Flexible Solutions International, Inc. — 2011 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the fiscal year ended December 31, 2011, filed March 29, 2012. The company develops, manufactures and markets water- and energy-conservation chemicals, including HEAT$AVR/ECO$AVR and WATER$AVR, and biodegradable thermal polyaspartate polymers used in petroleum, agriculture, irrigation and detergent applications. The company operates through wholly owned Canadian and U.S. subsidiaries and reports in U.S. dollars.
The filing provides annual 2011 and 2010 results; it does not provide a clear standalone fourth-quarter financial table despite the request metadata referencing 2011 Q4.
Key financial metrics
| U.S. dollars | 2011 | 2010 | Change |
|---|---|---|---|
| Sales | $15.519 million | $11.491 million | 35.1% increase |
| Gross profit | $5.855 million | $4.473 million | 30.9% increase |
| Gross margin | 37.7% | 38.9% | Down approximately 1.2 points |
| Operating income | $1.308 million | $0.500 million | 161.6% increase |
| Operating margin | 8.4% | 4.4% | Up approximately 4.0 points |
| Net income (loss) | $182,990 | $(190,080) | Returned to profitability |
| Basic EPS | $0.01 | $(0.01) | Improved |
| Cash from operations | $(798,800) | $1.319 million | Declined $2.118 million |
The TPA segment generated $14.486 million of 2011 revenue and $1.972 million of segment profit. EWCP generated $1.033 million of revenue but a $1.789 million segment loss. Three customers represented 63% of 2011 sales, compared with 61% in 2010. Approximately 73% of revenue came from shipments outside the United States.
At December 31, 2011, cash and cash equivalents were $506,903, accounts receivable were $2.332 million, inventory was $2.891 million and working capital was $3.601 million. Total assets were $14.505 million and stockholders’ equity was $10.613 million.
Total debt consisted of a $650,000 short-term revolving line, $1.977 million of long-term debt before current classification, and $1.647 million of long-term debt after the current portion. The short-term line had a 4.0% weighted-average interest rate and was scheduled to mature February 28, 2012. On March 19, 2012, the company disclosed replacement financing consisting of a $5.0 million revolving line and a $1.4 million secured loan, both at 3.75%.
Capital expenditures were $794,848, primarily for the Taber, Alberta facility. The company repurchased and cancelled 792,576 shares for $1.030 million in February 2011. Shares outstanding at March 15, 2012 were 13,169,991.
Material changes versus the prior comparable period
- Sales increased primarily because customers rebuilt inventories to more normal levels for EWCP products and because TPA sales increased across markets following improved marketing success.
- Operating income improved substantially, but operating expenses rose to $4.547 million from $3.973 million. Wage costs increased due to annual raises and stock-option grants, while professional fees increased because of patent filings and litigation-related costs.
- Net income improved from a $190,080 loss to $182,990 of income. The reported effective tax burden remained high because U.S. income could not be offset by Canadian subsidiary losses.
- Cash declined by $2.257 million during 2011, compared with a $637,270 increase in 2010. The decline reflected negative operating cash flow, capital expenditures, debt repayments and the stock repurchase.
- Accounts receivable increased from $1.199 million to $2.332 million, and inventory increased from $2.539 million to $2.891 million, contributing to the negative operating cash flow.
- TPA revenue increased from $10.555 million to $14.486 million, while EWCP revenue increased from $936,832 to $1.033 million. The EWCP segment continued to report a substantial operating loss.
Guidance, outlook, risks and unusual items
Management stated that it expected to have sufficient cash resources for commitments and cash-flow requirements during the following year and identified no substantial anticipated capital requirements beyond disclosed items. The company expected to spend approximately $200,000 in fiscal 2012 on marketing and production of WATER$AVR, which management acknowledged had not yet proven to be a revenue-producing product.
The Taber facility is intended to produce aspartic acid using sugar rather than imported, oil-based inputs from China. Management expects this could reduce raw-material costs, oil-price exposure and shipping costs, although the plant was still under construction and had not begun depreciation.
- The company has a history of operating losses, negative operating cash flow and an accumulated deficit, and future profitability is not assured.
- Revenue is concentrated among a small number of customers and products, with three customers accounting for 63% of 2011 sales.
- International sales, foreign-exchange movements, political and economic conditions, regulatory requirements and collection risk could affect results.
- Raw materials are generally available but some TPA inputs are derived from crude oil and are subject to price fluctuations. The company has no long-term supply contracts for certain materials.
- The business is seasonal, particularly swimming-pool products and WATER$AVR. Competitive pressure, product acceptance, pricing and order timing may cause substantial operating volatility.
- Patents expire at various dates between 2011 and 2020, and pending applications may not be granted or upheld. The company also faces potential intellectual-property, environmental, product-liability and hazardous-material risks.
- A former WATER$AVR distributor initiated arbitration on June 29, 2011. The amount and outcome were indeterminable; $250,000 received from the distributor was included in deferred revenue.
- The financial statements were audited by MNP LLP with an unqualified opinion. Management reported effective disclosure controls and internal control over financial reporting.
The filing contains an apparent inconsistency in reported income-tax amounts: the statement of operations shows income-tax expense of $1.145 million, while Note 11 reports total tax expense of $1.126 million and a separate tax-reconciliation amount of $835,785. The filing text does not clearly reconcile these figures.
Important facts for investors to verify
- Reconcile the inconsistent 2011 income-tax expense figures and confirm the correct effective tax rate.
- Assess liquidity after the March 2012 replacement financing, including borrowing availability, collateral requirements, covenants and maturity terms.
- Verify the operating status, remaining completion costs and expected economic benefits of the Taber fermentation facility.
- Evaluate whether the TPA segment’s growth can offset continuing losses in the EWCP segment and planned WATER$AVR spending.
- Review customer concentration, accounts-receivable aging and the ability to convert increased inventory and receivables into operating cash flow.
- Monitor the WaterSavr Singapore arbitration and the treatment of the $250,000 deferred-revenue balance.
- Consider dilution from 1,193,700 outstanding stock options, in addition to the 13,169,991 common shares outstanding as of March 15, 2012.