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Flexible Solutions International, Inc. (NYSEMKT:FSI)

Q3 2013 Earnings Call

November 15, 2013 11:00 AM ET

Executives

Dan O’Brien – CEO

Analysts

William Gregozeski – Mont Blanc Capital Management AG

Gary Schwab – Valley Forge Capital

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Third Quarter 2013 Financials Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to Dan O’Brien. Please go ahead, sir.

Dan O’Brien

Thank you, George. Good morning. I am 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 third quarter conference 2013. Prior to focusing on the financials, I would like to speak about where we are in general and what we expect for the next several quarters. Revenue was down substantially in third quarter of 2013, compared to 2012 and flat for the nine months. Growth in the first two quarters was on counteracted by an expected reduction in sales through large customer in Q3. This is expected to be a onetime event. Q3 is usually our smallest quarter and thus effect is magnified. The NanoChem division represents most of the revenues of FSI. This division makes polyaspartic acid called TPA for short, a biodegradable protein with many uses.

Our sugar to aspartic acid plant in Alberta is now in operation. Our corporate policy is not to provide volume information or details of production. However, revenue is ongoing. We’re depreciating the factory and the Taber production team is focused on continuous increases in quantity, efficiency and quality. Aspartic acid from the Taber plant is shipped to our Peru, Illinois plant, where it is converted to polyaspartic acid for onward sale through our customers.

TPA is used in agriculture to increase crop yield, the method of action is through limiting crystal embryo growth between the fertilizer ions in the soil, when embryonic crystals are prevented from transforming into fully crystalline form by TPA, the fertilizer remains available to plants further into the growing season.

The firm but light attraction between the TPA and the fertilizer ions also prevents fertilizer run off, keeping fertilizer easily available to the crops results and better yield with the same level of fertilization. In North America alone the wholesale market for TPA is estimated at over $2 billion a year and most crops are able to use TPA profitably.

Sales into agriculture for the first nine months of 2013 did not grow as well as hoped for; we attribute the deterioration to weather conditions in late 2012 and early 2013 that affected our distributors’ ability to earn new business. The end of the 2013 crop season has not seen the same level of the disturbance as late 2012 and spring 2013, so we believe the rate of growth seen in 2010 through 2012 can resume.

Our internal sales team is focused on supporting our best distributors, helping the others improve their performance and identifying additional distribution opportunity.

TPA in agriculture is a unique economic situation for all links in the manufacture to end user chain. With many agriculture inputs the economic value is good for all but one party most commonly the farmer who has asked to accept the soft values such as convenient instead of the cash profit accruing to the other parties, not so for TPA.

FSI earns a fair profit on manufacturing; distribution earns strong profit selling to dealers. Dealers make good profit selling to growers, if the grower still earns a great profit from the extra crops he produces with on the same land and fertilizer program. More than 300 trials over the last 15 years have demonstrated that investing $20 an acre in TPA can payback $40 to $100 or more. We believe this is an excellent basis for long-term growth in sales.

TPA is also a biodegradable way of treating oil filled water to prevent pipes from plugging with mineral scale. Our sales into this market are well-established and growing steadily, they can be subject to temporary reductions when production is cutback or when platforms are shut down for reconditioning. Industrially, TPA is used in high-quality dish and laundry detergents that wish to be as biodegradable as possible.

TPA is also an excellent choice for water treatment processes if customers w accept a small cost premium compared to polyacrylates. We have also recently identified two additional industrial users with significant volume potential and are conducting trials. Sales into these new verticals should begin over the next five to seven quarters.

Q4 and the start of 2014, we’re optimistic. We consider Q3 in anomaly, our products have exceptional value to our customers and there appears to be less volatility in economic conditions compared to last year. We are not able to provide special and specific growth predictions because even with loyal growing customers and new sales opportunities in multiple markets, our sales, our purchase order by purchase order rather than long- term uptake contract, it’s unrealistic to give numerical guidance under these conditions.

