Flexible Solutions International, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, filed April 2, 2018. The company develops, manufactures and markets specialty chemicals, primarily energy and water conservation products and biodegradable polymers (TPAs/BCPAs) used in oilfield, agricultural, irrigation, detergent and related applications. The filing presents U.S. GAAP consolidated results for 2017 compared with 2016.
Revenue was concentrated in biodegradable polymers, which generated $14.9 million, or approximately 96% of 2017 sales. Energy and water conservation products generated $0.6 million. Three customers represented 55% of total sales, and approximately 72% of revenue came from shipments outside the United States.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Sales | $15.494 million | $16.246 million | Down 4.6% |
| Gross profit | $5.985 million | $6.989 million | Down 14.4% |
| Gross margin | 38.6% | 43.0% | Down 4.4 percentage points |
| Operating income | $1.511 million | $3.085 million | Down 51.0% |
| Operating margin | 9.8% | 19.0% | Down 9.3 percentage points |
| Net income | $1.755 million | $1.793 million | Down 2.2% |
| Basic diluted EPS | $0.15 / $0.15 | $0.16 / $0.15 | Basic EPS declined |
| Cash flow from operations | $1.042 million | $1.775 million | Down 41.3% |
| Ending cash and equivalents | $6.912 million | $2.470 million | Up $4.442 million |
The 2017 results included a $2.044 million after-tax gain on the involuntary disposition of the Taber, Alberta facility following a February 2017 fire. Excluding this unusual gain, reported profitability would have been materially lower; the filing does not provide a separate adjusted net income figure.
Total assets were $17.773 million and stockholders’ equity was $14.922 million at December 31, 2017. Working capital was $11.259 million. Accounts receivable declined to $2.105 million from $3.008 million, while inventory increased to $4.687 million from $3.786 million.
Debt, liquidity and cash flow
- Cash increased primarily because of $3.367 million of insurance proceeds related to the Taber fire, $1.042 million of operating cash flow and $0.471 million of favorable exchange-rate effects.
- The company reported $250,000 outstanding under a revolving credit line with capacity of up to the lesser of $3.0 million or specified percentages of eligible receivables and inventory. The line carried a 5% annual interest rate and was scheduled for renewal on June 30, 2018.
- Long-term debt totaled $352,089, including $201,193 due in 2018 and $150,896 due in 2019. The company stated that it was in compliance with all loan covenants.
- Management stated that available cash resources were sufficient for the coming year and that no substantial cash commitments were expected other than disclosed lease and debt obligations.
- Minimum remaining rental commitments totaled approximately $735,670, with 2018 payments of $201,840 and the final lease expiring in 2021.
Material changes versus 2016
- Sales declined $751,689, primarily from lower energy and water conservation product sales following the Taber facility fire and lower customer uptake of TPA products.
- Gross margin contracted because of temporary cost increases after the fire and higher aspartic acid costs.
- Operating expenses increased to $4.474 million from $3.904 million, including higher wages and administrative compensation, additional rent for storage and capacity, and higher professional fees related to intellectual property and other legal matters.
- Operating income fell sharply despite the unusual insurance-related gain, while net income remained relatively stable because of that gain and lower income tax expense.
- Cash flow from operations decreased by $733,000, although year-end cash rose substantially because of insurance proceeds and foreign exchange effects.
- The Taber plant was destroyed in February 2017. The company recorded insurance proceeds and purchased a new 3,000-square-foot building in Taber during 2017. TPA production continued at the company’s Peru, Illinois facility.
Guidance, outlook, commentary and risks
The company did not provide formal revenue or earnings guidance. Management identified crude-oil prices, which affect the cost of imported aspartic acid, oil and gas industry activity, and drought conditions affecting agricultural demand as key factors influencing future results.
- Management expected to spend approximately $200,000 during fiscal 2018 on marketing and production of WATERSAVR. The filing states that WATERSAVR had not yet proven to be a revenue-producing product and may not recover its development and marketing costs.
- Research and development spending was $98,833 in 2017 versus $95,028 in 2016.
- The business is seasonal: pool-product demand is generally stronger in the first half, water-conservation demand varies with wet and dry seasons, and TPA demand has modest agricultural and year-end oilfield seasonality.
- Major risks include customer concentration, international sales and foreign-exchange exposure, dependence on oil and gas and agricultural markets, raw-material price volatility, competition, product liability, environmental regulation, intellectual-property protection, supply interruptions and dependence on key personnel.
- Two primary customers represented 65% of accounts receivable at year-end 2017, increasing collection and concentration risk.
- The company has incurred operating losses and negative operating cash flow in prior periods and cautioned that future profitability is not assured, although management reported adequate liquidity for the coming year.
- No legal proceedings were reported. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2017.
Most important facts to verify
- Reconcile 2017 earnings and cash generation excluding the $2.044 million after-tax fire-related gain and $3.367 million of insurance proceeds.
- Confirm the status and renewal terms of the $250,000 revolving credit facility after its June 30, 2018 renewal date.
- Assess whether TPA sales and margins recovered from the 2017 decline and whether aspartic acid and other raw-material costs remain elevated.
- Evaluate customer concentration, including the loss or delayed payment of any of the three customers representing 55% of sales.
- Monitor the commercial traction and 2018 spending associated with WATERSAVR, which had limited commercial adoption at the filing date.
- Verify the final insurance settlement and the company’s replacement manufacturing capacity following the Taber fire.
- Review the effect of international revenue exposure, currency movements and the company’s lack of foreign-exchange hedging.