Flexible Solutions International Inc.

Good day, everyone, and welcome to today's first quarter 2021 Financial Resorts Conference. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. Please note this call may be recorded, and I will be standing by if you need any assistance. It is now my pleasure to turn today's program over to Dan O'Brien.

Thank you, Mallory. Good morning. This is 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 and 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 Q1 2021. Prior to discussing our financials, I'd like to update our corporate condition and product lines along with what, in our opinion, might occur over the next two quarters. COVID virus. The Nanochem subsidiary, the E&P subsidiary, and the Florida LLC investment are all engaged in producing for the agriculture and or the cleaning product sectors. Therefore, we're considered essential services and are likely to remain so even if restrictions are reinstated. Our nanochem division, NCS, represents more than half the revenue of FSI. This division makes thermal polyaspartic acid, called TPA for short, which is a biodegradable polymer with many valuable uses. NCS also manufactures SUN27 and NSAVER30, which are used to reduce nitrogen fertilizer loss from soil. TPA is used in agriculture to significantly increase crop yield. It acts by slowing crystal growth between fertilizer ions and other ions in the soil, resulting in the fertilizer remaining available longer for the plant to use. TPA is also a biodegradable way of treating oil field water to prevent pipes from plugging with mineral scale. 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. SUN27 and NSAVER30 are nitrogen conservation products. Nitrogen is a critical fertilizer, but it can be lost through bacterial breakdown, evaporation, and soil runoff. SUN27 is used to conserve nitrogen from attack by soil bacterial enzymes, while NSAVER30 is directed towards reducing nitrogen loss through leaching and evaporation. The EMP division. EMP is focused on sales into the greenhouse, turf, and golf markets, while our NCS sales are into row crop agriculture, two very distinct markets. The strong quarters for EMP are second and third to match the U.S. spring and summer. Full-year 2020 growth in both revenue and profit was good, and based on good results for Q1, EMP expects the level of growth in 2021 to be at least equal to 2020. The Florida LLC investment, this investment was profitable as usual. The company is focused on international sales into multiple countries, all of which are facing different issues and responding in varied ways. A large number of variables prevents any useful prediction for full year 2021, except that the LLC management expects continued growth. In Q1 2021, some customers made their spring orders so late that shipments occurred in Q2. No revenue loss ensued, but recognition will be in Q2 rather than Q1. Our strategic investment in LIGOS. In December, FSI invested $500,000 in LIGOS in return for equity. LIGOS is using the investment to continue development of a microbial route to aspartic acid. using corn sugar as a feedstock. FSI would be the major user of aspartic acid derived this way and believes that sustainable aspartic acid would allow us to obtain large new customers and develop valuable new products. LIGO's scientific team have already successfully developed other organic acids from sustainable feedstock, and are recognized as one of the world leaders in synthetic biology by their peers in the industry and academia. We have high confidence in their ability to achieve sustainable aspartic acid through a fermentation route. Once an economic microbial route is fully developed, we plan to work with LIGOS to build capacity and produce aspartic acid, which we will then polymerize into sustainable polyaspartates. Q2 2021. TPA, Sun 27, and NSAVER 30 for agricultural use have peak uptake in Q1 and Q2. As we suspected, ordering in 2021 is not the same as in 2020, and some orders are early while others are later than usual. Oil, gas, and industrial sales are expected to be flat to slightly up in Q2 2021. Tariffs. Since September 30, 2018, many of our raw materials imported from China have included a 10% additional tariff, which then rose to 25% in 2019. U.S. customers received price increases from us as this inventory entered production. International customers are not charged the tariffs because we have applied for the export rebates available to recover them. 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 are very complicated to apply for and can take many months to arrive. We submitted our completed applications more than a year ago. The total dollar amount due back to us now exceeds a million, and it's continuing to increase. Changes in customs categories in Q3 2020 have resulted in another of our raw materials being added to the list, increasing the strain on us. The rebates will increase profitability and cash flow while decreasing cost of goods for future quarters in which the rebates are received. Most recently, we received a request for small changes to our application in early January 2021 and responded 24 hours later. We're still waiting for the government's response to our response. Shipping and inventory. Ocean shipping from Asia to the U.S. and ocean shipments from the U.S. to international ports continue to take much longer and prices per container are much more than normal. In fact, double. Land transport inside the U.S. is taking much longer than usual and pricing is unusually high as well. We're doing our best to cope with shipping issues by ordering far ahead, but we warn that some disruption will be unavoidable and some of the extra costs will have to be borne by us until price rises have been accepted by our customers. Raw material prices have also increased substantially over the last four months. Passing price increases along to customers can take several months and result in temporarily constrained margins. We expect to see this effect in Q2 and Q3. New equipment. 2.5 years ago, we began the purchase and installation of new equipment that will allow us to make additional products and increase sales. The machinery went live in December and will contribute to sales and profits in 2021 and onward. Revenue from this equipment is expected to be significant by early 2022. Highlights from the financial results. Sales for the quarter decreased to 7.62 million compared to 8.43 million for Q1 2020. The reduced sales can be attributed to orders received too late for shipment in the quarter, along with sales that could not be shipped as a lack of raw materials, and that was due to shipping delays. Profits. The result is a profit of 1.45 million or 12 cents per share in 2021 compared to a gain of 1.26 million or 10 cents a share in Q1 2020. The improvement is entirely due to the forgiveness of the PPP loans issued to our NCS and EMP divisions during 2020. Operating cash flow. This non-GAAP number is useful to show our progress with non-cash items removed for clarity. For 2021 Q1, it was $1.51 million, or $0.12 a share, compared to $1.78 million, or $0.15 per share, in the equivalent period a year ago. Long-term debt, $500,000, actually $537,000 in PPP loans have been forgiven. We continue to pay down our other long-term debt according to the terms of the loans. Working capital, it's adequate for all our purposes, and it's increasing continuously as we book retained profit from sales. We also have a line of credit from Midland States Bank. Increased inventory to service increased expectation of sales has caused us to use more of our LLCs this spring with the intention to pay it down as the sales are crystallized. We're confident that we can execute our plans with our existing capital. The purchase of E&P in 2018 was funded by the term loan and a $1 million convertible debenture taken by the seller. One half of the debenture was converted to 200,000 FSI shares in 2019, while the remainder was paid back in cash. The LLC investment in January 2019 was made with cash on hand provided by FSL, our Canadian operating company. The equity investment in LIGOS was funded with cash on hand from the same source. The text of this speech will be available as an 8K filing on www.sec.gov by Tuesday, May 16th, and email or fax copies can be requested from Jason Bloom, jason at flexiblesolutions.com. Thank you. The floor is open for questions. And Naluri, will you give the instructions and handle the people, please? Thank you.

