption of the agriculture product in Q1, potentially related to the 2012 drought in the central United States.
- Gross margin contracted because production at the Taber plant increased depreciation expense and higher oil prices increased aspartic acid costs.
- Operating expenses increased modestly to $1.225 million from $1.194 million. Wages and administrative salaries increased for employee retention and sales-force expansion; professional fees and commissions declined.
- Depreciation and amortization increased to $329,199 from $306,548, reflecting the operational Taber plant.
- Operating cash flow turned negative because of increases in accounts receivable and inventory, partially offset by higher accounts payable.
- The company reported no stock issuances during the quarter. It granted 183,000 options, cancelled or expired 68,000 options, and had 1,114,000 options outstanding at March 31, 2013.
Outlook, Commentary, Risks and Unusual Items
- Management stated that the Taber, Alberta plant is intended to manufacture aspartic acid using sugar rather than oil-based raw materials imported primarily from China. At full production, management expects reduced raw material costs, oil-price exposure and shipping costs, although some Chinese imports are expected to continue.
- Management stated that the company has sufficient cash resources for its commitments and cash-flow requirements for the coming year and does not anticipate significant capital requirements for the twelve months ending December 31, 2013.
- Lease commitments total approximately $158,872, with approximately $111,901 due in 2013 and $46,971 in 2014.
- Three customers represented 60% of Q1 sales, compared with 58% in Q1 2012. The three primary customers represented 60% of accounts receivable at March 31, 2013, compared with 75% at December 31, 2012.
- Key disclosed risks include competition, customer or sales weakness, economic conditions, regulation, borrowing costs and debt covenant compliance, availability of capital expenditures funding, operational inefficiencies, foreign exchange exposure and dependence on key customers.
- The former WaterSavr Singapore distributor arbitration was terminated in November 2012 without liability to the company.
- No impairment charges were recorded during the periods presented. The company stated that its disclosure controls were effective as of March 31, 2013 and that no material change occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether BPCA sales recover from the agriculture-related slowdown and whether the Taber plant reaches expected production levels and cost benefits.
- The sustainability of the reduced gross margin in light of depreciation, aspartic acid input costs and oil-price movements.
- Accounts receivable and inventory growth relative to sales, and the company’s ability to convert working capital into operating cash flow.
- Availability under, borrowing-base requirements for and covenant compliance with the revolving credit facility.
- Repayment requirements and collateral arrangements for the AAFC and AFSC loans, including pledged property, equipment, inventory and receivables.
- Customer concentration and potential effects of losing or reducing business with any of the three major customers.
- The filing’s forward-looking statements and the company’s statement that quarterly results are not necessarily indicative of full-year performance.