Q1 2021 Flexible Solutions International Inc Earnings Call

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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'll have an opportunity to ask questions. During the question answer session. You May Register to ask a question and at anytime by pressing the star and one on your Touchtone phone.

Please note this call maybe 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 Obrien.

Thank you Mallory.

Good morning. This is Dan O'brien CEO of flexible solutions.

Safe Harbor provision.

Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward looking statements and certain other statements contained herein, which are not historical facts are forward looking statements with respect to events.

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 and you detailed from time to time and the Companys reports filed with the Securities and Exchange Commission.

Welcome to the F. S. A 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.

The COVID-19 virus.

The nano Cam subsidiary.

And he and subsidiary and the Florida LLC investment are all engaged and producing for the agriculture and or the cleaning product sectors.

Therefore were considered essential services and are likely to remain so even if restrictions are reinstated.

And now Ken Division and C. S represents more than half the revenue of the pet side. This division makes thermal poly aspartic acid called Tpa for short.

Which is a biodegradable polymer with many valuable uses and.

And she is also manufactures sun 27, and N Savr 30, which are used to reduce nitrogen fertilizer loss from soil.

Tpa is used in agriculture to significantly increase crop yield index by slowing crystal growth between fertilizer ions and other items and the soil, resulting and the fertilizer remaining available longer for the plant to use.

Tpa is also a biodegradable way of treating oilfield water to prevent pipes from plugging with mineral scale.

Tpa and the fact 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, and N Savr, 30 year and nitrogen conservation products nitrogen is a critical fertilizer, but it can be lost through bacterial breakdown evaporation and soil runoff.

Sun 27, and it used to conserve nitrogen from attack by soil bacterial enzymes, while N. Savr 30 is directed towards reducing nitrogen loss through leaching and evaporation.

Yeah and P Division.

And he is focused on sales into the greenhouse turf and golf markets.

And our NCS sales are into row crop agriculture, two very distinct markets.

The strong quarters for N P or second and third to match the U S spring and summer.

Full year, 'twenty, and 'twenty growth and both revenue and profit was good and based on good results for Q1 P. M. P expects the level of growth in 2020, one to be at least equal to 2020.

The Florida LLC investment this profit and this investment was profitable as usual.

The company is focused on the international sales into multiple countries, all of which are facing different issues and responding and varied ways.

Large number of variables prevents any useful prediction and for full year 2021 ex.

And that the L. L C management expects continued growth.

In Q1, 2020, one and some customers made their spring order. So late that shipments occurred in Q2.

No revenue loss and sued but recognition will be and Q2 rather than Q1.

Our strategic investment and logos and December F S I invested $500000 and logos and return for equity.

<unk> is using the investment to continue development of and microbial route to aspartic acid using corn sugar as a feedstock.

So I would be the major user of aspartic acid derived this way and believes that sustainable as part of cash and would allow us to obtain large new customers and develop valuable and new products.

Like other scientific team have already successfully developed other organic acids from sustainable feedstock.

And are recognized as one of the world leaders and synthetic biology by their peers in the industry and academia.

We have high confidence and their ability to achieve sustainable aspartic acid through affirm mentation route.

Once and economic microbial route is fully developed we plan to work with law goes to build capacity and produce aspartic acid, which we will then polymer.

All of them are eyes into sustainable poly as far tapes.

Q2, 2021.

Tpa Sun 27, and N Savr 30 for agricultural use has peak uptake in Q2, Q1, and Q2 as we suspected ordering and in 2020. One is not the same as in 2020 and some orders early while others are later than usual.

Oil and gas and industrial sales are expected to be flat to slightly up and Q 'twenty Q2 2021.

Tariffs.

Since September 30th 2018, many of our raw materials imported from China have included a 10% additional tariff, which then rose to 25% in 2019.

And as customers received price increases from us as this inventory entry production and.

National customers are not charged the tariffs because we have applied for the export rebates available to recover them.

As a result, you're accumulating tariff payments to the government are affecting our cost of goods, our cash flow and our profit negatively until the rebates are received.

Rebates are very complicated to apply for and can take many months for it to arrive.

We submitted our completed applications more than a year ago. The total dollar amount and due back to us now exceeds a million and its continuing to increase.

Changes and customs categories, and Q3, 2020 have resulted in another of our raw materials being added to the list and creative sing the strain on us.

The rebates will increase profitability and cash flow, while decreasing cost of goods for future quarters, and which the rebates are received.

