Flexible Solutions International Inc. — Q1 2016 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended March 31, 2016. Flexible Solutions develops and sells specialty chemicals that reduce water evaporation and biodegradable polymers and chemical additives used in petroleum, chemical, utility, mining, agriculture, detergent and consumer applications. The company reports two segments: Energy and Water Conservation Products (EWCP) and Biodegradable Polymers and Chemical Additives (BPCA).
The interim financial statements are unaudited and should be read with the company’s 2015 Form 10-K. Management stated that the results for the quarter are not necessarily indicative of the full fiscal year.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales | $5.313 million | $4.964 million | +7.0% |
| Gross profit | $2.239 million | $1.899 million | +17.9% |
| Gross margin | 42.1% | 38.3% | +3.8 percentage points |
| Income before income tax | $1.300 million | $0.909 million | +43.0% |
| Net income | $0.742 million | $0.504 million | +47.1% |
| Net margin | 14.0% | 10.2% | +3.8 percentage points |
| Basic and diluted EPS | $0.06 | $0.04 | Increase |
| Cash provided by operating activities | $0.186 million | $0.031 million | Increase |
- BPCA generated $4.985 million of revenue and $0.872 million of segment profit. EWCP generated $0.328 million of revenue and a $0.130 million segment loss.
- Gross profit benefited from lower aspartic acid costs associated with lower oil prices.
- Cash and cash equivalents were $1.249 million at March 31, 2016, compared with $2.499 million at December 31, 2015. The decline primarily reflected a $1.575 million common-stock repurchase.
- Working capital was $5.640 million at March 31, 2016, compared with $6.411 million at year-end 2015.
- Accounts receivable increased to $3.668 million from $1.955 million at year-end, while inventory declined to $2.622 million from $3.275 million.
- Total liabilities were $2.539 million, including a $0.450 million line-of-credit balance, $0.201 million of current long-term debt and $0.503 million of long-term debt.
- The company had a $3.0 million revolving credit facility, subject to borrowing-base limitations, with borrowings bearing interest at 3.75%. It was in compliance with all loan covenants.
- Debt repayments totaled $50,298 during the quarter. Capital expenditures were $90,701.
Material Changes Versus the Prior Comparable Period
- EWCP revenue increased to $327,713 from $238,402, which management attributed to new customers.
- BPCA revenue increased to $4.985 million from $4.725 million, driven by increased uptake from new and existing customers and new agriculture products.
- Operating expenses declined modestly to $938,903 from $966,426. Lower wages, office costs, rent, consulting, professional fees and interest expense were partly offset by higher research, commissions, travel and currency-exchange costs.
- Interest expense declined to $10,944 from $17,346, primarily reflecting lower debt outstanding. The prior-year period included a $26,867 loss on the sale of equipment; no comparable loss was recorded in 2016.
- Other comprehensive loss improved to $77,142 from $504,769, primarily reflecting foreign-currency translation effects.
- The company repurchased and cancelled 1,750,000 common shares for $1.575 million on January 6, 2016. Shares outstanding were 11,427,991 as of May 12, 2016, compared with 13,177,991 at December 31, 2015.
- Three customers represented 62% of quarterly sales, up from 60% in the prior-year quarter. The three customers represented 56% of accounts receivable at March 31, 2016.
Outlook, Commentary, Risks and Unusual Items
- Management stated that it has sufficient cash resources for expected commitments and cash-flow requirements during the coming year and anticipates no significant capital requirements for the twelve months ending December 31, 2016, other than disclosed items.
- The Taber, Alberta, aspartic-acid plant has been inactive since February 2014 because operating costs increased and imported oil-based aspartic acid became less expensive than forecast. Management is seeking a partner to complete process development and reach profitable production levels. The plant suspension is expected to save approximately $800,000 annually in operating and general and administrative costs.
- Future results may be affected by crude-oil prices, activity in the oil and gas industry, drought conditions, competition, economic conditions, regulatory changes, customer losses, access to capital, borrowing costs, foreign-exchange movements and operational inefficiencies.
- Revenue concentration and receivables concentration create customer-credit and business-dependency risks. The company has not hedged its foreign-currency exposure.
- The company has approximately $323,286 of minimum lease commitments through 2020, including $54,966 due in 2016.
- The filing provides no formal revenue, earnings or margin guidance. Forward-looking statements are subject to the risks identified in the filing and the company’s 2015 Form 10-K.
- The company adopted specified accounting updates without material effects and was evaluating the future effects of revenue-recognition, lease and stock-compensation standards.
Facts Investors Should Verify
- Whether BPCA growth and lower input costs are sustainable, particularly given sensitivity to oil prices and oil-and-gas activity.
- Whether EWCP can progress from a segment loss to profitability and whether new customers will continue to offset seasonal or market variability.
- The collectability of the sharply higher accounts receivable balance and continued exposure to three major customers.
- Liquidity after the $1.575 million share repurchase, including availability under the revolving credit facility and scheduled debt repayments.
- Progress toward finding a partner or otherwise monetizing the inactive Taber plant and related intellectual property.
- The effect of foreign-exchange movements, regulatory-compliance costs and future accounting standards on reported results.