FLEXIBLE SOLUTIONS INTERNATIONAL INC annual report, FY2020

Flexible Solutions International, Inc. — FY2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020; filed March 31, 2021. The filing reports full-year results, not a standalone 2020 fourth quarter. The company develops and manufactures specialty chemicals, including thermal polyaspartates and nitrogen-conservation products, plus energy- and water-conservation products marketed as HEATSAVR and WATERSAVR.

Financial performance and position

Metric	2020	2019	Change
Sales	$31.41 million	$27.44 million	+14.5%
Gross profit	$9.77 million	$8.62 million	+13.3%
Gross margin	31.1%	31.4%	Down approximately 0.3 percentage points
Operating income	$4.12 million	$1.91 million	+115.9%
Operating margin	13.1%	7.0%	Improved
Net income attributable to controlling interest	$2.98 million	$1.91 million	+55.7%
Basic and diluted EPS	$0.24	$0.16	+50.0%
Cash provided by operations	$5.71 million	$2.37 million	+140.7%

Net income including non-controlling interests was $3.58 million, compared with $2.30 million in 2019. Total comprehensive income attributable to the company was $3.10 million, compared with $2.14 million. The filing does not present a consolidated adjusted EBITDA measure.

BCPA/TPA products generated $31.07 million of 2020 sales and segment profit of $3.51 million. EWCP products generated $334,423 of sales and a segment loss of $536,220. Three customers represented 47% of sales, or $14.71 million, and 68% of accounts receivable at year-end, or $3.99 million.

Liquidity, cash flow, debt and capital allocation

Cash and cash equivalents were $3.47 million at December 31, 2020, compared with $3.63 million in 2019. Including a $1.00 million term deposit, reported cash resources were $4.47 million.
Working capital was $11.15 million, compared with $10.71 million in 2019. Management stated that available cash resources were sufficient for expected commitments and cash-flow needs over the following year.
Operating cash flow of $5.71 million was offset by $3.22 million of investing outflows and $2.70 million of financing outflows, resulting in a $161,894 decrease in cash resources after exchange-rate effects.
Short-term lines of credit totaled $2.12 million at year-end. Long-term debt totaled $3.85 million, including $848,794 classified as current. Lease liabilities totaled $483,113. The $500,000 remaining convertible note was repaid in April 2020.
Debt refinancing in October 2020 replaced Harris Bank facilities with Midland facilities and included new term loans. The company was in compliance with all debt covenants at year-end.
The company invested $3.15 million in investments, received $972,295 in investment distributions, and spent $1.07 million on property, equipment and leaseholds.
No dividends were paid in 2020. The annual dividend was suspended in March 2020 because of COVID-19 uncertainty.

Material changes versus 2019

Sales growth was driven primarily by growth across most TPA product lines. EWCP sales declined because of lower customer orders.
Operating income increased substantially as revenue grew and operating expenses declined from $6.71 million to $5.65 million. Travel costs fell because of COVID-19, while professional fees, administrative salaries, interest expense and bad-debt expense also declined.
Interest expense decreased to $260,657 from $428,371, reflecting lower debt balances and refinancing activity.
Gain on investments increased to $877,358 from $323,824, primarily reflecting stronger results from the Florida fertilizer-additives investment. The company also recognized a $133,341 gain when ENP Realty became wholly owned through ENP Investments.
Accounts receivable increased to $5.89 million from $4.47 million, while inventories decreased to $8.37 million from $9.18 million.
Total assets increased to $35.09 million from $32.38 million, and total stockholders’ equity increased to $23.77 million from $20.46 million.
ENP Investments acquired 100% of ENP Realty in January 2020, including a 14,000-square-foot manufacturing facility. The company also invested $500,000 in Lygos Inc. to pursue sustainable aspartic acid using synthetic biology.

Outlook, risks and unusual items

Management identified crude-oil prices and related raw-material costs, oil-and-gas activity, drought conditions affecting agricultural demand, tariffs on imported aspartic acid, and COVID-19 as factors likely to affect future results. The company provided no formal revenue or earnings guidance.

Management expects to spend approximately $50,000 in fiscal 2021 on marketing and production of WATERSAVR, which has not yet become a meaningful revenue-producing product.
COVID-19 may cause staff shortages, reduced demand, government intervention and supply-chain disruption; the duration and severity were described as uncertain.
The company has material customer concentration and credit exposure. Three customers accounted for 47% of revenue and 68% of receivables at year-end.
International shipments represented approximately 32% of 2020 revenue, creating foreign-exchange, political, regulatory, collection and trade risks.
Raw materials are sourced globally and include materials derived from crude oil. The company has no long-term supply contracts for certain materials and components.
Several patents expire at various dates through 2022. The company faces competition from Lanxess, Asian manufacturers and substitute chemicals or products.
Canadian tax-loss carryforwards totaled approximately $6.07 million, subject to tax-authority review. A Canadian deferred-tax valuation allowance of $2.31 million was recorded.
The independent auditor issued an unqualified opinion. Inventory valuation, with a December 31, 2020 balance of $8.37 million, was identified as the critical audit matter. No legal proceedings were reported.

Important facts for investors to verify

Verify the sustainability of 2020 TPA revenue growth and whether the decline in EWCP orders continued after year-end.
Assess customer concentration, receivable aging and collectability, particularly for the three major customers.
Review debt maturities, borrowing-base availability, interest-rate exposure and compliance with financial covenants.
Confirm whether the two Paycheck Protection Program loans totaling $537,960 were forgiven; management expected forgiveness but had not received acceptance as of year-end.
Evaluate the recurring nature of the $877,358 investment gain and the $133,341 ENP Realty acquisition gain.
Monitor the suspended dividend and management’s future capital-allocation priorities.
Assess the commercial prospects and planned 2021 spending for WATERSAVR, as well as patent expirations and competitive threats.
Consider the effects of crude-oil prices, tariffs, foreign exchange, international sales and COVID-19 on margins and supply availability.