We are comfortable predicting that full-year 2013 revenue will be higher than 2012. Our best estimate is that in Q4 we may see past two year over growth due to pre-ordering of agricultural TPA for the 2014, with precaution that other market vertical may enhance or counteract our prediction. In 2014, we expect additional growth in revenue, with the usual lumpy quarterly numbers resulting from customer behavior, weather, crop pricing and the other variables of our business.

Highlights of the financial results; sales for the quarter decreased 17% to $2.98 million compared to $3.6 million for Q3 2012. The result is a loss of $682,000 or $0.05 per share in the 2013 period compared to a loss of $458,000 or $0.03 in 2012.

Now that the Alberta factory is operating, a biomass expense is no longer given in the news release. Instead, due to the generation of revenue from that facility expenses are included in operations. In addition, depreciation of the factory has begun and is being applied against income from all divisions.

Our working capital is very adequate. Our sales tend to be larger during the first half of the year resulting in higher accounts receivable, lower cash and lower inventory reverting in the opposite way in the second half of last year. The company’s growth is supported by its mostly unused $6.4 million line of credit with the Chicago base bank.

Because of the outside effects of depreciation, stock option expenses and one-time items on the financials of the small companies, FSI also provide a non-GAAP measure useful for judging year-over-year success. Operating cash flow is arrived at by removing depreciation, option expenses and one-time items.

For the nine months 2013, operating cash flow was $590,000, $0.04 per share compared to $1.16 million and $0.09 a share in 2012. The detailed information on how to reconcile GAAP with non-GAAP numbers is included in our news release of November 14.

Net income and income tax as a result of our January 1, 2013 change in accounting for Taber, Alberta operations and its historical losses, our taxable income is greatly reduced, until all the historical losses from Taber are applied against future income, we suggest that reviewing the quarterly and annual changes in current assets, current liabilities and long-term debt will help those straight the forward momentum of the company.

And then regarding our other product lines, WaterSavr Swimming pool divisions, are emphasized less than the NanoChem division, while maintaining the long-term opportunities and limiting the cash and management costs. Swimming pool sales are steady and we think that a new distributor in Western Europe will have an upward effect on pool division revenue in 2014.

WaterSavr sales are more difficult to predict. We are continuing efforts in the U.S., Turkey, Morocco, Chile, Senegal, East Asia and Australia; small sales are expected at intervals through the year.

The drought of last summer has continued in the Colorado River Basin resulting in several small sales and dozens of inquiries some with quite large potential. The successful trial in 2012 on Lake Sahara, in Las Vegas has provided concrete evidence that WaterSavr works as safely in the U.S. Southwest as in the rest of the world and pays water at low costs to the water owner. The text of this speech will be available on our website by Monday, November 18, email copies can be requested from Jason Bloom at 1800-661-3560 or by email jason@flexiblesolutions.com

Thank you, the floor is now open for questions and George will you give everyone the proper instruction. Thank you.

Question-and-Answer Session

Operator

Certainly, sir. (Operator Instructions). And our first question is from the line of William Gregozeski with Mont Blanc Capital. Please go ahead sir.

William Gregozeski – Mont Blanc Capital Management AG

Hi, Dan.

Dan O’Brien

Hi, Bill.

William Gregozeski – Mont Blanc Capital Management AG

Were you just kind of blindsided by this order loss? I know in the last conference call which was halfway through the quarter you thought that you see year-over-year growth in the third quarter. So I just kind of curious as to what happen and the timing of it?

Dan O’Brien

I won’t tell you what happened. The timing was unknown to us. Yes, we were blindsided and as I said we expected it to be one time situation.

William Gregozeski – Mont Blanc Capital Management AG

Okay, is it result as of the fourth quarter or was that revenue from that customer still affecting the fourth quarter?

