Flexible Solutions International, Inc.FSINYSE
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Operator: Good day, everyone, and welcome to today's Flexible Solutions International's Third Quarter 2025 Financials Conference Call. [Operator Instructions] Please note, this call is being recorded, and I will be standing by if you should need assistance. It is now my pleasure to turn the conference over to Dan O'Brien. Please go ahead, sir.
Daniel O’Brien: Thank you, Paul. Good morning. I'm Dan O'Brien, the 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 involves risks and uncertainties. These forward-looking statements may be impacted either positively or negatively by various factors and information concerning the 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 Q3 2025. I'd like to discuss our company condition and our product lines first, along with what we think might occur in Q4 2025 and Q1 2026. I will comment on our financials in the second part of the speech. NanoChem division. NCS represents the majority of FSI's revenue. This division makes thermal polyaspartic 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. In 2022, NCS started food-grade operations. TPA is used in agriculture to significantly increase crop yield. It acts by allowing the fertilizer to remain longer for the plants to use. TPA is a biodegradable way of treating oilfield water to prevent scale and to keep oil recovery pipes from clogging. TPA is also sold as a biodegradable ingredient in cleaning products and as a water treatment chemical. A special version of TPA is sold as a wine stability aid in our food division. SUN 27 and N Savr 30 are our nitrogen conservation products. Nitrogen is a critical fertilizer that can be lost through bacterial breakdown, evaporation and soil runoff. Food products. Our Illinois plant is FDA and SQF certified. We've commercialized 2 food products. The first was our wine additive based on polyaspartates that was developed in-house. In August, we announced our second major food grade contract of 2025 and our third overall. As noted in the news release, it's a 5-year contract with protection from tariffs and inflation, has a minimum revenue of $6.5 million per year and a maximum if the customer requests it of greater than $25 million per year. The August contract has reached full production. It's running 24 hours per day and it is now our second food grade product after the wine product. We're reviewing methods of increasing production quickly if the customer requests it. Production began in very late Q3 after all setup and new employee training was completed. The first shipment and first invoicing was in very early Q4. Revenue has already reached more than $1 million. Production will utilize equipment that we have been buying and installing over the last 2 years, but had no customer for. Therefore, very little CapEx will be needed to reach $13 million to $15 million per year in sales and mild CapEx in the $2 million to $3 million range to reach $25 million. In January, we announced another larger food grade contract. In order to achieve the objectives of that contract, there are certain actions that must be completed. For example, we need to install new specialized equipment capable of manufacturing the product. In addition, we needed to install a new clean room because our current clean rooms are not suitable for the processes. There have been CapEx and expenses associated with our efforts to earn the January contract business because our food grade improvements over the last 2.5 years did not anticipate this new product category. We estimated additional CapEx of about $4 million for equipment and plant improvements combined. Most of the CapEx and expenses have been deployed already and the remainder will be spent in Q4. We have substantial cash on hand in our U.S. subsidiaries and access to an LLC. There will be no finance -- equity financing needed. CapEx involving equipment and improvements requires lead time for delivery and installation time prior to testing, leading hopefully to purchase orders for production. These lead times are being reduced as much as we can control and our estimate of the earliest that production could begin is late Q4 or early 2026. After we're satisfied that we can manufacture the product at scale and assuming that we can still meet our customers' pricing expectations, we then hope to begin receiving purchase orders. As such, we believe that revenue could begin in Q4 and could reach significant levels by the start of 2026. Earning these orders and hopefully growing them to the estimated maximum revenues of $30 million plus $25 million per year is the critical goal for the next 4 to 6 quarters. We hope to execute this to the customers' absolute satisfaction and obtain all their business before taking on additional major projects. So this does not mean that we're not looking for more customers. We're already doing R&D work in certain areas. However, it does mean that several quarters are likely to elapse before other major customers are found. We would also like to be clear regarding margins in the Food division. In order to obtain such large contracts from a very low base and in order to negotiate tariff and inflation protection clauses, we have lower margins than we prefer. We hope to be in the 22% to 25% range before tax. Future customers will be selected in order to increase our average margins now that we have a base in place. ENP division. ENP represents most of our other revenue. ENP is focused on sales into the greenhouse, turf and golf markets. We experienced strong