Flexible Solutions International, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2013; filed August 14, 2013. The unaudited statements cover the Company and wholly owned subsidiaries. The Company develops, manufactures and markets water- and energy-conservation chemicals and biodegradable polymers used in industrial, agricultural, petroleum, utility and consumer applications.
Financial Results and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sales | $4.885 million, versus $3.762 million | $9.389 million, versus $8.956 million |
| Gross profit | $1.573 million, versus $1.107 million | $2.920 million, versus $3.081 million |
| Gross margin | 32.2%, versus 29.4% | 31.1%, versus 34.4% |
| Operating expenses | $1.491 million, versus $1.453 million | $2.716 million, versus $2.647 million |
| Net income (loss) | $70,169, versus $(465,995) | $135,329, versus $(243,339) |
| Comprehensive income (loss) | $(59,338), versus $(579,549) | $(71,235), versus $(245,885) |
| Basic and diluted EPS | $0.00, versus $(0.04) | $(0.01), versus $(0.02) |
- At June 30, 2013, cash and cash equivalents were $512,363, accounts receivable were $2.740 million, inventory was $3.103 million, and total assets were $13.393 million.
- Working capital was reported at $4.195 million, compared with $3.490 million at December 31, 2012.
- Cash provided by operating activities was $116,589 for the six-month period, compared with $65,895 in the prior-year period. The MD&A presents a slightly different operating cash figure of $117,663.
- Capital expenditures were $55,487. Financing provided $110,512, including $195,000 of additional short-term line-of-credit borrowings, partially offset by $84,488 of loan repayments. Ending cash increased by $150,496, after a $21,118 foreign-exchange reduction.
- Total debt was $3.102 million, consisting of $1.400 million drawn on the short-term revolving line, $304,660 of current long-term debt and $1.247 million of long-term debt. Long-term debt declined from $1.407 million at year-end 2012.
- Stockholders’ equity was $9.745 million, compared with $9.769 million at December 31, 2012. Common shares outstanding remained 13,169,991.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased approximately 30% year over year, driven primarily by higher biodegradable-polymer sales. Six-month sales increased approximately 5%.
- Energy and water-conservation product sales decreased for the six-month period because unusually high orders in the prior period reduced subsequent-period orders. Six-month segment revenue was $503,703 for these products and $8.885 million for biodegradable polymers.
- Six-month gross profit and gross margin declined despite higher sales. Management attributed the margin pressure to increased depreciation from the Taber plant and higher aspartic-acid costs associated with high oil prices.
- Second-quarter gross margin improved, reflecting increased sales, but operating expenses remained broadly level. Office and miscellaneous costs increased following the allocation of construction administration costs to general administration after the Taber plant became operational.
- Wages increased in the first six months as the Company sought to retain employees and expand its sales force. Professional fees declined because of reduced litigation activity.
- Interest expense declined for the six-month period, while research expense, bad-debt expense and certain administrative costs increased.
Outlook, Liquidity, Risks and Unusual Items
- Management stated that the Company had sufficient cash resources to meet commitments and cash-flow requirements for the coming year and did not anticipate material capital requirements during the twelve months ending December 31, 2013.
- The Taber, Alberta plant is intended to manufacture aspartic acid using sugar rather than oil-based Chinese feedstock. Management expects full production to reduce raw-material costs, oil-price exposure and shipping costs, although the filing does not provide a production ramp or quantified savings forecast.
- The revolving credit facility permits borrowings up to the lesser of $5.0 million or specified percentages of eligible receivables and inventory; $1.4 million was outstanding at June 30, 2013. The facility bears interest at 3.75% under the disclosed agreement and is subject to customary covenants and collateral requirements.
- Accounts receivable from the three primary customers totaled $2.052 million, or 75% of receivables. Three customers also accounted for 60% of six-month sales according to the filing’s customer disclosure, although the comparative-year wording in that disclosure is not clear.
- The Company is exposed to customer concentration, foreign-exchange movements, interest-rate and borrowing risks, competition, economic conditions, regulatory changes, sales weakness, funding constraints and operational inefficiencies.
- Approximately $114,170 of minimum lease payments was disclosed in Note 13, while the MD&A separately reports aggregate lease commitments of approximately $158,872. The difference should be reconciled to the underlying filing schedules.
- Other comprehensive losses of $206,564 for the six-month period primarily reflected foreign-currency translation effects. No asset impairment charges were recorded.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2013, and reported no material change in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify the reconciliation between the statement-of-cash-flows operating cash figure of $116,589 and the MD&A figure of $117,663.
- Assess whether biodegradable-polymer growth and Taber plant production can offset weaker energy and water-conservation product demand and lower gross margins.
- Review the $1.4 million revolving-credit balance, borrowing-base availability, interest rate and covenant compliance.
- Evaluate concentration risk from the three primary customers and the collectibility of the $2.740 million accounts receivable balance.
- Reconcile the differing lease-commitment amounts disclosed in Note 13 and MD&A.
- Consider the effects of foreign-currency translation, raw-material pricing and the Company’s dependence on continued access to working-capital financing.