Flexible Solutions International, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2021. Flexible Solutions International develops, manufactures and markets specialty chemicals through two reportable segments: biodegradable polymers and nitrogen-conservation products (BCPA/TPA), and energy and water-conservation products (EWCP), including HEATSAVR and WATERSAVR. The company operates primarily in the United States and Canada and consolidates its 65% interest in ENP Investments.
The financial statements were audited by Smythe LLP, which issued an unqualified opinion. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Sales | $34.416 million | $31.407 million | Up 9.6% |
| Gross profit | $11.397 million | $9.766 million | Up 16.7% |
| Gross margin | 33.1% | 31.1% | Up approximately 2.0 points |
| Operating income | $5.483 million | $4.118 million | Up 33.2% |
| Operating margin | 15.9% | 13.1% | Improved |
| Net income | $4.294 million | $3.584 million | Up 19.8% |
| Net income attributable to controlling interest | $3.449 million | $2.977 million | Up 15.9% |
| Basic and diluted EPS | $0.28 | $0.24 | Up $0.04 |
| Cash provided by operations | $4.536 million | $5.705 million | Down 20.5% |
BCPA sales were $33.996 million, or approximately 98.8% of consolidated sales, compared with $31.073 million in 2020. EWCP sales increased to $420,811 from $334,423, but the segment remained loss-making, with a reported segment loss of $368,994 versus a $536,220 loss in 2020.
Net income included $537,960 of PPP loan forgiveness, a $507,143 gain on investments, and a $44,330 gain on the sale of land. Total income tax expense increased to $2.356 million from $1.607 million.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $5.710 million; cash resources including term deposits were $6.736 million, compared with $4.473 million at year-end 2020.
- Working capital was $13.986 million, up from $11.146 million.
- Total assets were $39.551 million and total stockholders’ equity was $27.705 million.
- Accounts receivable increased to $7.129 million and inventory increased to $9.502 million, including $6.084 million of raw materials and supplies.
- Short-term lines of credit totaled $2.301 million. Long-term debt totaled $2.367 million, consisting of $793,574 current and $1.573 million non-current. Total debt excluding lease liabilities was approximately $4.667 million.
- Lease liabilities totaled $217,267. Contractual rent payments through 2025 aggregate approximately $297,720.
- Operating cash flow declined despite higher earnings, primarily reflecting increases in accounts receivable, inventory and prepaid expenses. The company stated that it had sufficient cash resources for the coming year and no substantial near-term capital requirements.
Material changes versus the prior comparable period
- Revenue growth reflected increased EWCP orders and growth across most TPA product lines.
- Profitability improved through higher sales and gross profit, while operating expenses increased modestly to $5.913 million from $5.649 million.
- Wages increased to retain employees; lease expense declined following ENP Realty’s acquisition by ENP Investments; interest expense declined with lower debt; and 2020’s one-time historic-sales commission did not recur.
- Debt declined from $3.848 million of long-term debt at year-end 2020 to $2.367 million, while the short-term credit lines increased from $2.116 million to $2.301 million.
- Capital expenditures decreased to $782,219 from $1.081 million. The company also invested an additional $500,000 in Lygos, bringing that investment to $1.000 million.
- The dividend remained suspended, having been suspended in March 2020 because of COVID-19 uncertainty.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management identified crude-oil and aspartic-acid costs, tariffs, oil-and-gas activity, drought conditions and COVID-19 as factors that could materially affect results.
- Three customers represented $16.918 million, or 49% of 2021 sales, and 69% of year-end accounts receivable. Customer concentration creates material revenue and credit risk.
- International shipments represented approximately 20% of revenue, exposing the company to foreign-exchange, political, regulatory, collection and trade risks.
- Raw materials are sourced globally and include inputs derived from crude oil. The company has no guaranteed long-term supply arrangements and may face cost increases or disruptions.
- Competition includes Lanxess and Asian producers for TPA products, as well as substitute chemicals and alternative water- or energy-conservation products.
- WATERSAVR has not become a significant revenue-producing product. The company expects to spend approximately $50,000 on its marketing and production in fiscal 2022.
- Operations are seasonal, particularly swimming-pool products and agricultural products. The company also faces environmental, product-liability, regulatory, intellectual-property and key-person risks.
- The audit identified inventory valuation as a critical audit matter. Inventory was $9.502 million at year-end, and valuation depends partly on overhead allocation and estimates of net realizable value.
Important facts for investors to verify
- Reconcile the improvement in reported earnings with the $537,960 PPP loan-forgiveness benefit and other investment and land-sale gains.
- Assess the sustainability of BCPA growth and the continuing losses in the EWCP segment.
- Monitor customer concentration, receivable aging and the collectability of the $7.129 million receivables balance.
- Evaluate inventory levels, raw-material costs, supply-chain exposure and potential inventory obsolescence.
- Review debt maturities, credit-line availability, borrowing-base requirements and compliance with loan covenants.
- Track the commercial progress and planned fiscal 2022 spending for WATERSAVR and other new products.
- Consider the effect of suspended dividends, outstanding options, and the 65% ownership structure with non-controlling interests.