Flexible Solutions International Inc. — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended March 31, 2019, with comparative results for the three months ended March 31, 2018. The company develops and sells water- and energy-conservation chemicals, including EWCP products, and biodegradable polymers and chemical additives, including TPA products. The company also consolidates its 65% interest in EnP Investments, LLC, a manufacturer and distributor of golf, turf and ornamental agriculture products.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales | $8.471 million | $4.201 million |
| Gross profit | $2.776 million | $1.967 million |
| Gross margin | 32.8% | 46.8% |
| Operating income | $1.047 million | $1.012 million |
| Operating margin | 12.4% | 24.1% |
| Net income attributable to controlling interest | $1.011 million | $0.704 million |
| Basic and diluted EPS | $0.09 | $0.06 |
- Net income including non-controlling interests was $1.040 million. Comprehensive income attributable to the company was $1.193 million, including a $182,293 foreign-currency translation gain.
- Q1 included a $230,652 gain on an investment and a $125,999 deferred income-tax recovery.
- Cash used in operating activities was $1.723 million, compared with $0.182 million used in Q1 2018. The operating cash shortfall primarily reflected a $3.222 million increase in accounts receivable.
- Investing cash outflows were $2.272 million, including $996,001 invested in an equity-method venture and $1.276 million for property and equipment.
- Financing activities provided $0.599 million, including $1.384 million of additional short-term line-of-credit borrowings, partly offset by $205,262 of loan repayments and $590,483 of dividends.
- Cash and cash equivalents declined to $3.696 million from $7.858 million at December 31, 2018. Including restricted cash, ending cash was $4.696 million.
- At March 31, 2019, accounts receivable were $7.592 million and inventory was $8.737 million. Three primary customers represented 50% of accounts receivable and approximately 44% to 45% of Q1 sales.
- Short-term borrowings were $4.182 million; long-term debt was $4.146 million, including $0.721 million current; and the convertible note payable was $1.000 million. Lease liabilities totaled approximately $0.740 million after adoption of ASC 842.
- Total assets were $34.412 million and total stockholders’ equity was $20.170 million at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Sales approximately doubled, rising 101.6%, driven by increased EWCP customer orders, growth across most TPA product lines, and sales from the EnP acquisition.
- TPA revenue increased to $8.348 million from $4.125 million, while EWCP revenue increased to $123,139 from $75,820. TPA represented approximately 98.5% of total sales.
- Gross profit increased 41.1%, but gross margin declined materially because of higher raw-material costs, new tariffs, and the company’s inability to pass all additional costs to customers.
- Operating expenses increased to $1.729 million from $0.956 million. Notable increases included wages, advertising, interest expense, consulting, professional fees and travel.
- Interest expense increased to $129,007 from $7,400 as a result of additional acquisition-related debt and other borrowings.
- The company invested $1.001 million in a Florida-based fertilizer-additives LLC and recognized a $224,402 equity-method gain. It also placed $1.000 million in restricted cash tied to an EBITDA milestone; additional payments of $1.000 million and $0.500 million may become due if further milestones are achieved.
- The company adopted ASC 842 on January 1, 2019, recognizing approximately $819,079 of right-of-use assets and lease liabilities without a material reported impact on earnings or cash flow.
Guidance, Outlook, Risks and Unusual Items
The filing provides no quantitative revenue, earnings or margin guidance. Management states that future results will be affected by crude-oil prices, the cost of aspartic acid imported from China, activity in the oil and gas industry, drought conditions and agricultural demand.
- Tariffs on raw materials imported from China and higher raw-material costs are pressuring margins.
- Competition, customer concentration, sales weakness, economic conditions, regulatory changes, interest rates, debt covenant compliance, access to capital expenditures and distribution inefficiencies could adversely affect results.
- The company had $1.005 million of remaining minimum lease payments through 2023. Management stated it had sufficient resources for the coming year and no substantial commitments requiring significant additional cash outlays.
- The company reported compliance with the covenants governing its credit facilities as of March 31, 2019. EnP’s $2.5 million revolving line was extended to May 15, 2019, creating a near-term refinancing or repayment date to monitor.
- Management reported that internal control over financial reporting was ineffective at March 31, 2019 because of a material weakness involving premature release of prior-year financial statements before completion of auditor review and approval. Remediation was in progress but not complete or fully tested.
- The filing states that disclosure controls and procedures were effective, while separately identifying ineffective internal control over financial reporting; investors should distinguish these two conclusions.
- Subsequent to quarter-end, the company issued 8,000 employee-option shares and 10,888 consultant-option shares in April and 6,000 employee-option shares in May.
Important Facts for Investors to Verify
- Reconcile the reported $12.068 million working-capital figure with the March 31 balance sheet, which shows current assets of $20.317 million and current liabilities of $8.557 million.
- Assess whether the sharp increase in receivables and negative operating cash flow reflects timing or collection risk, particularly given customer concentration.
- Monitor gross-margin recovery, tariff exposure and the company’s ability to pass higher input costs to customers.
- Review the maturity and refinancing status of EnP’s revolving credit facility, including the May 15, 2019 extension date and applicable covenants.
- Evaluate the $1.001 million fertilizer-additives investment, the $1.000 million restricted cash balance and potential additional milestone payments.
- Track remediation and testing of the material weakness in internal control over financial reporting.
- Confirm the sustainability of earnings excluding the $230,652 investment gain, $125,999 deferred-tax recovery and foreign-currency translation gain.