Flexible Solutions International, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Flexible Solutions International, Inc. develops, manufactures and markets specialty chemicals, including biodegradable thermal polyaspartates (TPAs), nitrogen-conservation products, and energy- and water-conservation products marketed primarily as HEATSAVR and WATERSAVR. The company operates mainly through its U.S. and Canadian subsidiaries and reports in U.S. dollars.
This filing covers the fiscal year ended December 31, 2022. Although the request references 2022 Q4, the source is an annual Form 10-K rather than a standalone quarterly filing. The consolidated financial statements received an unqualified audit opinion from Smythe LLP.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Sales | $45.84 million | $34.42 million | +33.2% |
| Gross profit | $13.87 million | $11.40 million | +21.7% |
| Gross margin | 30.3% | 33.1% | Down 2.8 percentage points |
| Operating income | $7.05 million | $5.48 million | +28.6% |
| Operating margin | 15.4% | 15.9% | Down 0.6 percentage points |
| Net income attributable to controlling interest | $7.02 million | $3.45 million | +103.6% |
| Basic/diluted EPS | $0.57/$0.56 | $0.28/$0.28 | Improved |
| Cash provided by operations | $1.48 million | $4.54 million | Down 67.4% |
Net income benefited from a $1.48 million recovery of prior-year estimated current taxes, a $335,051 gain related to the ENP Peru acquisition, $341,424 of investment gains and $132,233 of interest income. Excluding these items, the filing does not provide a separately stated adjusted earnings measure.
- TPA/biodegradable polymer sales were $45.31 million, or approximately 98.8% of consolidated sales, compared with $34.00 million in 2021.
- Energy and water-conservation product sales were $528,462, compared with $420,811 in 2021; the segment remained loss-making, with a segment loss of $334,525.
- Three customers represented 61% of sales in 2022, up from 49% in 2021. The three largest customers generated $27.78 million of revenue.
- International shipments represented approximately 21% of revenue, compared with 20% in 2021.
Balance sheet, debt and liquidity
| Metric | December 31, 2022 | December 31, 2021 |
|---|---|---|
| Cash and term deposits | $6.82 million | $6.74 million |
| Accounts receivable, net | $9.45 million | $7.13 million |
| Inventory | $14.42 million | $9.50 million |
| Total current assets | $30.99 million | $23.81 million |
| Total current liabilities | $10.30 million | $9.82 million |
| Working capital | $20.69 million | $13.99 million |
| Short-term line of credit | $2.82 million | $2.30 million |
| Total long-term debt, including current portion | $6.15 million | $2.37 million |
| Total stockholders’ equity | $35.24 million | $27.71 million |
Management stated that available cash resources were sufficient for the coming year and that there were no substantial near-term capital commitments. The company was in compliance with all loan covenants at year-end. The new revolving credit facilities carried a stated interest rate of 7.5% at December 31, 2022. Total debt, including the short-term lines of credit, was approximately $8.97 million.
Cash flow and capital allocation
- Operating cash flow was $1.48 million, pressured by increases of $2.34 million in accounts receivable and $4.12 million in inventory.
- Investing cash outflows were $2.22 million, including $1.98 million for property and equipment and $499,329 for the ENP Peru acquisition, partially offset by $265,001 of investment distributions.
- Financing activities generated $848,326, including $3.23 million of long-term borrowings and $517,772 of short-term line advances, offset by $2.29 million of debt repayments and $689,434 distributed to non-controlling interests.
- The company invested substantially more in property and equipment than in 2021, primarily reflecting manufacturing and facility expansion.
- The dividend remains suspended; the filing states that the suspension began in March 2020 and continued through the reporting period.
Material changes versus the prior comparable period
- Revenue increased by $11.42 million, driven by higher customer orders for energy and water-conservation products and growth across most TPA product lines.
- Gross margin declined as raw-material costs and wages increased. Management also cited higher employee-retention wages, insurance, travel, interest and professional fees.
- Professional fees increased partly because of costs associated with a now-cancelled merger with Lygos Inc.
- ENP Peru became consolidated after the company increased its ownership and control during 2022. The transaction produced a $335,051 gain and added significant property and debt to the balance sheet.
- Long-term debt increased by approximately $3.79 million, while short-term revolving borrowings increased by approximately $518,000.
- Inventory increased 51.7%, and accounts receivable increased 32.5%, contributing to the substantial decline in operating cash flow.
- Stock-based compensation increased to $399,148 from $210,112. Outstanding options totaled 1.686 million shares at year-end, with exercise prices from $1.70 to $4.13.
Guidance, outlook, risks and unusual items
The filing provides no formal revenue or earnings guidance. Management expects future results to be affected by oil and gas activity, drought conditions, crude-oil-derived raw-material prices, tariffs on imported aspartic acid, customer order timing, competitive pricing and the continuing effects of COVID-19.
- Management expected to spend approximately $50,000 in fiscal 2023 on marketing and production of WATERSAVR. The product has generated limited commercial orders and has not yet proven to be a meaningful revenue source.
- Three customers account for a substantial portion of sales and receivables, creating customer concentration and credit risk.
- Raw materials are sourced globally, including aspartic acid from China, and may be affected by oil prices, tariffs, supply disruptions and transportation conditions.
- The business has seasonal exposure, particularly to swimming-pool demand, agricultural cycles and wet-versus-dry conditions.
- The company relies on patents, trade secrets and trademarks but faces competition from Lanxess AG, Asian producers, alternative chemicals and substitute products. It also identifies risks from potential intellectual-property and product-liability claims.
- Environmental, chemical-handling and product-safety regulations could result in fines, remediation costs, production changes or operating interruptions.
- The company identified inventory valuation as the audit’s critical audit matter. Inventory was $14.42 million at year-end and is carried at the lower of cost and net realizable value.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022. The auditor was not engaged to provide an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether the 2022 earnings increase is sustainable after the $1.48 million tax recovery and other investment and acquisition-related gains.
- Whether operating cash flow improves as the elevated receivable and inventory balances convert to cash.
- The repayment schedule, interest-rate exposure and collateral requirements for approximately $8.97 million of total debt.
- The durability of revenue from the three customers representing 61% of sales and 65% of year-end receivables.
- The commercial traction and required funding for WATERSAVR and the loss profile of the EWCP segment.
- The effect of raw-material inflation, tariffs, oil-and-gas activity, drought conditions and foreign exchange movements on margins.
- The potential dilution from 1.686 million outstanding stock options and the company’s continued suspension of dividends.