Flexible Solutions International, Inc. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; filed March 31, 2015. The filing covers the full fiscal year, not a standalone fourth quarter. The company develops and sells water- and energy-conservation chemicals, including HEATSAVR and WATERSAVR, and biodegradable thermal polyaspartate polymers used in oilfield, agricultural, irrigation, detergent and related applications.
Financial performance and liquidity
| U.S. dollars | 2014 | 2013 | Change |
|---|---|---|---|
| Sales | $15,907,849 | $15,801,596 | 0.7% increase |
| Gross profit | $5,140,225 | $4,530,396 | 13.5% increase |
| Gross margin | 32.3% | 28.7% | Improved |
| Operating income (loss) | $660,778 | $(894,364) | Returned to operating profit |
| Operating margin | 4.2% | (5.7%) | Improved |
| Net income | $403,345 | $1,821,634 | 77.9% decrease |
| Basic and diluted EPS | $0.03 | $0.14 | Decreased |
| Comprehensive income (loss) | $(192,893) | $1,575,491 | Adversely affected by currency translation |
The 2014 net income was reduced by $257,433 of total income tax expense, compared with a $2,543,115 tax recovery in 2013. The 2013 result therefore benefited materially from a large deferred tax recovery and is not directly comparable to 2014 operating performance.
- Segment revenue: Energy and water conservation products generated $872,766, versus $769,818 in 2013. Biodegradable polymers generated $15,035,083, versus $15,031,778.
- Cash: Cash and cash equivalents were $747,517 at December 31, 2014, compared with $568,087 at year-end 2013.
- Operating cash flow: The consolidated statement of cash flows reports $1,602,198 of cash provided by operations, compared with $479,959 in 2013. The MD&A section separately states $1,061,198; the filing does not reconcile this discrepancy.
- Working capital: $4,552,049 at year-end 2014. Current assets were $6,660,839 and current liabilities were $2,108,790.
- Debt: Short-term line-of-credit borrowings were $750,000, down from $1,400,000. Long-term debt totaled $1,112,689, including $358,214 classified as current. Total reported debt was approximately $1.86 million.
- Debt facilities: The revolving credit line permits borrowings up to the lesser of $3.0 million or a borrowing-base calculation and bears interest at 3.75%. The company was in compliance with covenants at year-end.
- Assets and equity: Total assets were $14,234,854 and stockholders’ equity was $11,371,589. Accounts receivable were $2,322,373 and inventory was $3,467,438.
- Customer concentration: Three customers represented $10,216,470, or 64%, of 2014 sales. The three primary customers represented 76% of accounts receivable at year-end.
- Geographic exposure: Approximately 75% of revenue came from shipments outside the United States. Canada generated $404,483 of revenue, while the United States and abroad generated $15,503,366.
Material changes versus 2013
- Sales increased modestly, primarily from the addition of a new energy and water conservation customer.
- Gross margin improved, which management attributed in part to lower oil prices reducing the cost of aspartic acid.
- Operating expenses declined to $4,479,447 from $5,424,760. Lower wages, office costs, consulting, professional fees and utilities were associated with suspending operations at the Taber, Alberta plant and reduced litigation.
- The company returned from an operating loss of $894,364 to operating income of $660,778, despite substantially lower net income because 2013 included a significant deferred tax recovery.
- Depreciation declined to $789,733 from $1,298,616, and capital expenditures declined to $24,535 from $235,565.
- The company suspended aspartic acid production at Taber in February 2014 because operating costs had risen and oil-derived aspartic acid prices were below forecasts. Management expects the suspension to save approximately $800,000 annually in plant operating and general and administrative costs.
- The company repaid the AFSC loan in September 2014 and replaced it and other obligations with a $1,005,967 Harris Bank term loan. The Taber facility’s future use had not been determined.
- Other comprehensive loss increased to $596,238, primarily reflecting foreign-currency translation effects.
Outlook, risks and unusual items
- Management stated that it had sufficient cash resources for the coming year and no substantial cash commitments beyond approximately $93,466 of lease payments due in 2015.
- The company expects to spend approximately $200,000 in fiscal 2015 on marketing and production of WATERSAVR, which management acknowledges has generated limited commercial revenue and may not recover development and marketing costs.
- Management identified crude-oil prices, oil and gas industry activity and drought conditions as significant factors affecting future results.
- The business is seasonal: pool-product sales are generally stronger from January through June, while WATERSAVR demand varies with wet and dry seasons.
- Key risks include customer concentration, international sales and foreign-exchange exposure, credit and collections risk, raw-material price fluctuations, competition, regulatory and environmental obligations, product liability, intellectual-property protection and dependence on key personnel.
- Raw materials for TPA products are derived from crude oil and may be subject to significant price volatility. The company has no long-term supply contracts for certain raw materials and components.
- The company reported no legal proceedings or contingencies and stated that its disclosure controls and internal control over financial reporting were effective as of December 31, 2014.
- After year-end, the company issued 99,000 employee stock options and 60,000 consultant stock options, each with a $1.05 exercise price and a December 31, 2015 vesting date.
- As of December 31, 2014, 1,126,000 stock options were outstanding at exercise prices ranging from $1.00 to $2.45 per share. No options were exercised during 2014.
Important facts for investors to verify
- Reconcile the $1,602,198 operating cash-flow figure in the audited cash-flow statement with the $1,061,198 amount stated in MD&A.
- Assess the sustainability of 2014 profitability excluding the unusually large 2013 deferred tax recovery and considering the company’s accumulated deficit of $4,601,150.
- Monitor the concentration of revenue and receivables among three major customers and the potential effect of losing or delaying payment from any one of them.
- Evaluate the financial and strategic implications of the suspended Taber plant, including its future use and potential impairment or additional funding needs.
- Confirm the commercial traction and 2015 spending requirements for WATERSAVR, which management identifies as an unproven revenue-producing product.
- Review debt maturities, borrowing-base availability and compliance with revolving-credit and term-loan covenants.
- Consider foreign-exchange effects, international regulatory exposure and dependence on oilfield and agricultural markets when assessing future margins and cash flow.