Flexible Solutions International Inc. — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three and six months ended June 30, 2017. Flexible Solutions develops, manufactures, and markets water- and energy-conservation chemicals and biodegradable polymers and chemical additives. Its two reportable segments are Energy and Water Conservation Products (EWCP) and Biodegradable Polymers and Chemical Additives (BPCA). The interim financial statements are unaudited and presented in U.S. dollars.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Sales | $4.722 million | $3.733 million | $9.386 million | $9.046 million |
| Gross profit | $1.881 million | $1.983 million | $3.975 million | $4.222 million |
| Gross margin | 39.8% | 53.1% | 42.4% | 46.7% |
| Income before other items and tax | $0.736 million | $0.929 million | $1.787 million | $2.229 million |
| Net income | $0.274 million | $0.561 million | $3.526 million | $1.303 million |
| Basic diluted EPS | $0.02 | $0.05 | $0.31 / $0.30 | $0.11 / $0.11 |
Six-month operating cash flow was negative $407,527, compared with $1.248 million of cash provided in the prior-year period. Investing cash flow was $3.683 million, primarily reflecting $3.727 million of insurance proceeds related to the Taber fire. Financing cash flow was $281,903. Cash and cash equivalents increased to $6.256 million at June 30, 2017 from $2.470 million at December 31, 2016.
At June 30, 2017, current assets were $14.055 million and current liabilities were $1.962 million, producing reported working capital of $12.093 million. Total assets were $18.508 million and stockholders’ equity was $16.295 million. Debt consisted of a $600,000 revolving line of credit, $201,193 of current long-term debt, and $251,492 of long-term debt. The company reported compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 26.5%, while six-month sales increased 3.8%. BPCA sales increased, but EWCP sales declined following the loss of the Taber manufacturing facility.
- Gross profit declined 5.1% in the second quarter and 5.8% for the six-month period. Gross margin contracted because of temporary post-fire costs and higher aspartic acid costs.
- Second-quarter net income declined 51.2%, primarily because the prior-year quarter did not include the 2017 fire-related effects and because the current quarter recognized a $326,570 loss on involuntary disposition. Six-month net income increased 170.8% because of a $2.246 million after-tax gain on the involuntary disposition of the Taber facility and related assets.
- Operating expenses increased to $2.188 million for the six months from $1.993 million, including higher wages, administrative compensation, rent, professional fees, and currency-exchange expense.
- Property, plant and equipment declined to $1.696 million from $3.394 million at year-end 2016, primarily because the Taber facility and equipment were destroyed by fire.
- Accounts receivable increased to $3.825 million from $3.008 million. Three customers represented 59% of six-month sales and 70% of accounts receivable at June 30, 2017.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management stated that it expected sufficient cash resources to meet commitments and cash-flow requirements for the coming year and did not anticipate significant capital requirements for the twelve months ending December 31, 2017.
On February 11, 2017, a fire destroyed the Taber, Alberta plant and related contents. The filing reports a $1.659 million U.S. loss of building and manufacturing equipment and $277,482 of inventory, interim insurance proceeds of $4.208 million, and an after-tax gain of $2.246 million. Management described the impact on EWCP sales and gross margin as material, while stating that BPCA sales benefited from increased activity across market verticals.
Future results may be affected by crude-oil prices, aspartic-acid costs, oil and gas industry activity, drought conditions, competition, regulatory changes, customer concentration, foreign-exchange movements, interest rates, borrowing costs, and the availability of funds for capital expenditures. The company does not hedge its foreign-currency exposure. Operating leases require approximately $830,235 of minimum payments through 2021.
Management reported effective disclosure controls and procedures as of June 30, 2017, with no material changes in internal control over financial reporting. Ten thousand additional shares were issued upon employee stock-option exercises in July 2017.
Important Facts for Investors to Verify
- Whether insurance proceeds fully cover the Taber facility, equipment, inventory, cleanup costs, and future replacement or production requirements.
- Whether EWCP sales and margins recover after the Taber fire and whether BPCA growth is sustainable.
- The quality and collectability of receivables given that three customers account for 70% of the balance.
- The effect of higher aspartic-acid costs, customer concentration, oil and gas activity, drought conditions, and foreign-exchange changes on future margins.
- Whether the $600,000 line-of-credit balance and remaining long-term debt remain within borrowing-base and covenant requirements.
- The extent to which six-month earnings depend on the nonrecurring $2.246 million insurance-related gain and whether operating cash flow returns to positive levels.
- The potential balance-sheet impact of adopting the new lease and revenue-recognition standards described in the filing.