Company's Q3 2025 Earnings Call: Contradictions Emerge on Food Contract Revenue, Tariff Strategies, and Margin Forecasts

Date of Call: November 17, 2025

Financials Results

• Revenue: $10.56M, up 13% YOY ($10.56M vs $9.31M in Q3 2024)
• EPS: $0.04 loss per share, vs $0.05 EPS gain in Q3 2024 (loss of $503k vs profit of $612k)
• Gross Margin: Food-division gross margin expected 22%–25% before tax; company noted Q3 margins were reduced by tariffs and transition costs (no company-wide gross margin provided)

Guidance:

• Panama production could begin in Q4 2025, subject to occupancy permit delays.
• August food contract began production and invoicing (>$1M); January contract may start late Q4 or slip to Q1 2026.
• Expect profits and operating cash flow to rebound in Q1 2026 as food revenue scales.
• If customers award full volumes, target run-rate for the food contracts is $50M–$60M by 2027.
• Food division gross margins expected 22%–25% before tax; company targets 30%–35% on future contracts.
• CapEx to scale to ~$2M–$4M for higher volumes; no equity financing expected.

Business Commentary:

• Financial Performance and Profits:
• Flexible Solutions International reported sales for the quarter were up 13% to $10.56 million, compared to the 2024 period of $9.31 million.
• However, profits recorded a loss of $503,000 or $0.04 a share in Q3, compared to a gain of $612,000 or $0.05 a share in Q3 '24.

• The loss was attributed to costs incurred for preparing for new food-grade contracts and the Panama factory, which negatively affected Q3 profits.

• Food Grade Contracts and Margins:

• The company secured a 5-year contract with a minimum revenue of $6.5 million per year, aiming for a maximum of over $25 million.
• The margins for these contracts are projected to be between 22% to 25% before tax, lower than usual, due to negotiating tariff and inflation protection clauses.

• These lower margins are part of a strategy to obtain large contracts from a low base and improve margins over time.

• Panama Factory Expansion:

• Flexible Solutions is nearing completion of a duplicate agriculture and polymer factory in Panama, aiming to produce nearly all products for international sales by Q4 2025.
• The new plant will reduce tariff exposure and shipping times, targeting increased sales and new customers over the next two years.

• This expansion is a strategic move to mitigate the impact of U.S. tariffs and optimize production costs.

• ENP Division Growth:

• The ENP division experienced strong revenue in Q3 and is expected to have higher revenue in the first half of 2026 compared to the first half of 2025.
• Growth in this division is driven by sales into the greenhouse, turf, and golf markets, which have remained vibrant despite broader agricultural challenges.
• The company is focused on expanding in these vibrant areas and may redirect efforts from less vibrant segments such as traditional row crop agriculture.
  

  Sentiment Analysis:

  Overall Tone: Neutral

  • Sales rose 13% to $10.56M, but Q3 recorded a $503k loss ($0.04/sh) vs. a $612k profit ($0.05/sh) in Q3'24. Management expects Panama production in Q4, August contract already generating >$1M, January contract may slip to Q1'26, and projects profits to rebound in Q1'26 with a potential $50–60M run-rate by 2027.

Q&A:

• Question from Timothy Clarkson (Van Clemens & Co. Incorporated): In terms of getting ready for the new business... when you talk about the margins being somewhat lower than your traditional business, 22% to 25%, are those gross margins or net margins?
  Response: Those are expected gross margins before tax.

• Question from Timothy Clarkson (Van Clemens & Co. Incorporated): What kind of a net number after everything do you think you'll make on this business? 5%, 10% or 15%?
  Response: Using a 20% gross margin and ~31% Illinois tax, net margin would be roughly mid-teens (~14%).

• Question from Timothy Clarkson (Van Clemens & Co. Incorporated): On the first food additive product, the wine product, what's the functionality on these food products, if you can say?
  Response: Management said contracts prohibit disclosure of the specific functionality.

• Question from Timothy Clarkson (Van Clemens & Co. Incorporated): Are these chemicals brand-new or legacy products?
  Response: The chemicals are existing industry technologies (not new); FSI has no legacy with them but was selected for quality and service.

