Business Context and Reporting Period
Flexible Solutions International, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company develops, manufactures and markets water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable polymers used in industrial, oil and gas, agricultural, detergent and related applications. The company operates through Energy and Water Conservation Products and biodegradable polymer products.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Sales | $4.287 million vs. $4.885 million | $8.100 million vs. $9.389 million |
| Gross profit | $1.555 million vs. $1.573 million | $2.709 million vs. $2.920 million |
| Gross margin | 36.3% vs. 32.2% | 33.4% vs. 31.1% |
| Net income (loss) | $399,753 vs. $70,169 | $244,175 vs. $135,329 |
| Net margin | 9.3% vs. 1.4% | 3.0% vs. 1.4% |
| Comprehensive income (loss) | $590,729 vs. $(59,338) | $172,807 vs. $(71,235) |
Six-month operating cash flow was $411,937, compared with $116,589 in the prior-year period. Capital expenditures were $16,190, compared with $55,487. Financing cash outflows were $464,393, consisting primarily of a $400,000 repayment on the short-term line of credit and $64,393 of loan repayments. Cash and cash equivalents declined to $495,931 from $568,087 at December 31, 2013.
At June 30, 2014, total assets were $14.098 million, including accounts receivable of $2.243 million, inventory of $3.018 million and a deferred tax asset of $2.563 million. Current liabilities were $2.251 million and working capital was $3.608 million. Stockholders’ equity was $11.688 million.
Debt included $1.000 million outstanding under a revolving line of credit, $1.069 million of current long-term debt and $158,988 of long-term debt. Total debt was approximately $2.227 million, excluding other current liabilities. The revolving line bears interest at 3.75%, is secured by substantially all assets of NanoChem Solutions, and had $1.000 million outstanding at quarter-end. Management stated that all loan covenants were satisfied.
Material Changes Versus the Prior Comparable Period
- Six-month sales declined 13.7%, primarily because Energy and Water Conservation Products sales decreased to $358,703 from $503,703 and biodegradable polymer sales decreased to $7.741 million from $8.885 million.
- Management attributed the polymer-product decline partly to agricultural sales not recovering as expected after cold weather in the first quarter. Management was unsure of the reason for the Energy and Water Conservation Products decline and introduced special offers.
- Gross margin improved because lower oil prices reduced aspartic acid costs.
- Operating expenses declined to $2.366 million from $2.716 million for the first six months. Lower wages, office costs, consulting, commissions and utilities reflected the suspension of operations at the Taber plant.
- Net income increased despite lower sales, while comprehensive income benefited from a $190,976 other-comprehensive-income gain in the second quarter. Six-month other comprehensive income remained a loss of $71,368, primarily reflecting foreign-currency translation.
- Depreciation and amortization declined to $325,886 from $656,486, partly reflecting lower operating activity and the Taber plant suspension.
Guidance, Outlook, Risks and Unusual Items
- Production at the Taber, Alberta, aspartic-acid plant was suspended in February 2014 because operating costs increased and imported oil-based aspartic acid was priced below prior forecasts. Staffing was reduced to maintain the plant’s intellectual property and process equipment.
- The company expects the suspension to reduce plant operating costs and related general and administrative expenses by approximately $800,000 annually. Management is seeking a partner to complete process development and achieve profitable production; no partner or funding commitment was disclosed.
- Management stated that it has sufficient cash resources for the coming year and does not anticipate material capital requirements during the twelve months ending December 31, 2014, other than disclosed commitments. Lease commitments total approximately $56,814 through September 2015.
- Three customers represented 62% of six-month sales and 69% of second-quarter sales. The three primary customers represented 74% of accounts receivable at June 30, 2014, creating customer-concentration and credit-collection risk.
- Future results may be affected by crude-oil prices, oil and gas industry activity, agricultural demand and drought conditions. Other disclosed risks include competition, economic conditions, regulation, customer losses, borrowing costs, capital availability and operational inefficiencies.
- The company reported no impairment charges, no stock exercises and no common-stock activity during the six months. Litigation termination reduced professional fees in the second quarter.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2014, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether lower sales, particularly in agriculture and Energy and Water Conservation Products, persist into subsequent quarters.
- Progress toward securing a Taber plant partner and the company’s ability to realize the projected $800,000 annual cost savings.
- Availability and borrowing capacity under the revolving credit facility, covenant compliance and scheduled 2014–2015 debt repayments.
- Collectibility of concentrated receivables and dependence on three major customers.
- Realizability of the $2.563 million deferred tax asset and the assumptions supporting it.
- Whether improved gross margins from lower aspartic acid costs continue if crude-oil and raw-material prices change.
- The filing’s interim results are unaudited and are not necessarily indicative of full-year performance.