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and 1 to ask a question. We'll pause for a moment to allow questions to queue. We will take our first question from Greg Hillman.

You comment on your international distribution of your nitrogen stabilizer product, whether you're able or, you know, Florida LLC was able to sign up some large distributors, and how is market recognition of that product proceeding in Europe?

Good morning, Greg. Hi. Yes, the management of our LLC investment have been successful in finding new distributors. I believe they say that they're in over 30 countries now. Products are well received, but as is usual in the agriculture industry, you start small, you get a little bit bigger the next year, and then in the second year of a new distributor, that's when you see the significant growth if it's going to come. In most of the cases, I would say that our distribution to new rather than the existing strong distributors is in year one. one in a bit, or let's call it season two, and I would expect the growth in the newest places to occur in 2022 rather than 2021. I would suggest that the LLC is expecting its growth this year, which it does expect to come from small increments from new distribution and greater increments from existing distribution.

Okay. And I had, Dan, another follow-up question on your bank lines. Could you just comment on your relationships with BMO Harris and also Midland State Bank in terms of the amount of the line and the covenants, in particular covenants that are restrictive for you to pay dividends?

Sure. Our business with BMO has been completed. The last action that they were involved in was the forgiveness of the PPP loan. We do all our banking with Midland State Bank. The total of the LLCs that we have outstanding, of course, is in the financials, and I haven't memorized the number, but I believe it's in the three-point 3, 3.4 range in millions. And our long-term debt is also shown there. So we're doing a good job of managing that. The covenants that prevent us from paying dividends at this point are we need to request permission from Midland rather than having being told that we absolutely may not, which was BMO's position. So we are finding greater freedom there. On the other hand, we don't believe that we are financially ready after the or even that COVID is truly over. So I think we're still a while from resuming a dividend.

Okay. Thanks, Dan. I'll get back to you.

Appreciate it, Greg. Sure.

Once again, if you would like to ask a question, please press star and 1 on your touchtone phone. All right, looks like we do have another question from Greg. Your line is up.

