Flexible Solutions International Inc. — 2015 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with the three months ended March 31, 2014. The company develops, manufactures and markets water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable polymers and chemical additives used in petroleum, chemical, utility, mining, agriculture, detergent and related applications.
The company operates through two segments: Energy and Water Conservation Products (EWCP) and Biodegradable Polymers and Chemical Additives (BPCA). BPCA generated approximately 95% of first-quarter 2015 revenue.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Sales | $4.964 million | $3.813 million |
| Gross profit | $1.899 million | $1.154 million |
| Gross margin | 38.3% | 30.3% |
| Operating expenses | $966,426 | $1.310 million |
| Income before other items and tax | $932,767 | $(155,578) |
| Net income | $504,265 | $(155,578) |
| Net margin | 10.2% | (4.1%) |
| Basic and diluted earnings per share | $0.04 | $(0.01) |
| Cash provided by operating activities | $31,146 | $(503,964) |
| Ending cash and equivalents | $776,934 | $231,748 |
Sales increased 30.2% year over year. Gross profit increased 64.6%, and gross margin expanded by approximately 8.0 percentage points. Management attributed the margin improvement primarily to lower aspartic acid costs following lower oil prices. Net income included a $404,597 income-tax provision, $2,962 of interest income and a $26,867 loss on the sale of equipment. Other comprehensive loss was $504,769, primarily reflecting foreign-currency translation, resulting in comprehensive loss of $504.
Balance sheet, debt and liquidity
- Total assets were $14.360 million at March 31, 2015, compared with $14.235 million at December 31, 2014.
- Cash increased to $776,934 from $747,517. Accounts receivable increased to $3.115 million from $2.322 million, while inventory was broadly unchanged at $3.447 million.
- Working capital was reported at $5.188 million, compared with $4.552 million at year-end 2014.
- Total liabilities were $2.972 million. Debt consisted of a $775,000 revolving line of credit, $345,009 of current long-term debt and $704,177 of long-term debt, based on the balance sheet presentation.
- The revolving credit facility permits borrowings up to the lesser of $3.0 million or specified percentages of eligible receivables and inventory and carries a stated annual interest rate of 3.75%. The company reported compliance with all loan covenants.
- Long-term debt included a Harris Bank promissory note with a March 31, 2015 balance of $905,370 and an unsecured AAFC loan balance of $143,816. The company repaid its AFSC loan in full in September 2014.
- Operating cash flow was only modestly positive because the $807,204 increase in accounts receivable largely offset net income and noncash charges. The company also received $29,028 from equipment sales and borrowed $25,000 under its line of credit.
Material changes versus the prior comparable period
- EWCP revenue increased to $238,402 from $205,597, which management attributed to new customers.
- BPCA revenue increased to $4.725 million from $3.607 million, driven by increased uptake from new and existing customers and new agriculture products.
- BPCA segment profit increased to $816,001 from $423,613. EWCP remained loss-making but improved to a $311,737 loss from a $579,191 loss.
- Operating expenses declined by $343,307. Management cited lower costs following the suspension of operations at the Taber plant, reduced litigation and professional fees, lower research costs, and lower commissions.
- Three customers represented 60% of first-quarter sales, up from 56% in the prior-year quarter. The three largest customers accounted for 55% of accounts receivable at March 31, 2015, compared with 76% at December 31, 2014.
- Property, plant and equipment declined to $4.319 million from $4.765 million, primarily reflecting depreciation, disposals and currency effects. No capital expenditures were reported during the quarter.
Guidance, outlook, risks and unusual items
The filing provides no formal revenue or earnings guidance. Management stated that it had sufficient cash resources for the coming year, did not anticipate material capital requirements for the twelve months ending December 31, 2015, and expected approximately $64,524 of remaining 2015 lease commitments.
Production at the Taber, Alberta, aspartic-acid plant has been suspended since February 2014 because operating costs increased and imported oil-based aspartic acid became less expensive than anticipated. Management expects the suspension to save approximately $800,000 annually in plant operating and general and administrative costs, but stated that a partner is required to complete process development and reach profitable production levels.
Key operating sensitivities include crude-oil prices, oil and gas industry activity, drought conditions and demand from agricultural customers. Additional risks include customer and receivable concentration, competition, foreign-exchange movements, interest rates, regulatory changes, sales weakness and the availability of funds for capital expenditures. The company reported no legal proceedings, stated that its disclosure controls were effective, and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the sustainability of the BPCA revenue and margin improvement, including the impact of oil prices and customer concentration.
- Monitor accounts receivable growth and collections, since receivables increased substantially while operating cash flow remained only slightly positive.
- Reconcile the long-term debt and current-portion amounts across the balance sheet, debt note and repayment schedules, which contain differing comparative current-portion figures.
- Assess the strategic and funding prospects for the suspended Taber plant and the likelihood of obtaining a development partner.
- Evaluate the realization of the $2.459 million deferred tax asset and the effects of foreign-currency translation on equity and comprehensive income.
- Review covenant compliance, borrowing availability and scheduled debt repayments, including the Harris Bank note and the AAFC obligation.