revenue in Q3, which we estimate will continue in Q4. First half 2026 will likely have higher revenue than first half '25, but followed by strong sales in the second half of 2026, leading to year-over-year growth. The Florida LLC investment. The LLC had a small loss in Q3. The company is focused on international agriculture sales into multiple countries. Its management has advised us that they estimate a return to growth in 2026, which should translate into increased revenue for FSI. International markets like the U.S. market are stressed. So we expect the growth rate to be low. Agricultural products in the United States remain under pressure. Crop prices are still not increasing at the rate of inflation and extreme uncertainty is present due to tariff changes. Growers are facing a conflict between rising costs and low crop prices, aggravated by political actions. In some cases, sales have been lost for the whole season. As a result, we saw weakness in Q3, which we expect to continue in Q4 and on into the start of 2026. Tariffs. The current tariff on all our imports of raw materials from China into the United States is between 30%, 58.5% depending on the material. We will be careful not to import materials unless destined for U.S. customers who are certain to purchase and are aware that increased tariffs will be added to their invoices. We've now managed our transition to Panama to perfection, and we've had to import some raw materials into the U.S. in Q3. Some of this tariff costs will be passed on to customers. Some will qualify for the rebate program and some reduced our Q3 margins. The Panama factory for international sales. We've nearly completed a duplicate agriculture and polymer factory in the country of Panama that will be capable of producing nearly all the products we sell to international customers. We estimate that the first production from this factory could begin in Q4 2025. All of the equipment has arrived. Raw material inventory is on hand. Leasehold improvements are complete and equipment installation is close to finish. The remaining hurdle is obtaining an occupancy permit from the Panamanian government, which could slow startup. CapEx and expenses to develop the new plant have been funded by cash flow and retained earnings. There will be no need for debt or equity financing. Once operational, nearly all our product for international sales will be made in Panama using raw materials sourced without the U.S. tariffs. There will also be shipping advantages. The new plant is 30 minutes from the port, inbound raw materials and outbound finished goods will not have to be shipped across the United States to and from Illinois. For our international customers, delivery times will be shortened by many days. Reduced shipping time and no exposure to U.S. tariffs on international sales could allow us to increase sales to existing customers and obtain new customers over the next 2 years. We're already providing quotes for potential Q1 delivery. Moving most agriculture and polymer production to Panama, free space at the Illinois plant so that food grade production in the United States can be optimized and expanded substantially as more U.S. customers are found. Shipping and inventory. Shipping prices are stable. Shipping times are reasonable on the routes we use. Raw material prices are stable, but they're increasing in line with inflation. Highlights of the financial results. Sales for the quarter were up 13% compared to the 2024 period, $10.56 million versus $9.31 million. Profits. Q3 recorded a loss of $503,000 or $0.04 a share compared to a gain of $612,000 or $0.05 a share in Q3 '24. Many costs incurred to prepare for the potential new revenue from the food grade contracts announced in January and August negatively affected Q3 profits because they're being expensed as they occur. Some costs for the Panama factory also being expensed quarter-by-quarter. This will continue in Q4 for Panama and Q4 for food products, but at a lower level. We've done our best to maintain profitability as we built the new factory and repurposed the existing one for the new revenue streams in food products. Unfortunately, we did not manage it in Q3, and we are uncertain about Q4, because we don't know exactly when Panama will start or when revenue from the August contract will exceed costs. In Q1 2026, we do expect profits to revert to past levels and increase as our food product revenue grows. Operating cash flow. This is a non-GAAP number useful to show our progress, especially with noncash items removed for clarity. For 9 months 2025, it was $4.26 million or $0.34 a share, down from $5.91 million or $0.47 a share in '24. Cash flow has been reduced by the same costs as noted for profits, and it's expected to rebound in Q1 '26. Long-term debt. We continue to pay down our long-term debt according to the terms of the loans. The loan we used to buy our ENP division was paid in full in June this year. Our 3-year note for equipment will be fully paid in December 2025. This will free up over $2 million in cash flow per year for other purposes. Working capital is adequate for all our purposes. We have lines of credit with Stock Yards Bank for the ENP and NCS subsidiaries. We're confident that we can execute our plans with our existing capital and without resorting to any equity actions. The text of this speech will be available as an 8-K filing on www.sec.gov by Wednesday, November 19. E-mail copies can be requested from Jason Bloom at jason@flexiblesolutions.com. Thank you. The floor is open for questions. And Paul, will you make that happen, please?
