Flexible Solutions International, Inc. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The Company develops, manufactures and markets water- and energy-conservation chemicals, including HEAT$AVR and WATER$AVR, and biodegradable polyaspartate polymers used in industrial, agricultural and consumer applications. The Company reports two segments: energy and water conservation products (EWCP) and biodegradable polymers (BCPAs).
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Sales | $2.981 million | $3.598 million | $12.370 million | $12.554 million |
| Gross profit | $0.551 million | $1.030 million | $3.470 million | $4.111 million |
| Gross margin | 18.5% | 28.6% | 28.1% | 32.7% |
| Operating income (loss) before other items and tax | $(0.681) million | $(0.287) million | $(0.478) million | $0.147 million |
| Net income (loss) | $(0.682) million | $(0.458) million | $(0.547) million | $(0.701) million |
| Net loss per share | $(0.05) | $(0.02) | $(0.05) | $(0.04) |
For the nine months, BCPA revenue was $11.778 million, or approximately 95% of total sales, while EWCP revenue was $0.592 million. Three customers represented 60% of nine-month sales and 59% of third-quarter sales.
Nine-month cash provided by operating activities was $174,436, compared with $301,445 in 2012. Capital expenditures were $82,097, advances under the short-term line of credit were $195,000, and loan repayments were $117,331. Ending cash was $522,964, compared with $361,867 at December 31, 2012 and $849,144 at September 30, 2012.
At September 30, 2013, current assets were $6.263 million and current liabilities were $2.457 million, producing reported working capital of $3.805 million. Accounts receivable were $2.302 million, net of a $39,679 allowance, and inventory was $3.261 million.
Short-term line-of-credit borrowings were $1.400 million, versus $1.205 million at year-end 2012. Long-term debt, including the current portion, totaled $1.550 million, consisting primarily of secured and government-related Canadian loans. Total reported debt was approximately $2.950 million. The Company stated that it was in compliance with the line-of-credit covenants.
Material changes versus the prior comparable period
- Third-quarter sales decreased 17.1%, while nine-month sales decreased 1.5%.
- Third-quarter gross profit fell 46.5%, and gross margin declined approximately 10.1 percentage points. Nine-month gross profit declined 15.6%, with margin down approximately 4.6 percentage points.
- The Company reported a nine-month operating loss before other items and tax compared with operating income in 2012. Management attributed the margin pressure to higher depreciation following commencement of production at the Taber plant and higher aspartic acid costs associated with elevated oil prices.
- Management attributed lower EWCP sales to reduced orders following heavier orders in prior periods and lower BCPA sales to economic weakness in Europe.
- Office and miscellaneous expense increased due partly to construction costs being allocated to operating expenses after the Taber plant became operational. Professional fees declined with reduced litigation, and commissions declined because a greater proportion of sales was not commissionable.
- Property, equipment and leaseholds declined to $6.130 million from $7.186 million at December 31, 2012, primarily reflecting depreciation and currency effects. Depreciation and amortization increased to $978,093 from $919,528.
- Stockholders’ equity declined to $9.177 million from $9.769 million, primarily reflecting the period loss and foreign-currency translation effects. No common stock was issued and no options were exercised during the period.
Guidance, outlook, risks and unusual items
No quantitative revenue or earnings guidance was provided. Management stated that it had sufficient cash resources for expected commitments and cash-flow requirements during the coming year and did not anticipate material capital requirements for the twelve months ending September 30, 2014, other than disclosed commitments.
The Taber, Alberta plant is intended to manufacture aspartic acid using sugar rather than oil-based inputs sourced primarily from China. Management expects full production to reduce raw-material costs, oil-price exposure and shipping costs, although the plant’s production ramp contributed to higher depreciation during the period.
Material risks include customer and sales concentration, European economic weakness, competitive pressures, loss of customers, operational inefficiencies, interest-rate and borrowing risks, foreign-exchange exposure, regulatory changes, availability of funds for capital expenditures and the ability to achieve expected sales and operating results. Three customers accounted for $1.678 million, or 73%, of accounts receivable at September 30, 2013.
The Company had approximately $199,306 of remaining minimum lease commitments through September 2015. Accounts receivable of $107,101 and certain Canadian plant assets, equipment and inventory were pledged as collateral for debt. The filing reported no impairment charges and stated that disclosure controls and procedures were effective as of September 30, 2013.
Most important facts for investors to verify
- Whether the Taber plant reaches full production and delivers the expected cost savings.
- Whether gross margins recover from the 18.5% third-quarter level and the nine-month decline.
- The sustainability and collectability of revenue concentrated among three customers and the adequacy of the doubtful-account allowance.
- The Company’s ability to fund operations while relying on a $1.400 million short-term line of credit and servicing approximately $2.950 million of total debt.
- Progress in reducing the nine-month operating loss and exposure to European demand, raw-material prices and foreign-currency movements.