Flexible Solutions International, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 30, 2020. Financial statements are presented in U.S. dollars and were audited by Morgan & Company LLP. The company redomiciled from Nevada to Alberta, Canada, during 2019.
Business Context
Flexible Solutions develops, manufactures and markets specialty chemicals focused on water, energy and agricultural applications. Its principal product categories are thermal polyaspartates and nitrogen-conservation products, which generated most revenue through the BCPA/TPA segment; HEATSAVR and WATERSAVR comprise the energy and water conservation products segment. The company owns 65% of ENP Investments LLC, acquired in October 2018, and consolidated its results.
- 2019 revenue was concentrated in BCPA/TPA products: $27.1 million, or approximately 98.6% of consolidated sales.
- Three customers represented $12.8 million, or 47%, of 2019 sales; the company identifies dependence on several significant customers.
- Approximately 45% of revenue came from shipments outside the United States.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | $27.440 million | $17.830 million | +53.9% |
| Gross profit | $8.621 million | $5.637 million | +53.0% |
| Gross margin | 31.4% | 31.6% | Broadly stable |
| Operating income | $1.908 million | $1.307 million | +46.1% |
| Operating margin | 7.0% | 7.3% | Down modestly |
| Net income, including non-controlling interests | $2.297 million | $2.422 million | -5.1% |
| Net income attributable to controlling interest | $1.912 million | $2.490 million | -23.2% |
| Basic and diluted EPS | $0.16 | $0.21 | Down |
| Cash flow from operations | $2.370 million | $(2.230) million | Improved by $4.600 million |
Revenue growth reflected increased customer orders, growth in most product lines and the inclusion of ENP Investments for a full year. Profitability benefited from higher sales but was pressured by increased wages, advertising, lease, interest, consulting, professional, travel and commission costs, as well as a $231,696 bad-debt expense. The 2018 results included a $1.714 million after-tax gain from the Taber, Alberta fire insurance recovery, which did not recur in 2019.
- Year-end cash and cash equivalents were $3.635 million, compared with $7.858 million in 2018. Including $1.000 million of restricted cash, cash, cash equivalents and restricted cash totaled $4.635 million.
- Working capital was $10.713 million, compared with $15.104 million in 2018; the reported current ratio was approximately 2.6x.
- Accounts receivable were $4.470 million, net of a $270,652 allowance; inventories were $9.183 million.
- Total assets were $32.380 million and total stockholders’ equity was $20.461 million.
- Cash used in investing activities was $2.667 million, including $1.831 million of equipment purchases and a $1.001 million investment in a Florida fertilizer-additives LLC.
- Cash used in financing activities was $3.088 million, including $2.398 million of dividends, $1.071 million of loan repayments and $376,675 of lease financing costs.
Debt, Liquidity and Capital Resources
- Short-term revolving borrowings totaled $2.390 million at year-end: $1.641 million under the NanoChem facility and $749 thousand under the ENP facility.
- Long-term debt was $4.380 million before current maturities, consisting primarily of the $3.117 million ENP acquisition term loan and the $1.100 million equipment loan. The balance sheet reported $1.197 million as current and $3.184 million as long-term.
- A convertible note balance of $500,000 remained after the holder converted $500,000 into 200,000 common shares in June 2019. The remaining note bears 5% interest and is due by September 30, 2023, subject to extension provisions.
- Operating lease liabilities totaled $789,205, including $405,670 current and $383,535 long-term. Future lease payments disclosed total approximately $996,046 through 2023.
- Management stated that available cash resources were sufficient for expected commitments and cash-flow requirements for the following year, and the company was in compliance with its debt covenants at December 31, 2019.
Material Changes and Unusual Items
- Full-year consolidation of the 65%-owned ENP Investments acquisition materially increased revenue, assets, expenses and debt versus 2018.
- Operating cash flow turned positive, but cash declined because of equipment spending, investments, debt service and dividends.
- Bad-debt expense increased by $231,696 after a customer failed to pay for product.
- Interest expense increased to $428,371 from $93,653 due primarily to acquisition-related and equipment debt.
- The company adopted ASC 842 on January 1, 2019, recognizing approximately $819,079 of right-of-use assets and lease liabilities at adoption.
- Research and development spending declined to $123,660 from $135,930.
- The company paid a $0.05-per-share special dividend and $0.15-per-share annual dividend during 2019. On March 18, 2020, it suspended dividends until further notice because of COVID-19 uncertainty.
Outlook, Risks and Contingencies
Management did not provide quantitative revenue or earnings guidance. It identified crude-oil prices, oil-and-gas activity, drought conditions, customer demand, product orders, raw-material costs and COVID-19 as significant factors affecting future results. Management expected to spend approximately $50,000 in fiscal 2020 on WATERSAVR marketing and production, although WATERSAVR has not yet become a meaningful revenue-producing product.
- COVID-19 could cause staff shortages, reduced demand, supply-chain interruptions, regulatory intervention and broader economic disruption; its duration and financial impact were not estimable at filing.
- Customer concentration and increased receivable concentration create credit and collection risk. The three primary customers accounted for 61% of accounts receivable at December 31, 2019.
- International sales expose the company to foreign-exchange, political, economic, regulatory, tax, trade and collection risks. The company does not hedge foreign-currency exposure.
- Raw materials are sourced from multiple suppliers but certain inputs are derived from crude oil and may experience price volatility. The company generally has no long-term supply contracts.
- Competition includes Lanxess AG, Asian manufacturers and substitute chemicals or products. Patents expire at various dates through 2022, and intellectual-property protection may be insufficient.
- The company is exposed to environmental, product-liability, chemical-handling and regulatory risks. No legal proceedings were reported as of the filing.
- The company has a $1.000 million restricted cash balance tied to an EBITDA milestone for its Florida investment. Additional payments of $1.000 million and $500,000 may become due if subsequent milestones are achieved.
- Management reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2019.
Investor Verification Items
- Verify whether revenue growth and the BCPA/TPA concentration are sustainable after the full-year ENP contribution.
- Assess cash conversion, inventory levels, receivable collectability and the $270,652 doubtful-account allowance.
- Review debt maturities, revolving-credit availability, interest-rate exposure and compliance with loan covenants.
- Evaluate the effect of dividend suspension and the company’s capital-allocation priorities following the 2019 cash decline.
- Monitor COVID-19 effects on customer demand, supply availability, international operations and 2020 liquidity.
- Review the economics and milestone obligations of the Florida fertilizer-additives investment, including the $1.000 million restricted cash and potential additional payments.
- Confirm the commercial prospects of WATERSAVR, which management states has not yet proven to be revenue producing.