Flexible Solutions International, Inc. (FSI) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the First Quarter 2014 Financials Conference Call. [Operator Instructions] This conference is being recorded today, May 16, 2014. I would now like to turn the conference over to Mr. Dan O’Brien. Please go ahead. Daniel O’Brien: Thank you, Camille. Good morning. This is 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 first quarter 2014. Before concentrating on the financials, I'd like to speak about where we are in our major projects and what we expect for the next quarters. Our sugar to aspartic acid plant in Taber, Alberta has been shut down until a partner of sufficient size and financial strength is found to carry on the next stage of commercialization. We have confirmed that the process is biologically viable and chemically scalable. However, FSI is not able to reach breakeven levels of scale at the Taber plant with the financial assets we can deploy. The sales of TPA from the NanoChem division now represent greater than 90% of revenue and have become the main sales and profit driver of our company. The silver lining in the cloud of the Taber shutdown is that the management focus can resume on agriculture and oil opportunities, potentially leading to more rapid growth over the next several quarters. TPA is used in agriculture to increase crop yield. The method of action is through limiting crystal embryo growth between positive and negative fertilizer ions in the soil. When embryonic crystals are prevented from becoming a fully crystalline form by TPA, the fertilizer remains available at a lower energetic cost to the plant. Keeping fertilizer easily available to crops, results in bigger yields with the same level of fertilizer. Treating an acre of land costs a grower $20 or less and may result in $50 or more in extra yield, even on low price crops like winter wheat. High-value crops such as vegetables and cotton have net returns to the grower measured in hundreds of dollars per acre. We are expecting to add new distributors this year and are conducting trials on new crops, prospecting new crops and new distribution this year will increase our potential sales in future years. 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 growing steadily, but can be subject to temporarily -- excuse me, temporary reductions when production is cut back or when platforms are shut down for reconditioning. In some areas, including many Nordic countries and companies operating in the North Sea, use of TPA is mandated as part of environmental regulation. We have had some success in providing TPA as a component to hydraulic fracturing fluid and will attempt to build on that success. Q2, the rest of 2014. We are optimistic, but cautious. Our products are best in their class, and in the past, we have attempted to forecast sales based on historical results. However, none of our customers are on long-term contracts and the world's various economies are in continuous flux, so we're not able to provide numerical growth predictions. We have negative and positive surprises, such as oil field maintenance shutdown and fast volume uptake by new distributors. We do have early indications that Q2 may recoup some revenue decline experienced in Q1, and we predict that full year 2014 revenue should be higher than full year '13. Moving to the highlights of the financial results. Sales for the quarter decreased 15% to $3.8 million compared to $4.5 million in 2013. The result was a loss of $156,000 or $0.01 per share in the '14 period, compared to a profit of $65,000 or 0 per share in '13. Working capital is more than adequate. Our sales tend to be large during the first half of the year, but not always, resulting in higher accounts receivable, lower cash and higher inventory. The company's growth is supported by its mostly untapped line of credit with a Chicago-based bank. Because of the outside effects of depreciation, stock option expenses and onetime items on the financials of small companies, FSI also provides a non-GAAP measure useful for judging year-over-year success. Operating cash flow is arrived at by removing depreciation option expenses and onetime items from the statement of operations. For first quarter 2014, the operating cash flow was $66,000, $0.00 a share compared to $474,000 and $0.04 a share in 2013. Detailed information on how to reconcile GAAP with non-GAAP numbers is included in our news release of May 15. The reduction in cash flow was a combination of reduced revenue, the windup cost of Taber, the product mix, the amounts at market verticals, and the cost of goods sold. Regarding our other product lines. WaterSavr and pools products are emphasized less than the NanoChem division, while maintaining the long-term opportunities and limiting the cash and management costs. Swimming pool sales were lower in the quarter. The division manager has devised promotions intended to recover sales over the rest of the year. WaterSavr sales are difficult to predict because the prospects are all or nearly all government organizations. We've added new independent agents skilled in obtaining government contracts to our sales efforts this season to improve our chances of closing sales in the United States. We're also continuing our efforts in Morocco, parts of East Asia and Australia. The 31% water savings from a trial done on Lake Sahara in Las Vegas and done by the Southern Nevada Water Authority resulted in a very favorable article in the American Water Works Association Magazine published this past quarter. And we hope that the trial results from last year, this article, and the most prestigious U.S. water magazine, and the addition of political skills to our sales effort, will finally result in a significant U.S. WaterSavr sale. The text of this speech will be available on our website by Monday, May 19. And email or faxed copies can be requested from Jason Bloom at 1 (800) 661-3560. Email, jason@flexiblesolutions.com. Thank you. The floor is open for questions. And Camille, will you please give the instructions?

