Flexible Solutions International, Inc. — Q1 2014 Form 10-Q Summary
Business Context and Reporting Period
The company develops, manufactures and markets specialty chemicals, including HEAT$AVR and WATER$AVR products that reduce water evaporation, and biodegradable thermal polyaspartate polymers used in industrial, agricultural, petroleum and consumer applications. The filing covers the three months ended March 31, 2014. Financial statements are unaudited and presented in U.S. dollars.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales | $3.813 million | $4.505 million |
| Gross profit | $1.154 million | $1.346 million |
| Gross margin | 30.3% | 29.9% |
| Operating expenses | $1.310 million | $1.225 million |
| Income before taxes | $(155,578) | $123,161 |
| Net income (loss) | $(155,578) | $65,161 |
| Comprehensive income (loss) | $(417,922) | $(11,896) |
| Basic and diluted loss per share | $(0.01) | $0.00 |
- Cash used in operating activities was $503,964, compared with $47,467 used in Q1 2013. Accounts receivable increased by $871,669 during the quarter and was the principal working-capital use.
- Cash used in investing activities was $6,161, primarily for property and equipment. Financing activities provided $168,196, including $200,000 of additional line-of-credit borrowings.
- Ending cash and cash equivalents were $231,748, compared with $568,087 at December 31, 2013 and $822,495 at March 31, 2013.
- At March 31, 2014, total assets were $14.406 million, total liabilities were $3.330 million and stockholders’ equity was $11.076 million.
- Working capital was $3.767 million, compared with $3.761 million at December 31, 2013.
- Accounts receivable were $2.857 million and inventory was $2.958 million. The three primary customers represented 49% of accounts receivable and three customers represented 56% of quarterly sales.
- Debt consisted of a $1.600 million short-term line of credit, $294,612 of current long-term debt and $922,325 of long-term debt. The company reported compliance with all loan covenants.
- The line of credit bears interest at 3.75% and is secured by substantially all assets of NanoChem Solutions Inc., excluding intellectual property. Long-term debt includes government-related borrowings, including a 5% AFSC loan secured by specified Canadian assets.
- Deferred tax assets totaled $2.582 million at March 31, 2014; the filing does not provide a separate valuation allowance amount in the supplied text.
Material Changes Versus the Prior Comparable Period
- Sales declined 15.4%, with energy and water conservation product revenue down to $205,597 from $288,939 and BPCA product revenue down to $3.607 million from $4.216 million.
- Management attributed lower BPCA sales partly to cold weather in the U.S. Midwest, which reduced early agricultural customer sales. Management was unsure of the reason for lower energy and water conservation sales and introduced special offers.
- Gross profit declined 14.3%, but gross margin improved modestly to 30.3% from 29.9%.
- The company moved from net income of $65,161 to a net loss of $155,578. Operating expenses increased 6.9%, principally reflecting higher professional fees, research costs, commissions and interest expense.
- Professional fees increased due to legal costs related to protecting intellectual property. Research costs increased due to work on a new nitrogen-conservation product and related regulatory compliance.
- Other comprehensive loss increased to $262,344 from $77,057, primarily reflecting foreign-currency translation effects.
- Operating cash flow deteriorated to a $503,964 use from a $47,467 use, while ending cash declined by $336,339 during the quarter.
Guidance, Outlook, Risks and Unusual Items
- In February 2014, the company suspended production at its Taber, Alberta, aspartic-acid plant because operating costs had increased and oil-derived aspartic acid prices were below forecast. Staffing was reduced to levels needed to maintain the plant’s intellectual property and process equipment.
- Management is seeking a partner to complete process development and achieve profitable production. Management expects the suspension to reduce plant operating and related general and administrative costs by approximately $800,000 annually.
- Management stated that it had sufficient cash resources for the coming year and no substantial near-term cash commitments, although Q1 operating cash usage and the low cash balance warrant monitoring.
- Management identified crude-oil prices, oil and gas industry activity and drought conditions as factors that could materially affect results. Other stated risks include competition, economic conditions, regulation, customer or sales losses, borrowing costs, availability of capital expenditures and operational inefficiencies.
- Three customers generated $2.135 million, or 56% of Q1 sales. Customer concentration and accounts-receivable concentration create credit and revenue-dependency risks.
- Minimum lease commitments totaled approximately $101,422, including approximately $90,838 in 2014 and $10,584 in 2015.
- The company granted 212,000 stock options during the quarter and recorded $20,693 of stock-based compensation. No options were exercised.
- No legal proceedings were reported. Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Investor Verification Checklist
- Verify the collectibility and aging of the $2.857 million accounts receivable balance, including customer concentration.
- Assess whether the company can sustain operations with $231,748 of cash and continued negative operating cash flow without additional borrowings.
- Review the availability, borrowing-base limitations and covenant requirements of the $1.600 million line of credit.
- Evaluate the financial impact, carrying values and potential impairment risk associated with the suspended Taber plant.
- Confirm whether the projected $800,000 annual savings from the Taber suspension are being realized and whether a development or commercialization partner is obtained.
- Assess the realizability of the $2.582 million deferred tax asset.
- Monitor customer concentration, BPCA demand, agricultural and oil-and-gas activity, crude-oil prices and drought conditions.
- Review the company’s latest Form 10-K for complete risk-factor, debt, tax, contractual-obligation and related-party disclosures not included in this condensed interim filing.