Operator: [Operator Instructions] And we'll take our first question from Tim Clarkson of Van Clemens Capital.
Timothy Clarkson: Great quarter. In terms of getting ready for the new business. Obviously, losses are never good. So I was wondering when you talk about the margins being somewhat lower than your traditional business, 22% to 25%, are those gross margins or net margins?
Daniel O’Brien: Those would be our expectation for gross margin before tax. So...
Timothy Clarkson: Okay. So what kind of a net number after everything you think you'll make on this business? Would it be more like 5% or 10% or 15%?
Daniel O’Brien: Well, let's just take the bottom end, our 20% anticipated gross before tax. In Illinois, we pay roughly 31% tax rates. So 28 x 0.69 is around 14%.
Timothy Clarkson: Okay. Well, those are still good margins. Now you mentioned on the first food additive product, the wine product, it's kind of a preservative. What's the functionality on these food products, if you can say?
Daniel O’Brien: I'm actually not allowed to say by contract on either of the food contracts. The companies involved really want to keep their -- themselves secret. So I'm sorry about that [indiscernible] customer.
Timothy Clarkson: Yes. Well, I'm guessing it would be either a preservative or a taste kind of a thing would probably be what it would impact. Now are these chemicals, brand-new chemicals? Or are these chemicals that you guys have some legacy with?
Daniel O’Brien: We have no legacy, but the chemicals are not new to the industry. The -- we've been targeted as a supplier because of our quality and our willingness to work with the customers. So this is an existing technology, and there aren't going to be any like health concerns or areas of that worry.
Timothy Clarkson: Did you have some personal relationships with these guys? Or how did the relationships actually develop?
Daniel O’Brien: We develop personal relationships based on meetings. One of them, the one I can talk about openly was a meeting at a trade show. So we go about to tell people that our second name is solutions and do they have any problems. And eventually, we find people with a problem, either quality, cost, performance, location. And we solve their problem, and we give them a solution and we get a contract.
Operator: And our next question comes from David Marsh of Singular Research.
David Marsh: Just wanted to touch on the new contracts. I wasn't following you entirely. It sounded like you've begun realizing revenue on one, but there's a second one that you have not yet begun realizing revenue. You are anticipating recognizing revenue on that in the fourth quarter. Is that correct?
Daniel O’Brien: Yes. Maybe this is a great chance to explain how the time frames make this a confusing situation. We obtained a contract in January that we are not going to be able to begin providing product and getting revenue for until late in Q4 because we have to install all the equipment in the clean room. Then we got a second contract in August that we actually had all the equipment and clean room for. So we were able to get the second contract running before the first one was ready to go. And that's why it's as confusing as it can be. Have I explained that adequately?
David Marsh: Yes. No, that's very helpful. Are you expecting to be able to recognize revenue on that January contract in the fourth quarter, though? Or is it possibly going to slide into Q1 just with getting the clean room ready and everything?
Daniel O’Brien: We think that Q4 is possible. We know that Q1 is for sure. It might even just be weird things like Christmas breaks that caused us to slide into Q1, but it is that close. So no guarantees for Q4, definite guarantees for revenue in Q1 '26.
David Marsh: Got it. And are you providing any guidance for Q4 at this time? Or are you just going to hold off for now just because of the uncertainty around that second contract?
Daniel O’Brien: Yes, Dave, we almost never provide guidance unless it's about a specific item because we've been wrong in both directions so many times when we did it in the past that we feel it's -- we're too small, too nimble for our own good. And we just can't give guidance that we feel is valid, so we don't give it.
David Marsh: No, I understand. Let me ask one other question around the top line, if I could. When all 3 of the contracts, the January, the August contract and then the ongoing wine contract are running and hitting on all cylinders. What do you think that the run rate annual revenue for those 3 contracts is going to look like?