[Operator Instructions] Our first question is from the line of Gregg Hillman with First Wilshire Securities Management.

I had a couple of questions. For the plant in Taber, the real estate value, what do you think it's worth, and what do you think you could rent space out for with like a reasonable cap rate? Daniel O’Brien: Well, this is strictly my opinion, but I would anticipate that the value of the property is about USD 1.3 million and that when we have discovered whether we will find a partner and whether the partner, which used to use that property or another property, but when we've discovered those two things, we would expect to realize somewhere in the range of $150,000 a year in rental income. That would be -- that would also be roughly in U.S. dollars also. I'll try and stay in the same currency. That would be our expectation.

Okay. And I have a question about the hydrogen -- nitrogen stabilizer. How's it differentiated from existing nitrogen stabilizers on the market? And what temperature does it work down to? Or what's its freezing point? Daniel O’Brien: Okay. Question first is, the significant differences between this product, SUN 27, and the competing products are: a, it's lower priced in most cases; b, it does have a lower freezing temperature. I can't give you an exact temperature, it's well below the competing products of minus 18, but we have trials out right now with laboratories to discover the actual bottom end. Our freezers did not go far enough.

Okay. Okay. Great. Okay, let me -- another question about the marketing of the TPA for fertilizer enhancer for phosphate. I noticed that you're just -- you're not branding it and it sold under a whole variety of different brands. And I was just wondering if that's the best strategy, since it's kind of in the missionary effort anyways? Wouldn't it be just best to have just one brand for it, and have you guys on that brand? If you get the gist of my question. Daniel O’Brien: Yes, I do. And we do have a brand that we sell direct with called X10D, and we are closely assessing whether we should be doing more direct sales. One of the problems with direct sales, of course, is that if you undertake direct sales strategies inside your distribution areas, there is friction. If we focus on direct sales, we will choose areas where our distribution is either not there yet or is not doing a good job and actually deserves the friction. But we do have some very good distributors whom we would like to support, and we will certainly not be going into the areas that they're active in, if we can possibly avoid it. So to answer your question, sort of the long way around, yes, we are looking at this and we were going to get very serious about finding the right answers.

Okay. And finally, has the long-term prospects of your company been diminished from your experience in Taber? Or have they been, like, enhanced? Daniel O’Brien: Well, it's a hard question to answer so soon after a major decision. But regardless of whether we find a partner and move forward with a sustainable product, I believe that the period we spent working in Taber was a necessary thing to do and that it will -- it has protected our company from competition that we would not have enjoyed being involved with at the time. And in the long run, we will find that it was on average a good thing for our company and certainly has not permanently, negatively affected us. I shouldn't -- really shouldn't get phrases like that going.

And how did it protect you from competition? Daniel O’Brien: I would suggest that groups in -- during the period before many, many aspartic acid producers were available in Asia, there was a possibility several of them may have gotten together and formed a cartel to prevent us from getting raw materials.

And now you have multiple sources of your raw material sources and the pricing's improved? Or what's the current take on that, for getting your own aspartic acid? Daniel O’Brien: We have multiple sources, we have reasonable pricing. We have an expectation that pricing will track oil prices, but not be something that we can be squeezed on by any individual supplier.

And you still just get it all from China? Or do you get it from -- can you get it from other countries too? Daniel O’Brien: All the processing plants are in China.

[Operator Instructions] And I'm showing no further questions at this time. I'd now like to turn it back over to Mr. O'Brien for closing remarks. Daniel O’Brien: Ladies and gentlemen, thank you for joining us for this conference call. I look forward to hearing from you again in 3 months, and to continuing to work as hard as I possibly can to make this a positive company for you to be involved with. Thank you very much.

Ladies and gentlemen, that does conclude our conference call for today. If you'd like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030, with the access code of 4683126. We'd like to thank you for your participation. You may now disconnect.