Flexible Solutions International, Inc. — Q3 2014 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter and nine months ended September 30, 2014. The company develops, manufactures, and markets water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable polymer products used in industrial, oil and gas, agriculture, detergent, and consumer applications. The company reported 13,169,991 common shares outstanding as of November 1, 2014.
Financial performance and position
| Metric | Three months ended September 30, 2014 | Three months ended September 30, 2013 | Nine months ended September 30, 2014 | Nine months ended September 30, 2013 |
|---|---|---|---|---|
| Sales | $3.851 million | $2.981 million | $11.950 million | $12.370 million |
| Gross profit | $1.326 million | $0.556 million | $4.035 million | $3.470 million |
| Gross margin | 34.4% | 18.6% | 33.8% | 28.1% |
| Operating income before other items and tax | $0.186 million | $(0.681) million | $0.529 million | $(0.478) million |
| Net income (loss) | $0.177 million | $(0.682) million | $0.421 million | $(0.547) million |
| Comprehensive income (loss) | $(0.113) million | $(0.611) million | $0.060 million | $(0.682) million |
| Basic and diluted EPS | $0.01 | $(0.05) | $0.03 | $(0.05) |
- Cash and cash equivalents were $0.300 million at September 30, 2014, down from $0.568 million at December 31, 2013.
- Accounts receivable increased to $2.801 million from $2.012 million, and inventory increased to $3.275 million from $3.062 million.
- Total assets were $14.370 million versus $14.474 million at year-end 2013. Stockholders’ equity was $11.610 million versus $11.473 million.
- Debt included a $1.350 million short-term revolving line of credit, $0.201 million of current long-term debt, and $0.967 million of long-term debt. Total reported debt was approximately $2.519 million.
- Working capital was $4.724 million at September 30, 2014, compared with $3.761 million at December 31, 2013.
- Cash used in operating activities was $0.093 million for the nine months, compared with $0.174 million provided in the prior-year period. Investing cash use was $0.025 million, and financing cash use was $0.139 million.
- Depreciation and amortization totaled $0.427 million for the nine months, compared with $0.978 million in the prior-year period.
Material changes versus the prior comparable period
- Third-quarter sales increased approximately 29% year over year, primarily because an order expected in the second quarter was received in the third quarter, a new customer was added, and the prior-year quarter was affected by an oil-platform shutdown.
- Nine-month sales declined approximately 3%, reflecting lower BCPA product sales attributed partly to economic weakness in Europe. Energy and water conservation product revenue increased to $0.792 million from $0.592 million, while BCPA revenue declined to $11.158 million from $11.778 million.
- Gross margin improved materially in both periods because lower oil prices reduced aspartic-acid costs.
- Operating expenses declined to $3.506 million for the nine months from $3.948 million, principally because wages and office expenses fell after the Taber plant ceased production. Commissions increased as commissionable sales represented a larger proportion of revenue.
- Other comprehensive loss was $0.362 million for the nine months, primarily reflecting foreign-currency translation effects.
- In September 2014, the company repaid its AFSC debt and entered into a $1.006 million Harris Bank promissory note at prime plus 0.5%, payable over five years. The proceeds were used to retire the AFSC debt and fund an AAFC loan payment.
Guidance, outlook, commentary, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management stated that it expects sufficient cash resources to meet commitments and cash-flow requirements for the coming year and does not anticipate significant capital requirements through September 30, 2015.
- Production at the Taber, Alberta, aspartic-acid plant was suspended in February 2014 because operating costs increased and imported oil-based aspartic acid prices were below expectations. Management estimates the suspension will save approximately $0.8 million annually in plant operating and general and administrative expenses.
- The company continues to seek a partner to complete process development and reach profitable production levels at Taber. Staffing has been reduced to maintain the plant’s intellectual property and process equipment.
- Future results may be affected by crude-oil prices, oil and gas industry activity, drought conditions, European economic conditions, foreign-exchange movements, customer concentration, competition, interest rates, regulation, and access to capital.
- Three customers represented 57% of third-quarter sales and 61% of nine-month sales. The three largest customer receivable balances represented 67% of total accounts receivable at September 30, 2014.
- The revolving credit facility permits borrowings up to the lesser of $3.0 million or a borrowing-base formula based on receivables and inventory. The company stated that it was in compliance with all loan covenants at September 30, 2014.
- There were no impairment charges, no stock-option exercises, and no common-stock activity during the nine-month period. The company recorded $68,273 of stock-based compensation for the nine months.
- Management concluded that disclosure controls were effective as of September 30, 2014 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improved gross margins are sustainable if oil prices or aspartic-acid input costs change.
- Progress toward finding a Taber plant partner, the plant’s recoverable value, and the expected timing of any restart or further investment.
- Customer concentration, receivable collections, and the effect of increased accounts receivable and inventory on operating cash flow.
- Availability under the revolving credit facility and compliance with its financial and operating covenants.
- Debt repayment requirements, including the Harris Bank note, and exposure to Canadian-dollar/U.S.-dollar exchange-rate movements.
- The filing text contains an apparent cash-flow presentation discrepancy: the cash-flow statement reports $93,334 of operating cash use, while MD&A cites $92,334.
- The filing’s check-box presentation identifies the registrant as a shell company; investors should verify this classification against the filed SEC version and related disclosures.