Flexible Solutions International, Inc. — Q3 2015 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2015, with comparisons to the corresponding 2014 periods. The company develops, manufactures and markets water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable polymers used in petroleum, chemical, utility, mining, agriculture, detergent and consumer-care applications. The company reports two segments: Energy and Water Conservation Products and biodegradable polymers.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Sales | $3.303 million | $3.851 million | $12.168 million | $11.950 million |
| Gross profit | $1.209 million | $1.326 million | $4.735 million | $4.035 million |
| Gross margin | 36.6% | 34.4% | 38.9% | 33.8% |
| Net income | $237,202 | $177,228 | $1.060 million | $421,403 |
| Net margin | 7.2% | 4.6% | 8.7% | 3.5% |
| Basic diluted EPS | $0.02 | $0.01 | $0.08 | $0.03 |
| Comprehensive income (loss) | ($113,231) | ($112,928) | $283,280 | $59,879 |
- Operating income before other items and taxes was $314,856 in Q3 and $1.853 million for nine months, compared with $186,038 and $528,922, respectively, in the prior-year periods.
- Nine-month operating performance benefited from lower aspartic-acid costs, reduced overhead following suspension of the Taber plant, lower professional and consulting fees, and higher biodegradable-polymer sales.
- Nine-month income included a $45,249 loss on the sale of equipment and $2,963 of interest income.
- Income-tax expense was $77,654 in Q3 and $750,357 for nine months, compared with $8,810 and $107,519, respectively, in 2014.
- Cash provided by operating activities was $1.575 million for the first nine months, versus cash used of $93,334 in 2014. Cash ended at $1.684 million, compared with $747,517 at December 31, 2014.
- Investing activities provided $35,992, primarily from equipment sales. Financing activities used $642,895, including $500,000 of line-of-credit repayment and $150,895 of loan repayments.
- Working capital was $5.928 million at September 30, 2015, compared with $4.552 million at December 31, 2014.
- Total debt was approximately $1.191 million, consisting of a $250,000 short-term line-of-credit balance and $941,266 of long-term debt. This compares with approximately $1.863 million at December 31, 2014.
- The company had $13.564 million of total assets and $11.716 million of stockholders’ equity at September 30, 2015.
Material changes versus the prior comparable period
- Q3 sales declined 14.2%, primarily because low oil prices reduced biodegradable-polymer customer orders and flood waters in Texas reduced demand for WATERSAVR.
- Nine-month sales increased 1.8%. Biodegradable-polymer revenue rose to $11.529 million from $11.158 million, while Energy and Water Conservation Products revenue declined to $639,166 from $792,235.
- Nine-month gross profit increased 17.3%, and gross margin expanded by approximately 510 basis points, principally because lower oil prices reduced aspartic-acid costs.
- Total operating expenses declined 17.8% for nine months, reflecting the non-operational status of the Taber plant, relocation to a smaller headquarters, termination of litigation and reduced research and other costs.
- Other comprehensive loss increased to $776,859 for nine months from $361,524, primarily reflecting unrealized foreign-currency translation effects.
Outlook, commentary, risks and unusual items
- Management stated that the Taber, Alberta, aspartic-acid plant remains suspended. Staffing has been reduced to maintenance levels, and the company is seeking a partner to complete process development and reach profitable production levels. Management expects the suspension to save approximately $800,000 annually.
- Management stated that it has sufficient cash resources for commitments and cash-flow requirements during the coming year and does not anticipate significant capital requirements for the remainder of 2015.
- No formal revenue or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Future results are expected to be affected by crude-oil prices and imported aspartic-acid costs, activity in the oil and gas industry, and drought conditions affecting agricultural demand.
- Three customers represented approximately 73% of Q3 sales and 62% of nine-month sales. Three customers held 72% of accounts receivable at September 30, 2015.
- The revolving credit facility permits borrowings up to the lesser of $3.0 million or specified percentages of eligible receivables and inventory, at 3.75% interest. The company reported compliance with all debt covenants.
- Minimum remaining lease commitments totaled approximately $101,983, with approximately $27,936 due in 2015 and $74,047 in 2016.
- Principal risks identified include competition, interest-rate and borrowing costs, economic conditions, regulatory changes, customer or sales weakness, inability to achieve operating targets, limited capital availability, distribution inefficiencies, foreign-exchange exposure and customer concentration.
- Disclosure controls and procedures were assessed as effective as of September 30, 2015, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether biodegradable-polymer demand remains resilient despite low oil prices and whether customer concentration creates material revenue or credit risk.
- Progress toward finding a Taber plant partner and the likelihood of restarting production or recovering value from the related assets and intellectual property.
- The sustainability of the improved gross margin and the extent to which lower raw-material costs are temporary.
- Foreign-exchange movements and their effect on comprehensive income, reported assets and Canadian-dollar debt obligations.
- Upcoming debt maturities, credit-facility availability and continued compliance with financial covenants.
- Realization of the $2.356 million deferred tax asset and the effect of future tax payments on cash flow.