Yeah, I might be one of the, yeah, a couple, I guess other questions about overall, Well, maybe you could talk about the United States a little bit in terms of on the ag side, both for, um, your son 27 and, and, um, uh, you know, and save, uh, 30, uh, what kind of traction, you know, you know, they're, they're getting, cause, um, uh, I remember you had like two bad years, like, uh, one year, I think in 2019, it was extremely wet and that hurt. And then last year it was kind of COVID. And, uh, When will things – well, I guess I'm asking two questions at the same time. I'm asking, number one, when will things, you think, normalize in terms of United States sales for some of your ag-related products? And then also, how is the traction you're getting with the distributors for both the nitrogen stabilizer and the phosphate stabilizer products, the TPA products?

Okay, well, that's a pretty in-depth question, but we're good for it. Normal in agriculture, luckily we're in the Q&A, not my main speech. I'm not quite sure what normal is, because this year prices have gone crazy. There's drought in Brazil that's driving and pork, swine flu in China. Those two things are driving corn and soybean prices into price points that we haven't seen since 2020-12. Beans are above $14, corn's above $6. You can even lock in your this year's crop at, I believe, $5.75 for corn This means that farmers are going to be extremely wealthy this fall, but it's a little bit imaginary for them this spring because they don't know the size of their crop. I'm thinking and what we're seeing is good pull through on our products this year because everyone is pretty sure they're going to be able to afford what they put down in their field to grow crops. And this is going to have positive effects on both our nitrogen stabilization and our polyaspartate yield increase products. We're not quite sure how much. We're not quite sure how much of it will be seen in 2022 as farmers are more willing to spend because they actually have the good money in their bank accounts. So, I think we're going to see pretty decent returns this year and growth in those markets. But I think we're going to have to work very, very hard and make sure that we not only crystallize those permanently in 2022, but we add to them based on the success of this year. One final point is that planting is extremely advanced this year. I think the last thing I saw was in the 18 big corn states, almost half the crop is in already. So this is a pretty unusual year of the positive format. We're going to do what we can. Our distributors are solid, but I think some of it's going to come this year and some of it's going to come next year.

Great. And then finally, do you have any products, you know, that you could get into, let's say, you know, direct a fertilizer product? I suppose if it adds to a fertilizer product itself or some other, you know, important products that you could introduce over the next two years?

We have looked at a fertilizer product in conjunction with our LLC investment. we're going to need a third party in that one, and we are looking. One of the problems with fertilizer, Greg, is that our enhancements become 2% of the fertilizer, which means that you're 98% exposed to a commodity. And in order to convert it into some of the new ideas we have, you have to actually buy that fertilizer and become exposed to that commodity at the price on the date you bought it, which means you have to put together a pretty complicated world where you've also pre-sold the finished enhanced product to somebody also at a set price so that you don't run the risk of, say, urea dropping by 40 bucks a ton and not only wiping out your profit, but putting you in a loss position on three or 5,000 tons of urea. That's something that we are not able, we're not financially able to play in that game. And if you haven't got the buy-in in a poker game, you probably should stay out. So we've got some ideas and some technology, but we don't have the right people backing us yet. We're looking hard. we may get in in the next year. It won't be this season.

Okay. And finally, Dan, have you seen anything on the regulatory front in terms of mandates for farmers or incentivizing farmers to have less runoff and eutrophication in terms of rates that would be favorable to the farmers using more TPA, for example?

We haven't seen any radically new legislation in the United States. There's a greater understanding that this could help. There is some movement in Europe. I believe Germany has legislation coming that will require a whole nitrogen to be protected from loss. One of the real problems, of course, with regulation and farm is does it get enforced? We like seeing the regulation. We think it's good to have the regulations, but until there's widespread enforcement, it's not going to have an effect that forces farmers to use it. And definitely we haven't seen incentives to use these products at this time. The big incentive for the farmer is always, does it save me money or does it make me money? And with TPA, it makes the money. And with our nitrogen conservation, it saves the money. And the higher nitrogen prices go, the more money it saves them.

Okay, that's great. Dan, thanks for your comments.

No problem, Greg.

Once again, if you would like to ask a question, please press star and 1 on your touchtone phone. It appears that we have no further questions at this time. I will now turn the program back over to you, Dan.

Thanks, Mallory. Well, everybody who joined us this morning, thank you very much. We'll talk again in three months and appreciate your time. Bye.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.