Flexible Solutions International, Inc. — Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2012, filed April 1, 2013. The filing covers the company’s water and energy conservation products, including HEATSAVR, ECOSAVR and WATERSAVR, and its thermal polyaspartate biopolymer products used in oilfield, agricultural, irrigation, detergent and related markets. The company operates primarily in Canada and the United States and reports in U.S. dollars.
The filing is a full-year 2012 Form 10-K rather than a standalone fourth-quarter report. Products are manufactured in Taber, Alberta, and Peru, Illinois. TPA products represented the substantial majority of revenue.
Financial Highlights
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Sales | $16.400 million | $15.519 million | 5.7% increase |
| Gross profit | $5.272 million | $5.855 million | 10.0% decrease |
| Gross margin | 32.1% | 37.7% | Down 5.6 percentage points |
| Operating income | $(34,066) | $1.308 million | Declined to a loss |
| Operating margin | (0.2%) | 8.4% | Down 8.6 percentage points |
| Net income (loss) | $(1.084 million) | $183,000 | Turned to a loss |
| Basic and diluted EPS | $(0.08) | $0.01 | Declined |
| Cash flow from operations | $(305,840) | $(798,800) | Improved, but remained negative |
Net loss included income tax expense of $1.053 million, consisting primarily of $1.126 million of current tax expense partially offset by a $73,111 deferred tax recovery. The company reported other comprehensive income of $97,690, resulting in a comprehensive loss of $986,757.
Revenue from TPA products increased to $15.572 million from $14.486 million, while EWCP revenue declined to $828,135 from $1.033 million. Three customers generated $9.713 million, or 59% of 2012 sales. Approximately 73% of revenue came from shipments outside the United States, unchanged from 2011.
Balance Sheet, Debt and Liquidity
| Metric | December 31, 2012 | December 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $361,867 | $506,903 |
| Working capital | $3.490 million | Not clearly provided in the filing text |
| Total assets | $13.736 million | $14.505 million |
| Short-term line of credit | $1.205 million | $650,000 |
| Current portion of long-term debt | $318,644 | $329,389 |
| Long-term debt | $1.407 million | $1.648 million |
| Total liabilities | $3.968 million | $3.892 million |
| Stockholders’ equity | $9.769 million | $10.613 million |
Total debt, including the line of credit and current portion of long-term debt, was approximately $2.931 million at year-end. The company had a revolving credit facility of up to $5.0 million, subject to borrowing-base limitations, at an annual interest rate of 3.75%; $1.205 million was outstanding at year-end. Long-term debt consisted primarily of government and agricultural financing, including a non-interest-bearing AAFC loan and a 5% AFSC loan.
Cash declined by $145,036 during 2012. Operating cash use of $305,840 and capital expenditures of $96,721 were partly funded by $555,000 of new short-term borrowings and $293,397 of debt repayments. Management stated that available cash resources were sufficient for the coming year and that no substantial capital commitments were expected, other than disclosed lease and debt obligations.
Material Changes Versus 2011
- Sales increased 5.7%, driven by stronger TPA sales across market verticals, while EWCP sales declined because prior-period order levels were unusually high.
- Gross margin decreased because the Taber facility began production, increasing depreciation, and higher oil prices increased aspartic acid costs.
- Operating expenses increased to $5.306 million from $4.547 million. Administrative salaries, consulting, professional fees, commissions and insurance increased; professional fees included higher intellectual-property and arbitration costs.
- Depreciation increased substantially to approximately $1.258 million from approximately $330,000 as the Taber plant entered service.
- The company moved from $183,000 of net income to a $1.084 million net loss, despite higher revenue and improved operating cash flow.
- Inventory increased to $3.362 million from $2.891 million, while accounts receivable decreased modestly to $2.199 million from $2.332 million.
- Capital expenditures fell to $96,721 from $794,848, reflecting the completion of significant Taber-related construction and equipment spending in the prior period.
- The company did not issue shares in 2012. Shares outstanding remained 13,169,991; 999,000 stock options were outstanding at year-end.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal revenue or earnings guidance. It expected to spend approximately $200,000 on the marketing and production of WATERSAVR in fiscal 2013. WATERSAVR had generated only limited commercial orders and may not recover its development and marketing costs.
The company expects the Taber facility to reduce raw-material costs, oil-price exposure and shipping costs by producing aspartic acid from sugar, although some imports from China may continue. The filing states that TPA irrigation applications remain at an early commercialization stage and that personal-care TPA products are not currently sold.
- The company has a history of operating losses, negative operating cash flow and an accumulated deficit. Continued profitability depends on revenue growth and expense control.
- Results are seasonal, particularly for swimming-pool products and WATERSAVR, and are sensitive to order timing, product mix, competition and economic conditions.
- Six customers were considered large enough that the loss of any one could materially reduce revenue. Accounts receivable from the three primary customers represented 75% of receivables at year-end.
- International sales expose the company to currency, political, economic, collection, trade and regulatory risks.
- Raw materials are available from multiple sources, but the company generally lacks long-term supply contracts; TPA inputs are affected by crude-oil prices.
- The company faces competition from Lanxess AG, alternative chemicals, pool blankets, Aquatain and other water-conservation or mosquito-control solutions.
- Products may create safety, environmental and product-liability exposure, and regulatory approvals remain necessary for certain WATERSAVR applications and any future personal-care products.
- Intellectual-property protection and dependence on key personnel, particularly the chief executive officer, are identified as material risks.
- An arbitration proceeding brought by former distributor WaterSavr Singapore was terminated in November 2012 without liability to the company.
- On January 1, 2013, the company granted 128,000 employee stock options and 55,000 consultant stock options at an exercise price of $1.21 per share.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management reported that disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to provide an opinion on internal control effectiveness.
Key Facts Investors Should Verify
- Whether TPA growth can offset declining EWCP revenue and restore positive operating margins.
- The timing and cash impact of the $1.205 million revolving-credit balance and scheduled long-term debt repayments.
- Whether operating cash flow becomes consistently positive after the Taber facility’s depreciation burden and production ramp-up.
- The commercial traction and expected return on the planned $200,000 WATERSAVR investment.
- Customer concentration, receivable collectibility and the company’s ability to manage inventory growth.
- Whether expected cost savings from in-house aspartic-acid production materialize despite oil-price and raw-material risks.
- The potential dilution from 999,000 outstanding options and the 183,000 options granted after year-end.
- The status of required regulatory approvals, patent protection and any future product-liability or environmental claims.