Most recently, we requested and we wish.

The request for small changes to our application.

And early January 'twenty, and 'twenty, one and respond and 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 price per container or a much more normal and 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 won that some disruption will be unavoidable and some of the extra costs will have to be borne by us and so 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 results and 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 increased sales.

The machinery and went live in December and will contribute to sales and profits in 2020, one 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, six 2 million compared to 8.43 million for Q1, 2020.

And 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 real lack of raw materials dude and that was due to shipping delays.

Profits. The result is a profit of 1.45 million or 12 cents per share and 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 E. M. P divisions during 2020.

Operating cash flow.

Non-GAAP number is useful to show our progress.

Non cash items removed for clarity.

For 2020, one Q1, it was 151 million or 12 cents, a share compared to $1, seven and 8 million or <unk> 15 per share.

And the equivalent period a year ago.

Long term debt.

500000, actually 537000 and P. P P loans had been forgiven.

We continue to pay down and our other long term debt. According to the terms of the loans.

Working capital, it's adequate for all our purposes and its increasing continuously as we book retained profit from sales.

We also have a line of credit from Midland States Bank increase.

Increased inventory to service increased expectation of sales has caused us to use more of our L. L. C is this spring.

With the intention to pay it down as the sales are crystallized.

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 200000 and peso Ishares and 2019, while the remainder was paid back and cash.

The L. L C and investment in January 2019 was made with cash on hand provided by F. S. L. Our Canadian operating company the.

And the equity investment and logos was funded with cash on hand from the same source.

The text of this speech will be available as an 8-K filing on www Dot FCC Dot G O V.

By Tuesday may 16th and email or fax copies can be requested from Jason Bloom.

Jason add flexible solutions dot com.

Thank you the floor is open for questions and Mallory will you give the instructions and handle the people. Please thank you.

At this time.

Ask a question please press the star and one on your Touchtone phone.

You have yourself from the queue at any time by pressing the pound key.

Once again that is star and wanted to ask a question.

Pause for a moment to allow questions to queue.

We will take our first question from Gregg Hillman.

You comment on your.

International distribution of your nitrogen stabilizer product.

Whether you are able or Florida L. L. C was able to sign up some large distributors and how is.

Market recognition of that product preceding and Europe.

Hi, good morning, Greg.

The yes, sorry is the management of our L. O L. L C investment have been.

Successful and finding new distributors. They are Ah I believe they <unk>, they say that there and over 30 countries now.

<unk>.

The.

Products are well received but as is usual and the agriculture industry you start small and you get a little bit bigger than next year, and then and the second year of a new distributor you. That's when you see the the significant growth if it's going to come.

And most of the cases.

I would say that our distribution to new rather than the existing strong distributors is in year.

One and a bit or let's call. It season, two and I would expect the growth and the newest places to occur and in 2022, rather than 2021.

I would suggest that the L. L. C is expecting its growth this year, which it does expect to come from.

Small increments from new distribution and greater increments from existing and distribution.

Okay and and.

And I had a Dan another follow up question on on your bank clients.

Could you just comment on it on your relationships with BMO Harris and also and.

Midland and state Bank in terms of the amount of the line and and the covenants and a particular covenants that are restrictive for you to pay dividends.

Yeah.

Oh sure I, our business with BMO has been completed are the last action was the that they were involved and was the forgiveness of the PPP loan.

We do a we do all our banking with Midland and State Bank.

The the.

Total of the L. L sees that we have outstanding of courses and the the financial side and I haven't memorized the number but.

But I believe its and the 3.3 and $3 four range and millions of them.

And our long term debt has also shown there so we're.

We're doing a good job of managing that the covenants that.

Prevent us from paying dividends at this point or.

We need to request permission from Midland rather than be having being told that we absolutely may not which was BMO is position.

So we are finding greater freedom there.

Hum.

And the other hand.

We don't believe that we are financially ready after the or even that COVID-19 is truly over so I think we're still and we're still a while from resuming.

Resuming the dividend.

Uh huh.

Okay, Thanks, Dan and I'll get back in queue.

Appreciate it Greg.

Sure.

Okay.

Once again, if you would like to ask a question. Please press star and one on your Touchtone phone.

Yeah.

Okay.

Okay.

[laughter].

Alright, it looks like we do have another question from Greg.

Yeah, yeah, it might be one of them.

Yeah, a couple of them.