Daniel O’Brien: When and if -- now let's say if because it's up to the customers. But if we get all the business from the customers that they believe they have to -- for us to earn, it's -- the total is between $50 million and $60 million and the time at which we would hit that run rate would be in 2027, not 2026.
Operator: Our next question comes from Greg Hillman, an investor.
Gregg Hillman: Yes, 2 things. Going back to one of your older products, WaterSavr. On your PowerPoint recently, you're talking about WaterSavr saving up to like 40% of evaporation for like reservoirs and lakes. And I thought in some of your prior information you put out, it was only like 20% savings. Did that product improve over time?
Daniel O’Brien: No. 40% is the largest that's possible. It is a biodegradable product. It's typically in a set of good conditions, you'll see 40% evaporation control on day 1. Day 2, it's likely to drop into the 20s and day 3 into the 10 to 15 to 20% range and then taper off rather rapidly unless it's reused. So the PowerPoint shows the best available situation. The average situation might be in the 20% range. The greater problem with that product is how to sell it to people who, a, can't see it because it is an invisible transparent layer; and b, our in bureaucratic situations where continuous proof of function is needed. And if it's already on the reservoir and you've already tested it, but you can't keep track of it on a day-to-day basis, it's an extraordinarily hard sell. I often tell people, bring me a partner who has satellite technology to show the actual evaporation rate off all surfaces all the time, and that's how we will convince the governments of the world. Until then, we're definitely going to have difficulties selling to governments. We are successfully selling to oilfield companies who know how much water they have for things like fracking and where the water is worth -- they know how much the water is worth and they'll spend to save the evaporation. So it's a difficult problem and a difficult product. It's certainly why we've taken emphasis off of it.
Gregg Hillman: Okay. And then switching to your 2 grade aspartic acid with these new contracts. Can any other substance do a similar function like, I don't know, acrylic acid or I don't know if acrylic acid is used for food at all, but some other product?
Daniel O’Brien: There are alternative systems. One uses a cellulose filtration program. There's another one that uses acrylic acid columns, not to add the acrylic acid directly to the wine, but acrylic acid ionic columns. The problem with that and also the best alternative is chilling the wine all the way down to, I believe, minus 3 Celsius and holding it for several days. All of these methodologies are more expensive than using a polyaspartate solution. And as you guessed, a polyacrylic solution is not allowed for food in several countries. And in the wine industry because things get shipped everywhere, it's not approved for food in any country, it's not going to be used by winemakers.
Gregg Hillman: Okay. Okay. That's fine. And then in your recent press release about you had a deal that you called off and you gave the terms of. I was wondering how much of your time have you been spending on that deal over the past 12 months?
Daniel O’Brien: Well, it was a 5-year -- sorry, a 5-month process. I would say I put a couple of hours a day in, so did our operations manager. It never reached the stage of documentation and full due diligence. So we came to a dead end before the major amount of the work had been done. We did set up financing subject to due diligence. But again, these are things that didn't consume a large amount of my time or the corporate time. Sad it didn't go through. It was extremely synergistic, and we were -- until close to the end, we thought it was working. So yes, sad about that.
Gregg Hillman: But you never inspected their books, right?
Daniel O’Brien: Yes, I saw their financials.
Gregg Hillman: Okay. You did. Okay, fine. And also in regard to future deals, like -- do you have a pipeline of future deals you're looking at? Or are you working with an investment banker?
Daniel O’Brien: We do not have an investment banker under contract looking for deals. We would only consider deals that we found ourselves or that were accidentally referred to us. It's too hard with an investment banker. They want to get paid, so they find you all sorts of stuff, and then you have to just keep saying no. As to your question about pipeline, we are always looking. We don't have a pipeline at the moment, but that can change momentarily as well. And I really would not want to call it a pipeline even if it did change. Let's just say we take it each target singularly and move through it because it's got to get through some pretty severe screens before we even look at it.
Operator: And our next question comes from William Gregozeski of Greenbridge Capital.
