Flexible Solutions International, Inc. — Fiscal 2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013, with comparative 2012 information. The company develops, manufactures, and markets water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable thermal polyaspartate polymers used in petroleum, agricultural, industrial, detergent, and related applications. The company operates through subsidiaries in Canada and the United States and sells internationally.
- Reportable segments: energy and water conservation products (EWCP) and thermal polyaspartate products (TPA).
- 2013 revenue was concentrated in the TPA segment, which generated $15.0 million of $15.8 million consolidated sales.
- Three customers represented 63% of 2013 sales, compared with 59% in 2012.
- Approximately 73% of revenue came from shipments outside the United States.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Sales | $15.802 million | $16.400 million | Down 3.6% |
| Gross profit | $4.530 million | $5.272 million | Down 14.1% |
| Gross margin | 28.7% | 32.1% | Down 3.4 percentage points |
| Operating income (loss) | $(894,364) | $(34,067) | Lower by $860,297 |
| Income (loss) before tax | $(721,481) | $(31,091) | Lower by $690,390 |
| Net income (loss) | $1.822 million | $(1.084) million | Improved by $2.906 million |
| Basic and diluted EPS | $0.14 | $(0.08) | Improved by $0.22 |
| Cash flow from operations | $479,959 | $(307,246) | Improved by $787,205 |
- The 2013 net profit was primarily attributable to a $2.408 million deferred income tax recovery and a $134,720 current income tax recovery. The company recorded a $721,481 pretax loss.
- Operating expenses increased to $5.425 million from $5.306 million. Office and miscellaneous costs increased, while professional fees declined following reduced litigation activity.
- Research expense increased to $123,772 from $68,254, reflecting work on potential new products and regulatory compliance.
- Depreciation expense was $1.299 million, compared with $1.256 million in 2012.
- The company recorded an $81,174 inventory write-down and a $250,000 exclusive distributor fee in 2013.
Balance sheet, cash flow, debt, and liquidity
- Cash and cash equivalents were $568,087 at December 31, 2013, compared with $361,867 at December 31, 2012.
- Working capital was $3.554 million. Current assets were $5.769 million and current liabilities were $2.007 million, implying a current ratio of approximately 2.9.
- Accounts receivable declined to $2.012 million from $2.199 million, while inventories declined to $3.062 million from $3.362 million.
- Total debt was approximately $2.698 million, consisting of a $1.400 million short-term line of credit, $304,556 of current long-term debt, and $993,274 of long-term debt.
- The revolving credit facility permits borrowing of up to the lesser of $5.0 million or specified percentages of eligible receivables and inventory; the company had $1.4 million outstanding and was in compliance with its covenants.
- 2013 investing cash use was $232,844, primarily equipment purchases. Financing activities used $132,145, reflecting $195,000 of additional short-term borrowing and loan repayments.
- Cash increased by $206,220 during 2013, including a $91,250 favorable foreign-exchange effect.
- Total assets were $14.474 million and stockholders’ equity was $11.473 million at year-end.
Material changes versus the prior comparable period
- Revenue declined 3.6%, with EWCP revenue decreasing to $769,818 from $828,135 and TPA revenue decreasing to $15.032 million from $15.572 million.
- Gross margin contracted because production at the Taber plant increased depreciation and higher oil prices increased aspartic acid costs.
- The company shifted from a 2012 operating cash outflow of $307,246 to a 2013 operating cash inflow of $479,959.
- Long-term debt declined from $1.726 million to $1.298 million, while short-term line-of-credit borrowings increased from $1.205 million to $1.400 million.
- The deferred tax asset increased to $2.701 million from $292,111, substantially affecting reported net income.
- Property, equipment, and leaseholds declined to $5.831 million from $7.186 million, primarily reflecting depreciation and currency effects.
- Three major customers accounted for $9.885 million of 2013 sales, increasing customer concentration risk.
Guidance, outlook, commentary, risks, and unusual items
- In February 2014, the company suspended production of aspartic acid at its Taber, Alberta facility until a partner could be found to help fund operations to profitable production levels. Management expected the suspension to reduce annual plant operating and general and administrative costs by approximately $800,000.
- Management stated that it had sufficient cash resources for the coming year and no substantial near-term cash commitments beyond disclosed lease and debt obligations.
- The company expected to spend approximately $200,000 in fiscal 2014 on marketing and production of WATERSAVR, which had generated only limited commercial orders and had not yet proven to be a revenue-producing product.
- Key operating drivers include crude oil prices, oil and gas industry activity, drought conditions, product demand, customer order timing, competitive pricing, raw-material costs, and foreign exchange rates.
- Major risks include customer concentration, international operations, credit and collection exposure, seasonality, dependence on key personnel, raw-material supply and pricing, product liability, environmental regulation, intellectual property protection, and the ability to develop and commercialize new products.
- The company had no reported legal proceedings or contingencies at year-end. U.S. federal tax years 2008 through 2011 remained subject to examination, but no examination was in process.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2013.
- The company paid no dividends and stated that none were expected in the foreseeable future.
Most important facts for investors to verify
- Whether the $2.543 million total income tax recovery, including the $2.408 million deferred component, is sustainable or primarily a noncash, one-time benefit.
- Whether suspending the Taber facility produces the expected approximately $800,000 annual savings and whether a funding or operating partner is secured.
- The status, borrowing capacity, interest rate, collateral, and covenant requirements of the $1.4 million revolving credit line.
- Customer concentration and collectability, particularly because the three largest customers represented 63% of sales and 73% of accounts receivable for the three primary customers.
- Whether gross margins recover after the Taber suspension and in light of oil-derived raw-material costs.
- Commercial adoption and required regulatory approvals for WATERSAVR and other developing products.
- The impact of 1,164,000 outstanding stock options, including potential dilution and option expirations.