• Question from Timothy Clarkson (Van Clemens & Co. Incorporated): How did the relationships with these customers develop?
  Response: Relationships developed through meetings and trade shows where FSI offered solutions to customers' problems.

• Question from David Marsh (Singular Research, LLC): It sounded like you've begun realizing revenue on one contract, but there's a second one not yet recognizing revenue—are you anticipating recognizing revenue on that in Q4?
  Response: August contract is already producing; the January contract requires clean-room equipment and may only begin late Q4 or possibly slip to Q1'26.

• Question from David Marsh (Singular Research, LLC): Are you expecting to be able to recognize revenue on that January contract in the fourth quarter, or could it slide into Q1?
  Response: Q4 is possible but not guaranteed; Q1 2026 recognition is definite.

• Question from David Marsh (Singular Research, LLC): Are you providing any guidance for Q4 at this time?
  Response: FSI generally does not provide formal guidance and will not give specific Q4 guidance.

• Question from David Marsh (Singular Research, LLC): When all three contracts (January, August, wine) are running at scale, what do you think the run-rate annual revenue will be?
  Response: If customers award full volumes, combined run-rate could be $50M–$60M, likely reached in 2027.

• Question from Gregg Hillman (Investor): Your WaterSavr product shows up to 40% evaporation savings—previously it was ~20%; did the product improve?
  Response: 40% is the best-case day-1 result; average performance is nearer ~20% and declines over days unless reapplied, making government sales difficult.

• Question from Gregg Hillman (Investor): Can other substances perform similar functions to your polyaspartates (e.g., acrylic acid)?
  Response: Alternatives exist (cellulose filtration, acrylic acid columns, chilling) but are generally more expensive or not food-approved worldwide; polyacrylics are often not allowed for food.

• Question from Gregg Hillman (Investor): How much time have you spent on the deal you called off over the past 12 months?
  Response: It was a ~5-month effort with a few hours/day by management, but it never reached full due diligence; financials were reviewed.

• Question from Gregg Hillman (Investor): Did you inspect their books?
  Response: Yes, management reviewed their financials.

• Question from Gregg Hillman (Investor): Do you have a pipeline of future deals or are you working with an investment banker?
  Response: No investment banker; no formal pipeline today, but management continually evaluates opportunities opportunistically.

• Question from William Gregozeski (Greenridge Global LLC): How much were the one-time expenses from Panama and the food ramp in Q3 impacting the expense line?
  Response: Management declined to provide a phone figure and will follow up by email; said those costs were a very large portion of the Q3 loss.

• Question from William Gregozeski (Greenridge Global LLC): ENP was strong—should Q3 be considered a good base going forward?
  Response: ENP Q3 was a strong quarter; management expects Q4 to be strong (but likely not as high as Q3) and anticipates second-half weighting as a structural pattern.

• Question from William Gregozeski (Greenridge Global LLC): For core NanoChem (excluding food), is there hope oil or industrial applications will grow in 2026?
  Response: Possible—Panama production could improve competitiveness and restore oil sales, but management will evaluate demand and allocate Panama capacity opportunistically.

• Question from William Gregozeski (Greenridge Global LLC): Why the Mendota sale/leaseback and will ENP production move to Peru?
  Response: Mendota was sold to reduce landlord risk; 60k sqft leased back will produce ENP (~$13M–$15M expected this year); Peru will focus on food products, not ENP.

• Question from Manny Stoupakis (Geoinvesting, LLC): How much were the onetime costs associated with the contract ramp and Panama move in Q3?
  Response: No phone figure provided; management will email details and said those costs accounted for a very large share of the loss.

• Question from Manny Stoupakis (Geoinvesting, LLC): Are the gross margins on the two new food contracts expected to be similar?
  Response: Yes, both new contracts are expected to have similar gross margins.

• Question from Manny Stoupakis (Geoinvesting, LLC): Is there a possible data center angle for parts of your business?
  Response: No current data center application, though management would explore opportunities if introduced.

• Question from Raymond Howe (CFP, Inc.): The 60,000 sq ft leased back—what gets produced there?
  Response: That facility produces all ENP products, which account for roughly $13M–$15M of expected revenue this year.