Dan O’Brien

We believe its result but in every speech I mentioned that we are purchase order by purchase order sales people. Only at the end of the quarter will I know for sure.

William Gregozeski – Mont Blanc Capital Management AG

Okay and then if you are able to say how much do you typically see from that customer in the third quarter because it was big – it’s a quite bit below the third quarter year ago. So just curious how much that customer does?

Dan O’Brien

We are not prepared to comment on that.

William Gregozeski – Mont Blanc Capital Management AG

Is it safe to assume then that giving your looking for year-over-year growth that decline is attributed to the customer?

Dan O’Brien

In large parts.

William Gregozeski – Mont Blanc Capital Management AG

Okay, all right, thanks, Dan.

Dan O’Brien

Thank you, Bill.

Operator

(Operator Instructions). We have a question from the line of Gary Schwab with Valley Forge Capital Management. Please go ahead.

Gary Schwab – Valley Forge Capital

Yes, hi, there. Is there an Ag product that’s out there that farmers are matching against your TPA product, which one they like better?

Dan O’Brien

Yes, there are – there is another product. It is developed by a company called SFP, its name is AVAIL, head to head trial always show our product to work better, and our product is always less expensive I would suggest that SFP and AVAIL are much better marketing team than us and we are trying to improve marketing overtime to get better at that part of our business because we were inventors and builders and fixtures and we need to become better sales people.

Gary Schwab – Valley Forge Capital

Well, that’s for sure. I mean this is exactly what happened in your Tropical Fish product. You had a better product, way better product and you got beat by better marketing. I don’t know what you have to do about that but maybe you need to spend some money and hire a marketing team.

Dan O’Brien

Thank you for the advice Gary.

Gary Schwab – Valley Forge Capital

I mean I am sure you know that. I am sorry; I mean social media out there has had such major impact on getting new product being discovered sometime way faster than traditional marketing. Do you have a social media site at all? Is there –

Dan O’Brien

Not for that product line. We have for our Tropical Fish line and it does not generate very many sales. We do try – we try things Gary. It’s a difficult world and there is some very strong vested interest in the agricultural industry. We need as well as better marketing and sales we could certainly benefit from a partner as strong as Simplot is for AVAIL, on the other hand AVAIL has been one of the good things that’s happen to our company because when there is only one magical elixir on the market that does a certain job, everyone thinks it’s a snake oil and when there are two, they start to take things seriously. And although 2013 has not been a bad year for agriculture, the last five years has seen steady growth of very high level or very high rate in that product line. And we actually believe that will resume next year so taking one year rather five and believing that to be the trend rather than four years out of five and believing that could be the trend is perhaps the wrong way to look at it.

Gary Schwab – Valley Forge Capital

Your distributors in your Ag products also sell AVAIL?

Dan O’Brien

I believe one or two out of 10 may, but the other 10 probably do not.

Gary Schwab – Valley Forge Capital

Are you having a problem with your distributors? Why they are gaining new accounts for such a big product?

Dan O’Brien

I have spoken in the speech very specifically about this last call, there was the end of drought, this spring there was product in warehouses and farmers who didn’t get a good crop last year didn’t put fertilizer in for their winter wheat this spring or they cut back on it or they cut back on optional ingredients and the spring was very late and very wet in many parts of the country. And as I say 2013 fall was far closer to normal and unless there is another major weather event in the spring of 2014 we expect growth to resume.

Gary Schwab – Valley Forge Capital

Okay, very good, thanks, Dan.

Dan O’Brien

Thank you, Gary.

Operator

Thank you. I am showing there are no further questions. Dan, I’ll give the call back to you for closing comments.

Dan O’Brien

Thank you, George. And thank you everybody for joining us this morning. I look forward to talking to you at the end of the fourth quarter next year with our full year financials and some color about how the first quarter has gone and whether what I have predicted have come true or something different has occurred. Thank you all and good bye.

Operator

Ladies and gentleman that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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