Flexible Solutions International, Inc. — FY2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023; filed March 29, 2024. The company develops and manufactures specialty chemicals, primarily biodegradable polymers (TPAs), nitrogen-conservation products, and energy and water-conservation products marketed as HEATSAVR and WATERSAVR. The filing presents audited consolidated U.S. GAAP financial statements.
Key Financial Metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Sales | $38.325 million | $45.840 million | Down 16.4% |
| Gross profit | $10.337 million | $13.869 million | Down 25.4% |
| Gross margin | 27.0% | 30.3% | Down 3.3 percentage points |
| Operating income | $3.000 million | $7.050 million | Down 57.5% |
| Operating margin | 7.8% | 15.4% | Down 7.6 percentage points |
| Net income | $3.756 million | $7.713 million | Down 51.3% |
| Net income attributable to controlling interest | $2.776 million | $7.022 million | Down 60.5% |
| Basic diluted EPS | $0.22 | $0.57 / $0.56 | Lower year over year |
| Cash provided by operations | $6.990 million | $1.477 million | Up $5.513 million |
Balance Sheet, Debt and Liquidity
- Cash and term deposits totaled $7.708 million at December 31, 2023, compared with $6.815 million at year-end 2022.
- Working capital was $20.173 million, compared with $20.693 million in 2022.
- Total assets were $55.471 million and total stockholders’ equity was $38.268 million.
- Total debt was $8.115 million, including $1.282 million classified as current and $6.833 million classified as long term, versus $6.154 million at year-end 2022. The increase primarily reflects financing for a new Mendota building and manufacturing equipment.
- The company had $1.810 million outstanding under a short-term line of credit at year-end, at an interest rate of 8.5%. It also had a second line with no outstanding balance.
- Management stated that available cash resources were sufficient for expected commitments and cash-flow requirements for the coming year. Minimum remaining rental commitments were approximately $142,380 through 2025.
Material Changes Versus 2022
- Revenue declined primarily because of lower TPA customer orders and lower pricing. TPA/BCPA revenue fell to $37.752 million from $45.312 million, while energy and water conservation revenue increased to $573,000 from $528,000.
- Gross margin contracted because of higher raw-material costs, increased manufacturing wages, and costs associated with obtaining new certifications.
- Operating expenses increased to $7.338 million from $6.818 million, driven by employee-retention wages, insurance, property taxes, travel, and interest expense. Professional fees and lease expense declined.
- Operating income and controlling-interest earnings decreased substantially despite a $505,000 gain on investments and a $133,000 income-tax recovery. The 2022 results also included a $335,000 gain on the previously held ENP Peru equity interest.
- Operating cash flow improved significantly, aided by a $3.285 million reduction in inventory, compared with a $4.124 million inventory build in 2022.
- Capital expenditures increased to $4.991 million from $1.981 million, primarily for property, equipment, and the Mendota real-estate project.
- In 2023, the company acquired the remaining interest in ENP Peru and became its sole owner, and acquired an 80% interest in 317 Mendota LLC. These entities are consolidated, with related non-controlling interests recorded in equity.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance was provided. Management identified crude-oil prices and related raw-material costs, oil-and-gas activity, drought conditions, customer order timing, and competitive pricing as key drivers of future results.
- The company expects to spend approximately $50,000 in fiscal 2024 on WATERSAVR marketing and production. WATERSAVR has not yet become a significant revenue-producing product and may not recover its development and marketing costs.
- Three customers accounted for $20.483 million, or 53% of 2023 sales, compared with 61% in 2022. The loss or nonpayment of a major customer could materially affect revenue, liquidity, and results.
- International shipments represented approximately 21% of revenue. Relevant risks include foreign exchange, political and economic conditions, trade restrictions, collection risk, and differing regulations.
- Raw materials are available from multiple suppliers, but the company has limited long-term supply commitments and some materials are derived from crude oil. Supply interruptions or price increases could pressure margins.
- The company faces product-liability, environmental, intellectual-property, regulatory, seasonality, and key-person risks. No legal proceedings or material contingencies were reported, and management stated that no cybersecurity incident had materially affected the business.
- Inventory of $11.135 million was identified as the 2023 critical audit matter because valuation requires judgment regarding overhead allocation, recoverability, and potential obsolescence. No goodwill or indefinite-lived intangible impairment was recorded.
- The company declared and paid a special dividend of $0.05 per share in 2023 and distributed $719,439 to non-controlling interests.
Important Facts for Investors to Verify
- Whether TPA order volumes and pricing stabilize after the 2023 revenue decline.
- Whether higher raw-material, wage, certification, and interest costs continue to compress margins.
- Customer concentration and the collectability of receivables, particularly the $6.561 million owed by the three largest customers.
- Debt maturity schedules, interest-rate exposure, covenant compliance, and the effect of the new Mendota financing on future cash flow.
- The commercial progress and required investment for WATERSAVR and other new products.
- The valuation and turnover of the $11.135 million inventory balance and the potential for future write-downs.
- The company’s ability to fund capital expenditures, dividends, non-controlling-interest distributions, and debt service from operating cash flow.
- Subsequent events, including January 2024 option grants and the March 2024 termination of the Naperville lease, with operations consolidated in Peru, Illinois.