Flexible Solutions International, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; filed March 31, 2017. The company develops and sells water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable thermal polyaspartate polymers used in oilfield, agricultural, industrial, irrigation, detergent and related applications.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Sales | $16.246 million | $15.899 million | Up 2.2% |
| Gross profit | $6.989 million | $6.202 million | Up 12.7% |
| Gross margin | 43.0% | 39.0% | Up approximately 4.0 points |
| Operating income | $3.085 million | $2.350 million | Up 31.3% |
| Operating margin | 19.0% | 14.8% | Improved |
| Net income | $1.793 million | $1.505 million | Up 19.2% |
| Basic and diluted EPS | $0.16 | $0.11 | Improved |
| Comprehensive income | $1.912 million | $0.566 million | Improved primarily due to foreign-currency translation |
| Cash flow from operations | $1.775 million | $2.737 million | Down 35.1% |
TPA/BCPA products generated $15.460 million, or approximately 95% of 2016 sales, while energy and water-conservation products generated $785,660. The energy and water-conservation segment remained loss-making, with a reported segment loss of $417,770, compared with a $1.054 million loss in 2015.
- Cash and cash equivalents were $2.470 million at December 31, 2016, compared with $2.499 million in 2015.
- Working capital was $7.151 million.
- Total assets were $15.158 million and stockholders’ equity was $12.464 million.
- Accounts receivable increased to $3.008 million from $1.955 million, and inventories increased to $3.786 million from $3.275 million.
- Total debt consisted of a $250,000 short-term revolving line and $553,282 of long-term debt, including the current portion.
- The revolving facility permits borrowings up to the lesser of $3.0 million or specified percentages of eligible receivables and inventory; the interest rate was 4.0%. The company reported compliance with all loan covenants.
- The company had no stated dividend program and did not anticipate paying dividends in the foreseeable future.
Material changes versus 2015
- Sales increased modestly, reflecting new customers for energy and water-conservation products and increased uptake of TPA products, including new agricultural products.
- Gross margin improved because lower oil prices reduced the cost of aspartic acid, a key input for TPA production.
- Operating income increased despite relatively stable operating expenses. Administrative salaries and benefits, professional fees and travel increased; office, rent, consulting and commission costs declined.
- Operating cash flow declined substantially because of higher accounts receivable and inventory balances, partially offset by higher taxes payable and noncash expenses.
- On January 6, 2016, the company repurchased and cancelled 1.75 million shares for $1.575 million, reducing outstanding shares from 13.178 million at year-end 2015 to 11.458 million at year-end 2016.
- The company acquired a 42% interest in ENP Peru Investments LLC. The investment had a December 31, 2016 carrying value of $122,480 after a reported equity-method loss of $15,086.
- Three customers represented $10.148 million, or 63%, of 2016 sales, compared with 66% in 2015. The three largest customers also represented 67% of accounts receivable at year-end.
Outlook, risks and unusual items
- Management identified crude-oil prices, oil and gas industry activity and drought conditions as key factors affecting future results.
- The company expected to spend approximately $200,000 in fiscal 2017 on marketing and production of WATERSAVR. Management acknowledged that WATERSAVR had not yet become a significant revenue-producing product and may not recover its development and marketing costs.
- On February 11, 2017, a fire destroyed the Taber, Alberta facility where swimming-pool products were manufactured. The building and contents, with a carrying value of $2.512 million, were reported as a total loss; insurance was in place. The filing does not provide the amount or timing of any insurance recovery.
- Lease commitments totaled approximately $934,854 through 2021, including $206,934 due in 2017.
- Major risks include customer concentration, dependence on international sales, seasonal demand, raw-material price volatility, oil and gas exposure, competition, regulatory and environmental requirements, product liability, intellectual-property protection, foreign-exchange fluctuations and dependence on key personnel.
- Approximately 71% of 2016 revenue came from shipments outside the United States. The company had no foreign-exchange hedges.
- Management stated that it had sufficient cash resources for the coming year and no substantial cash commitments beyond disclosed debt, lease and operating requirements.
- The independent auditor issued an unmodified opinion and highlighted the post-year-end Taber facility fire as an emphasis-of-matter item. The auditor did not audit or express an opinion on the effectiveness of internal control over financial reporting.
Important facts for investors to verify
- Insurance coverage, claims status, proceeds and replacement or relocation plans following the Taber plant fire.
- Whether the company can maintain swimming-pool product supply and revenue after the loss of its manufacturing facility.
- Collection of the sharply higher accounts receivable balance and the creditworthiness of the three largest customers.
- Inventory composition, potential obsolescence and working-capital requirements.
- Actual 2017 WATERSAVR spending, commercial adoption and contribution to revenue.
- Debt repayment capacity, revolving-line availability and continued compliance with lending covenants.
- Impact of oil prices on TPA input costs and demand from oilfield customers.
- Effect of customer concentration and international exposure on future revenue volatility.
- The filing’s income-tax note contains amounts that do not align clearly with the income-statement presentation; investors should reconcile current, deferred and total tax expense directly to the audited financial statements.