Flexible Solutions International, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2012, with comparisons to the three months ended March 31, 2011. The company develops, manufactures and markets specialty chemicals, including HEAT$AVR and WATER$AVR evaporation-control products and thermal polyaspartate biopolymers used in industrial, agricultural and consumer applications. The company reports two segments: Energy and Water Conservation Products (EWCP) and Biodegradable Polymers and Chemical Additives (BPCA).
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Sales | $5.194 million | $4.357 million | +19.2% |
| Gross profit | $1.974 million | $1.784 million | +10.7% |
| Gross margin | 38.0% | 40.9% | Down 2.9 percentage points |
| Operating income | $780,082 | $678,107 | +15.0% |
| Operating margin | 15.0% | 15.6% | Down 0.5 percentage points |
| Net income | $222,660 | $358,107 | Down 37.8% |
| Net margin | 4.3% | 8.2% | Down 3.9 percentage points |
| Net comprehensive income | $333,668 | $484,797 | Down 31.2% |
| Basic diluted EPS | $0.02 | $0.03 | Lower |
- BPCA revenue increased to $4.919 million from $3.946 million, while EWCP revenue declined to $274,822 from $411,317. BPCA generated segment profit of $932,821; EWCP reported a segment loss of $710,161.
- Cost of sales increased faster than revenue, reducing gross margin. Operating expenses increased to $1.194 million from $1.105 million.
- Net income was reduced by a $570,000 income-tax provision, partially offset by a $10,000 deferred-tax recovery. Interest expense increased to $34,799 from $19,281.
- Cash provided by operating activities was $193,629, compared with cash used in operations of $895,178 in the prior-year quarter. The filing’s MD&A presents operating cash flow of approximately $195,800, reflecting presentation differences.
- Capital expenditures were $7,412, compared with $287,698 in Q1 2011. Financing activities provided $43,199, including $75,000 of additional line-of-credit borrowings.
- Cash and cash equivalents increased to $752,858 from $506,903 at December 31, 2011. Working capital was $4.161 million.
- Total assets were $15.112 million and total stockholders’ equity was $10.978 million at March 31, 2012.
- Debt included $725,000 outstanding under the revolving line of credit, $330,067 of current long-term debt and $1.654 million of long-term debt, for total reported debt of approximately $2.709 million.
Material changes versus the prior comparable period
- Sales growth was driven by increased BPCA sales across market verticals and improved sales activity. Management attributed the EWCP decline to larger orders received in the preceding quarter.
- Wages declined because employee attrition was temporarily replaced with consultants; consulting expense increased accordingly.
- Administrative salaries, professional fees, commissions and interest expense increased. Professional fees included higher legal costs related to intellectual-property protection, new patent filings and an arbitration proceeding.
- Depreciation increased to $306,548 from $81,153 because the company began depreciating its Taber, Alberta plant and equipment on January 1, 2012.
- The company entered into a new Harris Bank arrangement in March 2012, increasing the revolving credit facility to the lesser of $5.0 million or a borrowing-base formula. It also obtained an additional $1.4 million secured-loan commitment; no amount was outstanding under that secured loan at March 31, 2012. Both facilities bear interest at 3.75%.
- Three customers represented 58% of Q1 2012 sales, compared with 64% in Q1 2011. The three largest customers represented 47% of accounts receivable at March 31, 2012.
Guidance, outlook, risks and unusual items
- No quantitative revenue, earnings or margin 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 other than those disclosed.
- The company expects the Taber plant to manufacture aspartic acid using sugar, potentially reducing raw-material costs, oil-price exposure and shipping costs, although it expects to continue importing some aspartic acid from China.
- WaterSavr Singapore Pte. Ltd., a former distributor, initiated an American Arbitration Association proceeding in June 2011. The company denies the allegations and is defending itself; the amount and outcome were indeterminable. The company reported $250,000 received from WaterSavr Singapore in deferred revenue in connection with the proceeding.
- Key disclosed risks include competition, economic conditions, customer or sales weakness, interest-rate and borrowing-cost increases, regulatory changes, inability to achieve expected sales, limited funds for capital expenditures and operational inefficiencies.
- Lease commitments totaled approximately $235,220 through July 2014. The company also had secured debt obligations, including collateral over certain Taber, Alberta assets, inventory and receivables.
- Results are seasonal and interim results are not necessarily indicative of full-year performance. The filing states that disclosure controls were effective as of March 31, 2012 and that no material change occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether BPCA growth is sustainable and whether EWCP sales recover after the Q1 decline.
- The terms, borrowing-base availability and covenant compliance associated with the expanded Harris Bank facilities.
- The cash-flow impact of inventory and receivables growth and the company’s ability to fund debt repayments and operations.
- The status, potential exposure and accounting treatment of the WaterSavr Singapore arbitration, including the $250,000 deferred-revenue balance.
- Customer concentration and the collectibility of accounts receivable.
- Whether the Taber plant achieves expected cost savings and production objectives.
- The effect of higher depreciation, legal costs, consulting costs and taxes on future margins and earnings.