EXHIBIT 99.2
Q2 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 Q2 2019.
Before I speak 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 occur
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(TM) and N Savr
30(TM) 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.
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(TM) and N Savr 30(TM) 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
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respected and sales continue to grow. They utilize much more environmentally
friendly solvents than some of the competing products.
SUN 27(TM) is used to conserve nitrogen from attack by soil bacterial enzymes
while N Savr 30(TM) 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 data
suggest that FSI should expect annual pretax profits of greater than $1 MM from
this division with moderate annual growth. 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. Unfortunately, second quarter this year
coincided with very poor spring weather in most of ENP's territory resulting in
fewer sales. The onset of summer in Q3 will allow sales to recover but the
business not done in Q2 won't be available again until next year.
Effect of the LLC investment announced in January: This investment generated
quarterly cash flow and profits starting in Q1 2019 as shown in the financials.
The company we invested in will also order substantially more product from us in
each quarter of 2019 than it did in 2018. We expect this growth to continue for
many quarters to come which will further increase revenue and profitability. The
LLC has recently started representing more of our product line internationally
with small sales already booked. We expect this to grow over several seasons and
benefit our NCS division while increasing our share of profits from the LLC. It
is worth noting that the seasonality of the LLC's sales is opposite to our North
American sales most years which will tend to smooth out our quarterly revenue
numbers in a positive manner. Unfortunately, this year the tariff and currency
strife delayed some international business in Q2. This business is expected to
be realized in Q3 and Q4 instead.
Watersavr(TM): News regarding Watersavr(TM) 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(TM) is less than $200. WaterSavr(TM) 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(TM) is wasting
significant tax revenue - about $12 million a year for San Diego. We find it
extraordinary that with a decade and more of successful Watersavr(TM) trials, no
government water providers in areas with high water costs have implemented our
technology.
Q3 2019 and the rest of 2019
TPA, SUN 27(TM) and N Savr 30(TM) for agricultural use traditionally have peak
uptake in Q1 and Q2. Q2 2019 results were damaged by the poor weather in the
mid-west. 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
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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 reported
for Q1 2019.
Oil, gas and industrial sales of TPA increased compared to the previous year.
Increased sales into this market vertical is expected to continue throughout
2019. 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 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 2018, 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%. 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 and continues to increase. The rebates will increase profitability
and cash flow while decreasing cost of goods for the future quarters in which
the rebates are received.
Bad debt: Historically our group has had nearly zero bad debt. This year we made
a poor choice in extending credit to an agriculture customer who has not yet
paid their bills. We intend to recover this debt but wish to account for it now
to ensure that our financials are fully transparent.
Highlights of the financial results:
Sales for the quarter increased 63% to $6.77 million, compared with $4.14
million for Q2 2018. The result is a loss of 27 thousand or 0 cents per share in
the 2019 period, compared to a gain of $2.14 million or 18 cents per share, in
2018.
We attribute the lack of earnings to the bad debt mentioned above and the
tariffs paid on raw materials that will be converted and sold internationally.
We expect to recover these funds but do not control the timing.
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 Friday, August 16th.
Email or fax copies can be requested from Jason Bloom at
Jason@flexiblesolutions.com.
Thank you, the floor is open for questions.