Friday, June 13, 2008

Pinchin' Pennies

The Crystal Equity Research coverage universe includes another play on energy savings. Flexible Solutions, Inc. (FSI: AMEX) is a developmental stage specialty chemical company and has yet to produce consistent profits. Nonetheless, its patented technology for water conservation is a compelling investment opportunity.

Flexible Solutions offers two groups of products: 1) biodegradable polymers and chemical additives (BPCA) and 2) energy and water conservation (EWCP). An acquisition in 2004, took FSI into the market for chemicals used to prevent scale and corrosion in piping used in a variety of industries such as oil & gas and agriculture. By far the more compelling product offering is in the EWCP group, which also accounts for 79% of sales. HEAT$AVR is used to slow evaporation and reduce energy consumption in residential and commercial swimming pools. HEAT$AVR along with a patented dispensing device called the ECO$AVR account for over 75% of sales. Beta tests have shown a commercial version of the same chemistry, WATER$AVR, is highly effective in conserving water in surface water bodies such as canals and irrigation ditches. The product is safe for application in drinking water supplies. Recent product development work has also created WATER$AVR-BTI, a method of killing mosquito larvae in surface water. Initial trials at Louisiana State University reached a 100% kill rate. Subsequently, the U.S. EPA approved WATER$AVR-BTI for sale in the U.S.

We believe the Company is on the cusp of commercializing the WATER$AVR product. Its effectiveness in dramatically reducing evaporation of water should present a compelling proposition for owners of water sources, both potable and industrial. The impending water supply shortage is being felt worldwide due to increasing demand and high rates of contamination. We expect water owners to look at any and all solutions that could stretch supplies.

The balance sheet is free of debt, but the cash balance of $3.4 million is modest for an early stage company. In June 2006, the Company raised $3.7 million through the issuance of 987,000 new shares. On the plus side, cash flow from operations turned positive in 2006 and has remained positive since.

Management is dominated by two brothers who are the founders and inventors of the Company’s patented technology. Although the CEO has long experience in the swimming pool industry, no other member of management has experience with utilities or other owners of large water supplies which would be the prospective customers for the WATER$AVR products. Nor does the management team or board have prior experience in early stage company development. Insiders own 50% of the outstanding shares.

Lack of experience in the board room is a risk factor for the stock, but we believe the product line is compelling in the current energy-conscious economy. The stock has floundered in recent months, but sales continue to ramp and Flexible Solutions reported a health profit in the March 2008 quarter.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. FSI was first profiled with generally favorable commentary in the September 2006 issue of Small Cap SEARCH newsletter published by Crystal Equity Research.

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