Q1 2019 speech

Good morning. I’m Dan O’Brien, CEO of Flexible Solutions.

Safe Harbor provision:

 

The Private Securities Litigation Reform Act of 1995 provides a "Safe Harbor" for forward-looking statements.  Certain of the statements contained herein, which are not historical facts, are forward looking statements with respect to events, the occurrence of which involve risks and uncertainties.  These forward-looking statements may be impacted, either positively or negatively, by various factors.  Information concerning potential factors that could affect the company is detailed from time to time in the company's reports filed with the Securities and Exchange Commission.

Welcome to the FSI conference call for Q1 2019.

In advance of speaking about our financials, I’d like to talk about our product lines and what we think might occur over the next several quarters.

 

Insurance compensation from the fire has been received in full, but the accounting and tax effects of the payments will continue to distort and complicate our financials until year over year comparisons that do not contain compensation or tax adjustments are available. The first quarter this will be true is Q1 2020.

 

Our NanoChem division: NCS represents more than 1/2 of the revenue of FSI. This division makes thermal poly-aspartic acid, called TPA for short, a biodegradable polymer with many valuable uses. NCS also manufactures SUN 27™ and N Savr 30™ which are used to reduce nitrogen fertilizer loss from soil.

 

TPA is used in agriculture to significantly increase crop yield. The method of action is by slowing crystal growth between fertilizer ions and other ions in the soil resulting in the fertilizer remaining available longer for the plants to use. The attraction between the TPA and the fertilizer ions also retains the nutrients closer to the plant roots. Keeping fertilizer more easily available for crops to use, results in better yield with the same level of fertilization.

TPA in agriculture has a strong economic value for all links in the sales to end user chain. There are good profits from manufacturer through the distribution system to the grower, yet the grower still earns a great profit from the extra crops produced using the same land but no extra fertilizer. For example, a summer 2018 trial on strawberries done by the University of California at Davis resulted in a 15% increase in berries along with increased quality. The use of $40 worth of TPA yielded 45 hundred dollars in additional gross profit per acre.

TPA is also a biodegradable way of treating oilfield water to prevent pipes from plugging with mineral scale. Our sales into this market are well established and normally grow steadily but slowly. A simple explanation of TPA’s effect is that it prevents the scaling out of minerals that are part of the water fraction of oil as it exits the rock formation. Scale must be prevented to keep the oil recovery pipes from clogging.

SUN 27 and N Savr 30 are our nitrogen conservation products. Nitrogen is a critical fertilizer but it is subject to loss through bacterial breakdown, evaporation and soil runoff. Both our nitrogen products are becoming well respected and sales continue to grow. They utilize much more environmentally friendly solvents than some of the competing products.

SUN 27™ is used to conserve nitrogen from attack by soil bacterial enzymes while N Savr 30 is directed toward nitrogen loss through leaching and evaporation. Each of our nitrogen products are equal to, or better than, the competing products.

ENP, the October 2018 acquisition: ENP is focused on sales into the turf and golf markets whereas our NCS sales are into row crop agriculture – two very distinct markets. We account for ENP as a subsidiary and expect it to generate consolidated revenue of greater than $8 million in full year 2019. Historic results suggest that FSI should expect annual pretax profits of greater than $1 MM from this division with moderate annual growth. However, the strong quarters for ENP are 2 and 3 to match the US spring and summer along with Q4 when large customers engage in early buying for the year ahead. Q1 is the quarter when ENP is expected to contribute the least to the bottom line. We expect much higher profitability from ENP throughout the rest of 2019.

Watersavr™: Spring has arrived in most of the areas we are trying to sell into. News regarding Watersavr™ trials and sales will be released if and when it occurs.

Delivered wholesale water costs now exceed $1200 per acre foot in many California cities while the total cost of saving an acre foot using WaterSavr™ is less than $200. WaterSavr™ can reduce annual losses from reservoirs by up to 2 feet per treated acre. A municipality that pays $1200 – $2400 per acre foot for water and does not use WaterSavr™ is wasting significant tax revenue - about $12 million a year for San Diego - regardless of the drought conditions in any particular year.

Q1 2019 and the rest of 2019

TPA, SUN 27™ and N Savr 30™ for agricultural use traditionally have peak uptake in Q1 and Q2.  Q1 2019 results were very strong. Q2 is expected to be just as good. We are finding success selling agricultural products into international markets with opposite seasons which leads us to predict that our historic slow quarter, Q3, will increase substantially; perhaps becoming nearly as strong as Q1 and Q2. The effect of international sales is expected to be felt in Q4 as well. This, along with Q4 sales for US early buy and winter crop programs is expected move Q4 revenue upward toward the same level we have just reported for Q1 2019.

Oil, gas and industrial sales of TPA increased compared to the previous year. The recovery of sales into this market vertical is expected to continue throughout 2019.

Effect of the LLC investment announced in January: This investment generated quarterly cash flow and profits starting in Q1 2019 and shown in the financials. The company we invested in will also order substantially more product from us in Q1 2019 than it did in Q1 2018. We expect this to continue for many quarters to come which will further increase revenue and profitability. It is worth noting that the seasonality of the LLC’s sales is opposite to our North American sales which will tend to smooth out our quarterly revenue numbers in a positive manner.

Full year 2019 revenue will increase very strongly compared to 2018 driven by; historic operations, the ENP acquisition and the January LLC investment. We expect that profits and cash flow will increase very significantly along with the increases in top line revenue. Our regular warning applies - that we can’t control customer behavior, shipping dates, weather, crop pricing, oil platform maintenance and the other variables of our business, so quarterly results will be unlikely to form a straight line on a graph. However, we do expect the slope of the graph to be up sharply for all of 2019.

Tariffs: Since Sept 30th, all our raw materials imported from China have included a 10% additional tariff. US customers have received price increases from us now that this inventory is being used. US customers will receive additional price increases when we begin using inventory that is subject to the 25% tariffs just announced. International customers are not charged the tariff because we are applying for the export rebates available to recover the tariffs. To hedge against the chance of even higher tariffs, and to service the increased production expected in 2019, we have increased inventory substantially.

As a result, the accumulating tariff payments to the Government are affecting our cost of goods, our cash flow and our profits negatively until the rebates are received. Rebates can take many months and the total dollar amount due back to us has become significant. The rebates will increase profitability and cash flow while decreasing cost of goods for the future quarters in which the rebates are received.

Highlights of the financial results:

Sales for the quarter increased 102% to $8.47 million, compared with $4.2 million for Q1 2018. The result is a gain of $1.01 million or 9 cents per share in the 2019 period, compared to a gain of $704 thousand or 6 cents per share, in 2018.

In addition to the GAAP numbers I just mentioned, there was a one-time cost of the ENP acquisition [$70,000] recognized in Q1. We also paid $250,000 in tariffs during the quarter, most of which we expect to get back some months in the future. Without these two items, earnings would have been 11 cents per share rather than 9 cents.

Working capital is adequate for all our purposes and is expected to increase during the year as our revenue grows. We also have a line of credit with BMO Harris Bank of Chicago. We are confident that we can execute our plans with our existing capital. The ENP acquisition was funded with a loan from BMO Harris plus a convertible note to the seller and did not reduce our cash position. The LLC investment in January was made with cash on hand.

The text of this speech will be available on our website by Tuesday, May 20th. Email or fax copies can be requested from Jason Bloom at Jason@flexiblesolutions.com.

Thank you, the floor is open for questions.