William Gregozeski: Dan, I've got a couple of questions for you. In regard to the more onetime expenses you mentioned in the third quarter from Panama and the food products, can you give an idea of how much of an impact that was on the expense line in the third quarter?
Daniel O’Brien: Bill, I really -- giving numbers like that over the phone is not how I'd like to do it, but I'd be happy to give you after talking to our controller, give you a reasonable number by e-mail. I could tell you 2 things. You'll notice that our agriculture -- traditional row crop agriculture was pretty weak in Q3, including weakness in the LLC out of Florida. What that did was it weakened our financials. And you'll notice that our ENP division did a great job. It sells into the part of the agriculture market that is still vibrant. The turf for people to send their kids to play soccer on or football, ornamentals to keep their houses looking great and golf courses so that the golf courses are green and wonderful. So agriculture has become bifurcated. We're interested in growing in the area that is vibrant, and we're not going to put large amounts of effort and capital into growing the areas that are not vibrant until the cycle comes around and row crop agriculture becomes important again. So that was -- that split between our ENP division, which we only show 65% of the profits from and our row crop division where we get 100% of the profits, but had weakness, that was a big effect on Q3. And just for the actual numbers, I'd really like to take that to an e-mail stream and get you things that are not just off the top of my head. Does that seem fair?
William Gregozeski: Yes. Yes. No, that's totally fine. And then with the E&P and how strong that was, that was a heck of a quarter. And you mentioned expecting similar numbers in the fourth quarter. Is that kind of a trend that you guys are focusing on is this a good number for like a Q3? Because obviously, it's somewhat -- it's not stable every quarter, but is this kind of a good base going forward, do you think?
Daniel O’Brien: I think that would be a good, strong Q3. Q4, we're working through the early buy from the customer base. And I don't think it's going to be a barn burner like Q3 was, but it's going to be quite strong. And I think that, that's the way to look at that division going forward. It's going to have a much stronger second half than first half, and that's because our customer base is transitioning to a much more early buy-oriented system. And there -- so if the customers are tilting their sales towards Q3 and Q4, it automatically tilts our sales towards Q3 and Q4. So rather than saying, hey, we're going to just keep doing these same numbers. I think what I would like to say to you is that second half is always going to be stronger than first half and that's when we will show our growth for the year.
William Gregozeski: Okay. On the kind of the core NanoChem product lines or previous ones, excluding food, is there -- because that was down quite a bit in the third quarter. Is there any hope for -- you talked about ag quite a bit already, but is there any hope that oil or any other industrial application will show growth in '26? Or is this going to be just kind of a weaker segment for you guys until things turn around?
Daniel O’Brien: It's going to be very interesting to discover whether we are more competitive and as a result of being in Panama. And if we are and our historic customer base recognizes that, we believe that it's possible that we'll get back to historic numbers in oil. It's a little difficult to tell. And I'd really like to get Panama operational and see not only whether the customers appreciate us and appreciate the quicker shipping and the better service that we can do out of Panama. But I'd also like to find out whether that is actually the best use of our Panamanian production while we're spooling up. It may be that other product lines in the agriculture world are more profitable and growth is easier to come by. So you've seen us for -- I guess, we've -- you've known me for 22 or 23 years now. We are pretty opportunistic. We go where we're appreciated, and we try not to continue down paths that are not working properly. So it's going to be up in the air until we know what the customer base thinks of our Panama changes.
William Gregozeski: Okay. And last question I have is, can you talk a little bit about the reason on the Mendota facility sale and leaseback? And then if you'd ever move your E&P production to Peru or if that will just stay outside of Peru, and Peru will just focus on the food products?
Daniel O’Brien: Okay. Well, the first part -- or the second part of the question is easy. Peru is going to be food products. It will expand in food products. It won't do anything other than food products except accidentally. Mendota, we sold it because it was not central. We got a leaseback for 60,000 roughly of the 240,000 square feet. We removed the risk of expensive repairs to buildings that we were -- hadn't been able to lease yet. We have a new landlord who's going to have that responsibility. And we now have a single spot where ENP can do all the business and grow as needed without us having to take on the responsibilities and risks of being a landlord. So that was a very specific choice in order to limit risk and allow us to use our available bandwidth for things that we think are going to work a lot better than being a landlord in Mendota.
