Flexible Solutions International Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2018. Flexible Solutions develops, manufactures and markets specialty chemicals that reduce water evaporation, including HEATSAVR and WATERSAVR, and biodegradable thermal polyaspartate polymers used in petroleum, chemical, utility, mining, agriculture and consumer-product applications. The company reports two segments: Energy and Water Conservation Products (EWCP) and thermal polyaspartate polymers and chemical additives (TPA).
Financial performance and liquidity
| Metric | Three months ended September 30, 2018 | Three months ended September 30, 2017 |
|---|---|---|
| Sales | $3.817 million | $3.269 million |
| Gross profit | $0.957 million | $0.995 million |
| Gross margin | 25.1% | 30.4% |
| Net income (loss) | $(0.145) million | $(0.279) million |
| Net income (loss) per share | $(0.01) | $(0.02) |
| Metric | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 |
|---|---|---|
| Sales | $12.155 million | $12.655 million |
| Gross profit | $4.461 million | $4.971 million |
| Gross margin | 36.7% | 39.3% |
| Income before tax | $3.116 million | $3.492 million |
| Net income | $2.694 million | $3.247 million |
| Net income per share | $0.23 | $0.28 |
| Cash provided by operating activities | $(0.465) million | $0.039 million |
At September 30, 2018, cash and cash equivalents were $8.594 million, working capital was $14.638 million, and total assets were $19.704 million. Accounts receivable were $2.736 million and inventory was $5.271 million. Total liabilities were $2.163 million, including a $0.250 million line-of-credit balance and $0.201 million of current long-term debt. The company had no long-term debt remaining after the current portion.
Investing activities generated $2.388 million, primarily from $2.407 million of insurance proceeds related to the 2017 plant fire. Financing activities used $0.115 million, including $0.151 million of loan repayments. Ending cash increased from $6.912 million at December 31, 2017 to $8.594 million at September 30, 2018.
Material changes versus the prior comparable period
- Third-quarter sales increased 16.7%, driven by higher TPA sales, while EWCP customer orders were lower.
- Third-quarter gross profit declined 3.8%, and gross margin fell to 25.1% from 30.4%, indicating cost of sales grew faster than revenue.
- Third-quarter net loss improved to $145,470 from $278,924, partly because the prior-year quarter included a $307,432 loss on involuntary disposition. The 2018 quarter included a $5,336 gain on investment.
- Nine-month sales declined 4.0%, while net income declined 17.0%. The nine-month results included a $1.714 million gain on involuntary disposition, compared with $1.938 million in 2017.
- Nine-month operating cash flow was negative, compared with modestly positive operating cash flow in 2017, primarily reflecting increases in accounts receivable and inventory and decreases in accounts payable and deferred revenue.
- EWCP revenue declined to $0.292 million from $0.606 million, while TPA revenue declined modestly to $11.864 million from $12.049 million.
- Administrative salaries and benefits and research expense increased, while professional fees and commissions decreased. Currency exchange expense in the third quarter increased to $86,813 from $47,606; for the nine-month period, currency exchange was a $113,826 gain compared with an $89,350 expense in 2017.
Guidance, outlook, risks and unusual items
Management stated that it had sufficient cash resources to meet expected commitments and cash-flow requirements for the coming year and did not anticipate material capital requirements for the twelve months ending September 30, 2019. No formal revenue or earnings guidance was provided.
Key factors affecting future results include crude-oil prices and the cost of imported aspartic acid, potential tariffs, oil-and-gas industry activity, drought conditions, customer demand, competition, economic conditions, regulation, interest rates, access to capital expenditures and distribution or operating inefficiencies.
The company’s new revolving credit agreement permits borrowings up to the lesser of $2.5 million or a borrowing-base formula and carries a 5.75% annual interest rate. The company reported compliance with all loan covenants. The facility is secured by substantially all assets of NanoChem Solutions Inc., excluding intellectual property.
Three customers represented 47% of nine-month sales and 59% of accounts receivable at September 30, 2018, creating customer-concentration and collection risk. Lease commitments total approximately $584,605 through October 2021. The company maintains cash balances that may exceed federally insured limits and has not hedged its foreign-currency exposure.
The 2017 Taber plant fire resulted in insurance proceeds recognized in both periods; these gains are unusual and are not indicative of recurring operating performance. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the third-quarter decline in gross margin reflects temporary product mix, input-cost pressure or a recurring change in profitability.
- The sustainability of TPA demand and the extent to which EWCP order weakness continues.
- Why operating cash flow was negative despite reported nine-month net income and whether receivables and inventory normalize.
- The recurring earnings impact excluding insurance-related gains and other nonrecurring items.
- Exposure to the three major customers, imported raw materials, tariffs, oil-and-gas activity and foreign-currency movements.
- Availability under the revolving credit facility and repayment of the remaining $201,194 term debt.
- The realization of the $1.028 million deferred tax asset and the effect of future tax assessments or uncertain tax positions.