Flexible Solutions International, Inc. — FY2015 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended December 31, 2015. Flexible Solutions develops, manufactures and markets water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable thermal polyaspartate polymers used in oilfield, agricultural, irrigation and detergent applications. The company operates primarily in Canada and the United States and reports in U.S. dollars.
Financial Performance and Position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Sales | $15.899 million | $15.908 million | Flat |
| Gross profit | $6.202 million | $5.140 million | Up 20.7% |
| Gross margin | 39.0% | 32.3% | Up 6.7 percentage points |
| Operating income | $2.350 million | $0.661 million | Up 255.7% |
| Net income | $1.505 million | $0.403 million | Up 273.0% |
| Net margin | 9.5% | 2.5% | Up 7.0 percentage points |
| Basic and diluted EPS | $0.11 | $0.03 | Increased |
| Cash flow from operations | $2.737 million | $1.062 million | Up 157.7% |
- Cash and cash equivalents were $2.499 million at December 31, 2015, compared with $0.748 million at December 31, 2014.
- Working capital was $6.411 million. Total current assets were $7.972 million versus current liabilities of $1.561 million.
- Total debt, including the $0.200 million short-term line of credit, was approximately $0.954 million, down from approximately $1.863 million at the prior year-end. The company was in compliance with all debt covenants.
- Total assets were $14.143 million and stockholders’ equity was $12.028 million at year-end.
- Comprehensive income was $0.566 million, after a $0.938 million foreign-currency translation loss.
- Three customers represented $10.421 million, or 66%, of 2015 sales. The three largest accounts represented 66% of accounts receivable at year-end.
- International shipments represented approximately 75% of revenue.
Material Changes Versus 2014
- Revenue was essentially unchanged because lower EWCP revenue, including reduced WATERSAVR demand following Texas flooding, offset increased BCPA/TPA revenue from new and existing customers and new agricultural products.
- Gross margin improved primarily because lower oil prices reduced the cost of aspartic acid, a key input for BCPA products.
- Operating expenses declined by $0.628 million, reflecting the suspension of Taber aspartic-acid production, lower professional fees and reduced research costs.
- The company generated substantially more operating cash and reduced short-term credit-line borrowings by $0.550 million and long-term debt by approximately $0.358 million.
- The Taber plant remained inactive. Management stated that suspension reduced plant operating and related general and administrative costs by approximately $0.8 million annually, but the facility’s future use remains undetermined.
Guidance, Outlook, Risks and Unusual Items
- Management stated that existing cash resources were sufficient for the coming year and that no material capital requirements were anticipated for the twelve months ending December 31, 2016.
- The company expected to spend approximately $0.200 million in fiscal 2016 on WATERSAVR marketing and production, although WATERSAVR had not yet become a meaningful revenue-producing product.
- Future results are particularly sensitive to crude-oil prices, oil-and-gas industry activity and drought conditions affecting agricultural demand.
- Key risks include customer concentration, international operations and foreign-exchange exposure, seasonality, competitive pricing, raw-material availability and costs, product liability, environmental regulation, intellectual-property protection, regulatory approvals and dependence on key personnel.
- The company has historically incurred operating losses and negative operating cash flow and retains an accumulated deficit, although it reported net income and positive operating cash flow in 2015.
- Raw materials are purchased without long-term supply contracts, and some inputs are derived from crude oil.
- No legal proceedings were reported. The independent auditor issued an unqualified opinion; the company is a smaller reporting company and management concluded that disclosure controls and internal control over financial reporting were effective.
- On January 6, 2016, the company repurchased and cancelled 1.750 million shares at $0.90 per share, a material subsequent event not reflected in the December 31, 2015 balance sheet.
Most Important Facts for Investors to Verify
- Confirm the sustainability of the 2015 gross-margin improvement and whether it depends primarily on lower oil prices.
- Assess the concentration and credit quality of the three major customers representing 66% of sales and 66% of year-end receivables.
- Evaluate whether WATERSAVR can become commercially viable despite the company’s planned 2016 spending and limited historical orders.
- Review the impact of the Taber facility suspension, including possible future impairment, sale, reuse or additional investment requirements.
- Verify the effect of the January 2016 share repurchase on shares outstanding, liquidity and ownership concentration.
- Monitor remaining debt maturities, the $3.0 million revolving-credit availability formula, covenant compliance and the company’s ability to maintain positive operating cash flow.
- Review foreign-currency translation losses and the company’s substantial exposure to international revenue, oil-and-gas activity and agricultural demand.