Why 2011 will be Flexible Solutions’ Breakthrough Year

We’re going to keep a very close eye on Flexible Solutions Int’l (FSI – $1.39), as its breakthrough is imminent. Here’s why…

Flexible Solutions?

First some background information for those of you unfamiliar with the FSI story.

Flexible Solutions has two divisions. Its NanoChem division offers environmentally friendly, water-soluble products utilizing thermal polyaspartate (TPA) biopolymers (bear with me here). TPAs can be used as a biodegradable substitute for poly-acrylic acids in detergents. Poly-acrylic acids bind hard water elements such as calcium and magnesium, so that the detergents work more efficiently.

In addition, TPAs are applied in the agricultural industry to reduce fertilizer crystallization before, during, and after application, and also prevent crystal formation between the fertilizer and minerals present in the soil. What’s important is that using TPAs increases crop yields with 6% to 18%.

The second division specializes in energy and water conservation products. HeatSavr is a chemical product for use in swimming pools and spas. It forms a thin and transparent layer on the water’s surface thereby reducing energy costs by 15% to 40%. EcoSavr is a similar product designed for residential pools and spas. And WaterSavr reduces water evaporation by up to 30% in large reservoirs, potable water storage tanks, livestock watering ponds, aqueducts, canals, etc.

Third Quarter Results

Earlier this week, Flexible Solutions announced third quarter results for the period ending September 30, 2010 and Mr. O’Brien, the Company’s CEO, gave a thorough conference call in which he outlined FSI’s future prospects.

The third quarter usually is the weakest one for FSI due to lower sales to the agriculture and swimming pool market (it’s getting winter you know). Nevertheless, revenues increased 9% compared with the third quarter of 2009. In fact, the Company recorded the largest third quarter sales number in its history.

Especially, agricultural sales did very well and the Company believes this will continue to be the case next year as crop prices are strong and farmers had a profitable 2010. TPAs can profitably be used on most crops as yield increases are higher than the cost of the TPAs.

	Three Months Ended September 30		Nine Months Ended September 30
Amounts in $000’s	2010	2009	2010	2009
Net Sales	2,677	2,449	8,895	7,381
Cost of Goods Sold	1,834	1,476	5,279	5,058
S, G & A Expenses	990	1,063	2,899	2,762
Income From Operations	(146)	(90)	718	(439)
Income Tax Expense	9	71	491	71
Net Income	(155)	(162)	227	(510)
Earnings Per Share	(0.01)	(0.01)	0.02	(0.04)
Shares Out. – Diluted	13,963	13,963	13,963	14,028
Most important income statement data for the quarters ending September 30, 2010 and September 30, 2009. Source: Company Filings

For the full fiscal year 2010, Mr. O’Brien predicts revenue growth between 15% and 20% and a net profit.

Future Prospect

Although a profitable Company with strong increasing agricultural sales certainly fits our portfolio, there’s also a bonus.

In 2007, Flexible Solutions began construction of a plant in Alberta, Canada to manufacture aspartic acid which is the major component of TPAs. At this moment, FSI buys its aspartic acid from China to manufacture TPAs in its U.S. facility. The big difference will be that the aspartic acid imported from China is made out of oil, while the Alberta plant will use sugar as the base raw material. This will be the only sustainable sugar to aspartic acid facility in the world with both the plant and end products having patent protection.

Although the facility is already producing aspartic acid in small quantities, the Company is waiting for a piece of equipment to arrive to start producing commercial quantities (several tons per week). The piece of equipment is finished and waiting for approval from the local authority to be shipped. This approval procedure is standard and usually takes a few weeks. Once the equipment is delivered, it will take about 2 weeks to install and another 4 weeks to confirm that it’s working properly and producing commercial levels of aspartic acids.

Taking the plant into production has the following benefits:

• Several $100,000 per year of fixed operating expenses that the Company is experiencing at its Alberta facility, like wages, light & power, insurance and natural gas will then be offset by aspartic acids sales to the U.S. operations.
• Accumulated tax losses in the Canadian division will make sure that this higher income will go entirely to the net profit.
• It will reduce its raw material costs, reduce price fluctuations generated by oil prices and reduce shipping costs from China.
• And last but certainly not least, according to the Company, several soap companies are very much interested in using TPAs that are produced from sustainable sources. FSI has been working with these soap companies for several years and it believes that these contracts are available if they have the production capacity. To give an indication, each of these major detergent contracts are in the $10 million range and higher. This is a $350 million per year market.

Conclusion

We see two major growth drivers for FSI in 2011. First, taking the Alberta plant in production may open up the detergent market where soap companies are requesting TPAs produced from sustainable sources.

And secondly, the possibilities in agriculture are enormous. Flexible Solutions’ TPAs increase crop yields with 6% to 18%. Because farmers had a good year, they have the extra money to spend on TPAs. So 2011 may be the breakthrough year for agricultural sales. This is a $2 billion market for the FSI product.

Photo credit Grant MacDonald

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