Flexible Solutions International Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. The company develops and sells water- and energy-conservation chemicals, including HEAT$AVR and WATER$AVR, and biodegradable polymers and chemical additives used in industrial, petroleum, mining, utility, agricultural, detergent, and consumer applications.
The company reports two segments: Energy and Water Conservation Products (EWCP) and Biodegradable Polymers and Chemical Additives (BPCA). BPCA generated approximately 95% of six-month 2015 revenue.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Sales | $3.901 million | $4.287 million | $8.865 million | $8.100 million |
| Gross profit | $1.627 million | $1.555 million | $3.526 million | $2.709 million |
| Gross margin | 41.7% | 36.3% | 39.8% | 33.4% |
| Operating expenses | $1.022 million | $1.056 million | $1.988 million | $2.366 million |
| Net income | $318,671 | $399,753 | $822,936 | $244,175 |
| Net margin | 8.2% | 9.3% | 9.3% | 3.0% |
| Basic earnings per share | $0.02 | $0.03 | $0.06 | $0.01 |
Six-month operating cash flow was $779,357, compared with $411,937 in the prior-year period. Cash and cash equivalents increased to $1.126 million at June 30, 2015 from $747,517 at December 31, 2014. Working capital was $5.633 million, compared with $4.552 million at year-end 2014.
Total liabilities were $2.276 million at June 30, 2015, including a $400,000 short-term revolving credit balance, $347,031 of current long-term debt, and $653,878 of long-term debt. Total debt declined from $1.863 million at December 31, 2014 to approximately $1.401 million at June 30, 2015. The revolving credit facility permits borrowings of up to the lesser of $3.0 million or specified percentages of eligible receivables and inventory and carried a 3.75% annual interest rate. Management stated that all loan covenants were satisfied.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 9.0%, primarily because BPCA agricultural sales in the prior-year comparison were affected by unusually strong first-quarter 2015 sales that pulled revenue forward. EWCP sales increased due to new customers.
- Six-month sales increased 9.5%, driven by higher EWCP and BPCA revenue. EWCP revenue increased to $446,002 from $358,703, while BPCA revenue increased to $8.419 million from $7.741 million.
- Gross profit increased substantially in both periods. Management attributed improved gross margin to lower oil prices reducing aspartic acid costs.
- Six-month operating expenses decreased 16.0%, reflecting lower office, rent, consulting, professional-fee, research, and utility costs. The reductions were associated primarily with the inactive Taber plant, a smaller head office, the termination of litigation, and lower prior-period research and regulatory costs.
- Second-quarter net income decreased 20.3%, despite higher gross profit, because the prior-year period had lower income-tax expense. The 2015 quarter included $268,106 of income-tax expense versus $98,709 in 2014.
- Six-month net income increased more than threefold, from $244,175 to $822,936. The company also reported a $45,249 loss on sale of equipment in the 2015 six-month period and $2,963 of interest income.
- Other comprehensive loss was $426,426 for the six months, primarily reflecting foreign-currency translation, compared with a $71,368 loss in the prior-year period.
- Operating cash flow improved while the company repaid $350,000 of short-term credit and $100,597 of loans. No material capital requirements were anticipated for the remainder of 2015, other than disclosed commitments.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal revenue or earnings guidance was provided. Management stated that current cash resources were sufficient for expected commitments and cash-flow requirements for the coming year.
- The Taber, Alberta, aspartic-acid plant has been inactive since February 2014 because operating costs increased and petroleum-based aspartic acid was less expensive than anticipated. Management is seeking a partner to complete process development and reach profitable production levels and expects the suspension to save approximately $800,000 annually.
- Future results may be affected by crude-oil prices, oil and gas industry activity, and drought conditions affecting agricultural demand.
- Customer concentration remains significant: three customers represented 61% of six-month 2015 sales, and three customers represented approximately 61% of accounts receivable at June 30, 2015.
- The company had approximately $36,431 of remaining minimum lease payments, with the last of two leases expiring October 31, 2015.
- The AAFC loan had a U.S.-dollar equivalent balance of $145,837 due December 31, 2015. The Harris Bank loan balance was $855,072 and is repayable through 2019.
- The company disclosed standard risks involving competition, economic conditions, customer losses, borrowing costs, regulatory changes, operating inefficiencies, capital availability, foreign exchange, and the ability to achieve projected sales and operating results.
- In July 2015, after quarter-end, the company issued 8,000 shares upon the exercise of employee stock options.
- Management concluded that disclosure controls were effective as of June 30, 2015 and that no material change occurred in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the second-quarter BPCA sales decline reflects timing alone or weakening underlying demand, particularly in agriculture.
- The sustainability of improved gross margins and the company’s sensitivity to oil prices and aspartic-acid input costs.
- Progress toward finding a partner and achieving economic production at the suspended Taber plant.
- Customer concentration and the collectability of accounts receivable.
- Debt repayment requirements, borrowing-base availability, interest rates, and ongoing covenant compliance.
- The basis for the elevated 2015 income-tax provision and the realizability of the $2.487 million deferred tax asset.
- The effects of foreign-currency movements on comprehensive income, equity, assets, and liabilities.
- The filing’s cash-flow presentation, which reports $51,901 of positive investing cash flow while describing the activity as acquisition of property and equipment; the underlying transaction should be reconciled to the supporting detail.