• Question from Raymond Howe (CFP, Inc.): So that portion is ENP and food products in Peru, correct?
  Response: Correct.

• Question from William Gregozeski (Greenridge Global LLC): Are any ENP turf and golf products used on football fields (college/pro)?
  Response: Yes, some products are used on football fields.

• Question from Manny Stoupakis (Geoinvesting, LLC): Where would you expect margins to be on new contracts moving forward?
  Response: Target gross margins for future new contracts are in the 30%–35% range, though current wins are lower.

Contradiction Point 1

Food Contract Ramp-up and Revenue Expectations

It involves differing expectations about the revenue potential and ramp-up timeline of new food contracts, which are crucial for understanding the company's growth trajectory.

What is the expected annual revenue run rate for the three contracts? - David Marsh (Singular Research, LLC)

2025Q3: The combined revenue potential from all three contracts is $50 million to $60 million, expected to reach by 2027 following the customers' business growth. - Daniel O'Brien(CEO)

What will be the net margin for the food contracts? - Timothy Clarkson (Van Clemens Capital)

2025Q2: We originally anticipated these 2 separate contracts would generate approximately $10 million to $15 million in 2025 and $30 million to $40 million in 2026 as both plants ramp up. - Daniel O'Brien(CEO)

Contradiction Point 2

Tariff Solution and Production Shift

It concerns the company's strategy to address tariff issues, which has implications for operational efficiency and cost management.

What are the new food products' functions? Are these chemicals new to the industry? - Timothy Clarkson (Van Clemens & Co. Incorporated)

2025Q3: We've shifted a lot of the material from mainly our Texas plant to a new plant we built in Panama. - Daniel O'Brien(CEO)

Have you found a permanent solution to the tariff issue? - Timothy Clarkson (Van Clemens Capital)

2025Q2: We have found a solution, which involves setting up a duplicate facility in Panama. This will reduce tariffs and shipping times, and eventually free up space in our Illinois plant. - Daniel O'Brien(CEO)

Contradiction Point 3

Margin Expectations

It involves changes in financial forecasts, specifically regarding margin expectations, which are critical indicators for investors.

Are the lower margins compared to traditional business gross or net? - Timothy Clarkson (Van Clemens & Co. Incorporated)

2025Q3: The expected margins are gross margins before tax, around 22% to 25%. After accounting for tax, the net margin could be approximately 14%. - Daniel O'Brien(CEO)

What are the expected margins for the new food business? What are the gross margin expectations for the contract beyond initial costs? - Manny Stoupakis (Geoinvesting, LLC)

2025Q1: Gross margins, we're expecting the margin to be extremely stable because it is tied to inflation. - Daniel O'Brien(CEO)

Contradiction Point 4

Expected Revenue Run Rate from New Contracts

It involves the expected revenue run rate from new contracts, which is crucial for investor expectations and financial forecasting.

What is the expected annual revenue run rate for the three contracts? - David Marsh (Singular Research, LLC)

2025Q3: The combined revenue potential from all three contracts is $50 million to $60 million, expected to reach by 2027 following the customers' business growth. - Daniel O'Brien(CEO)

Will gross margins of the new food business be higher than historical levels? - Tim Clarkson (Van Clemens & Company)

2024Q4: The first customer expects to generate first year orders in 2025 and expects the business to ramp up to $40 million annually in the 2025 to 2027 period. - Daniel O'Brien(CEO)

Contradiction Point 5

Impact of Onetime Costs on Financial Performance

It highlights the impact of one-time costs on financial performance, which is important for understanding the company's financial health and growth prospects.

What was the impact of one-time costs from Panama and food products on Q3 expenses? - William Gregozeski (Greenridge Global LLC)

2025Q3: The one-time costs were significant and largely responsible for the loss in Q3. The expenses are due to setting up new facilities and equipment, which will continue in Q4. - Daniel O'Brien(CEO)

What are the plans for investments in Panama over the next 4 to 5 years? - Stacey Penner (Piper Jaffray)

2024Q4: Based on our current expectations, we expect to incur a net loss in the fourth quarter of 2024 primarily due to higher expenses related to the $3.8 million initial investment in our new production facility in Panama. - Daniel O'Brien(CEO)