I guess the other question it's about overall.

Well, maybe you could talk about the United States, a little bit and in terms of on the AG side, both for and <unk> 20.

And 27 and <unk> and.

Oh, and save 30, what kind of traction you know you guys are.

And they're getting because.

I remember you had like two bad years Spike one year, I think and 2019 it was extremely wet and that hurt and then last year. It was kind of COVID-19 and when will things well I guess I'm asking two questions at the same time.

Number one and one more thing you think normalize in terms of you know.

And in the United States sales for you know some of your and related products and then also you know how how and how is the traction you're getting with the distributors you know for both the nitrogen stabilizer and phosphate stabilizer products you know the tpa products.

Okay well.

And it's a pretty in depth question, but where we're good for it.

[laughter] are normal and and agriculture.

Luckily we're in the Q&A and not they are not and my main stage.

I'm not quite sure what normal is because this year is this year and prices have gone crazy, there's drought in Brazil, that's driving and.

Pork.

Swine flu and China, those two things are driving our corn and soybean prices.

And to you.

Price points. So we haven't seen since 2000 2012.

Beans, or above $14 corns above six.

You can even lock and your this year's crop, but 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 they don't know the size of the crop.

I'm thinking and what we're seeing is as 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 and their field to grow crops.

And.

This is going to have positive effects on both our nitrogen and stabilization and our.

And poly aspartate yield increased products, we're not quite sure how how much and we're not quite sure.

Uh huh.

How much of it will be seen in 2022 as farmers.

Are more willing to spend because they actually have the good money and their bank accounts.

So I think we're going to see pretty decent returns.

Returns this year and growth and 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 and 2022, but we add to them based on our on the success of this year.

And one final point is that.

Planting is extremely advanced this year I think the last thing I saw was and the and <unk>.

<unk> 18, big corn states.

They are almost half the crop is in already. So this is this is a pretty unusual euro and the positive format.

We're going to do what we can or distributors or is are solid.

But I think some of it is going to come in this year and some of it's going to come next year.

Oh, Great and then finally do you have any.

Products, you know that you could get into let's say you know direct from our fertilizer product I, suppose and fertilizer products sell for <unk>.

Some other important products that you could introduce over the next two years.

We have looked at our fertilizer products in conjunction with our LLC investment.

We're going to need a third party and not one and and we are looking one other problems with fertilizer Greg is the.

Is that all or enhancements become.

2% of the fertilizer, which means that your 98% ex.

<unk> to a commodity and.

And.

Two in order to convert it into some of the new ideas. We have you have to actually buy that fertilizer and and become exposed to that commodity at the price on the day he bought it.

Which means you have to put together a pretty complicated a 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.

And.

Urea dropping by.

40, Bucks, a ton and and not only wiping out your profit, but are putting in a loss position on three or 5000 tons of urea.

That's something that we are not able we're not financially able to play.

And that game and if you haven't got the buy and and 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 are backing us yet we're looking hard we.

And we may get in and and in the next year it won't be this season.

Okay.

And and finally, Dan and have you seen anything on the regulatory front in terms of.

Yeah and mandates for farmers are incentivizing farmers tab.

And to have less you know run off in neutrophil <unk> and <unk>.

And.

And in terms of rates that would be favorable too and the farmer shoes and more Tpa for example.

We see.

And we haven't seen any a radically new.

Legislation and and the United States, there's a greater understanding that this this could be.

This could help we are there is some movement and in Europe. There are I believe Germany is.

It has legislation coming.

And that will require all nitrogen.

Nitrogen to be.

Protected from.

Loss.

And.

And one of the real problems of course with the regulation and farm is it does it get doesn't get enforced. So we we like seeing the rig and the regulation. We think it's good to have the regulations, but until there is widespread and enforcement, it's not going to have.

And.

And effects that forces farmers to use it and.

And definitely we haven't seen and and incentives to 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 and make some money and with our nitrogen.

Conservation it saves them money and and the higher nitrogen prices go the more money it saves them.

Okay. Thanks.

Thanks Blake.

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

No problem Greg.

Once again, if you would like to ask a question. Please press star and one on your Touchtone phone.

Yeah.

Yeah.

And it appears that we have no further questions at this time I Wonder now ill turn the program back over to you Dan.

Thanks Malory.

And everybody who joined US. This morning. Thank you very much we'll talk again in three months and.

Appreciate your time.

Hi.

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

Okay.

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