Operator: [Operator Instructions] And our next question comes from Manny Stoupakis of Geoinvestments (sic) [ Geoinvesting ].
Manny Stoupakis: I have a couple of want to get through. Can you first touch on how much were the onetime costs associated with the contract ramp in the Panama move in Q3?
Daniel O’Brien: See, that's not a number that I have in my brain for a phone call, but we happily will -- and we're going to be doing it for Bill Gregozeski. We'll happily respond to an e-mail from that. I can tell you that it was responsible for a very large percentage of the loss, if not all of the loss. So it was very significant. And you can imagine that starting a brand-new factory and rebuilding another factory in a food grade quality, in fact, right up almost to drug grade quality. It's not cheap. It's amazing we've done as well as we have this year. I got to compliment my team. They've just done a fantastic job of making sure that we're not spending money on anything we don't need to.
Manny Stoupakis: Okay. Fair enough. We'll follow up with that. And then regarding the 2 new contracts, the gross margins on the 2 new contracts, were you preferring to them both being at that same level? Or was that just for the one as far as being lower? The lower gross [ new ] contract? Pardon me?
Daniel O’Brien: Both margins will be similar.
Manny Stoupakis: Okay. All right. And then I guess, lastly, and I'm just curious, is there a possible data center angle for parts of your business?
Daniel O’Brien: None whatsoever.
Manny Stoupakis: None, whatsoever. Okay. I just thought maybe with the energy conservation side that's possible, but I just thought I would ask -- I appreciate you taking the question.
Daniel O’Brien: No. But hey, that's something that if you want to help the company, data centers use energy, energy often needs water, water evaporates if it's left out in the open. We don't have any connections, but if someone gave us one, we'd follow it and see if we could turn it into money.
Manny Stoupakis: All right. Well, we'll do that. My Geoinvesting will reach out to you and we'll talk on the side then.
Operator: Our next question comes from Raymond Howe of CFP, Inc.
Raymond Howe: My question has mostly been answered. It was about the 317 Mendota sale. What -- the 60,000 square feet that you are leasing back, what gets produced there?
Daniel O’Brien: That produces all the ENP products that result in the ENP revenue that we show in the financials. So of the roughly -- I think it's roughly -- we're expecting somewhere around $13 million to $15 million this year out of ENP, that 60,000 feet produces those $13 million to $15 million.
Raymond Howe: Got you. And so that portion of the business there and then food products in Peru, correct?
Daniel O’Brien: Correct.
Operator: Our next question comes from Greg Hillman, an investor.
Gregg Hillman: Yes, Dan, just another follow-up on ENP. The products for the turf and the golf courses, are any of those products biological in nature that increase the -- basically that affect the anaerobic [Audio Gap]
Daniel O’Brien: [Audio Gap] The abuses that it gets. Was that helpful?
William Gregozeski: Yes, that's helpful. And just -- is any of the products being used on football fields like college or pro football fields?
Daniel O’Brien: Yes, absolutely.
Operator: And our next question comes from Manny Stoupakis of Geoinvestments (sic) [ Geoinvesting ].
Manny Stoupakis: Just had one follow-up question regarding the gross margins on the contracts. Where would you expect margins to be on new contracts moving forward?
Daniel O’Brien: We don't have anybody lined up. We -- as I mentioned in my speech, we're looking for new customers. We'd be much happier in the 30% to 35% margin range. I don't know if we can get it, but that's where we're going to be.
Manny Stoupakis: That's the target, okay.
Operator: And it appears that we have no further questions at this time. I will now turn the program back to our presenter for any closing remarks.
Daniel O’Brien: Thanks, Paul. Everybody, thank you. That was an interesting Q&A session. I enjoyed it very much. Looking forward to talking to you next year when we reconvene for the full year financials. Thanks again for taking time to listen today and talk to you next year. Bye now.
Operator: Thank you. This does conclude today's Flexible Solutions International's Third Quarter 2025 Financials Conference Call. Thank you for your participation. You may disconnect at any time.