Good day, everyone, and welcome to today's Flexible Solutions International Second Quarter 2023 Financials Call. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Dan O'Brien. Dan O'Brien: Thank you, Jennifer. 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, 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 second quarter 2023. First, I'd like to talk about our company condition and our product lines, along with what we think might occur in Q3 and Q4, 2023. Afterward, I will comment on our financials. The NanoChem division. NCS represents approximately 70% of FSI's revenue. This division makes thermal polyaspartic acid, called TPA for short, it's a biodegradable polymer with many valuable uses. NCS also manufactures SUN 27 and N Savr 30, which are used to reduce nitrogen fertilizer loss from soil. In 2022, NCS started food-grade total operations using the spray dryer we've installed over the last several years. 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 plants to use. TPA is also a biodegradable way of treating oilfield water to prevent pipes from plugging with mineral scale. TPA's effect is prevention of scale for minerals that are part of the water fraction of oil as it exits the rock formation, preventing the scale keeps the oil recovery pipes from clogging. TPA is also sold as a biodegradable ingredients in cleaning products for certain food uses and is a water treatment chemical. SUN27 and N Savr 30 are nitrogen conservation products. Nitrogen is a critical fertilizer that can be lost through bacterial breakdown, evaporation and soil runoff. SUN 27 is used to concern nitrogen from attack by soil bacterial enzymes that caused evaporation of the nitrogen, while N Savr 30 is effective at reducing nitrogen loss from leaching. Food Products. Our Illinois plant is food-grade inspected. We've received our FDA number. We've commercialized one food grade product based on polyaspartates that was developed fully in-house. We have a pipeline of additional products in development that are either our ideas, full production of outside the ideas or a mixture where an outside idea is being optimized by our team. NCS will focus on food products equally with our other market verticals because we've determined that this is an area with large markets that we are skilled in servicing and where we can obtain good margins. We have not received the food product orders we had hope for in Q2. Although we're still convinced this is a viable future business, it may take several more quarters to obtain significant sales. ENP. ENP represents most of our other revenue. ENP is focused on sales into the greenhouse, turf and golf markets, while our NCS sales go into row crop agriculture. The opening of the economy after the pandemic has affected ENP sales into the home gardening market, especially the home cannabis. We expect little revenue growth in 2023, and we don't have any clarity regarding 2024 yet. Our Florida LLC investment. The LLC was profitable for first half 2023 and it's one area where some revenue growth has occurred. The company is focused on international sales into multiple countries, all of which face different issues and respond in varied ways. Revenue was strong in Q1 and Q2, but the remainder of the year can't be predicted. Also, the LLC remains exposed to high cost of goods, while experiencing difficulty passing all the costs to its customers. As a result, the margins are compressed and earnings may not reach historical levels for some time. Our sales to the LLC grew in first half, and we were able to retain a positive margin. Our merger with Lygos did not proceed. On April 18, 2022, FSI and Lygos announced their intent to merge, subject to shareholder approval. The merger was not completed by the end date of the agreement, which was September 30, 2022, and so did not close. Our strategic investment in Lygos in 2020, we invested $500,000 in Lygos and return for equity. We invested a second $500,000 in June 2021. Lygos continues to use the investment towards developing a microbial route aspartic acid using sugar as a feedstock. FSI will be the major user of aspartic acid derived this way and believes that sustainable aspartic acid will allow us to obtain large new customers and develop valuable new products that both biodegrade and come from sustainable sources. We remain optimistic that we can continue to work with Lygos in ways that do not involve merging. FSI is dedicated to the goal of sustainability, while finding a route to this goal that is profitable for us, profitable for our suppliers and for Lygos. Q3 and Q4 of 2023, agricultural products were not as strong in Q2 2023 as they were in Q2 2022. As a result, total revenue for the first half was also below the previous year period. The orders that we thought were delayed from Q1 did not appear. We now expect that agriculture sales may remain slower than 2022 for the remainder of 2023. Oil, gas, industrial sales have also been lower in Q2. This is likely to continue also for the remainder of the year. Customers are reducing inventory and reassessing their needs now that shipping has become reliable again. Tariffs. Since 2019, several of our raw materials imported from China have included a 25% tariff. International customers are not charged to tariffs because we have applied for the export rebates available to recover the tariffs. These costs are affecting our cost of goods, our cash flow and our profits negatively. Rebates can take many years to arrive. We submitted our initial applications more than four years ago. The total dollar amount due back to us is well in excess of $1 million. We're going to persevere until we succeed in recovering our funds. Shipping and inventory. Ocean shipping from Asia to the U.S. and ocean shipments from the U.S. to international ports are back to pre-COVID speeds and have settled prices very close to historic levels. Land Transport inside the U.S. is continuing to stabilize. We coped with the shipping issues by ordering far ahead and carrying additional inventory in 2022, resulting in costs that we were unable to pass on to our customers. In 2023, we have been reducing inventory to a more normal level and are continuing to replace the expensive raw materials with somewhat less expensive ones. As this proceeds, margins may stabilize at slightly higher levels, but it's going to take more time. Raw material prices do not appear to be reverting to historic levels. Instead, they seem to be stabilizing at a new base level that is also experiencing inflation. Passing price increases, even small inflation-related ones along to customers can take several months, not always possible and will probably result in constrained margins throughout the rest of this year. We believe that the sum of the issues that we faced during the rest of 2023 will result in lower revenue, lower cash flow and lower profits for the second half and the full year. Moving to the financial results. We're disappointed with the results for Q2 2023. Year-over-year revenue and operating cash flow were down. Profits were negatively affected by product mix, cost of goods and reduced sales. We now estimate that year-over-year growth in revenue cash flow and profits will not be possible in 2023. Sales for the quarter decreased 7% to $10.33 million compared to $11.17 million for the previous year quarter. Profits in Q2 were $810,000 or $0.07 a share compared to $1.66 million and $0.13 a share in Q2 2022. Operating cash flow. This is a non-GAAP number. It's useful to show our progress with noncash items removed for clarity. For first half 2023 was $3.22 million or $0.26 per share down from $4.42 million or $0.36 a share in the 2022 period. Long-term debt. We're continuing to pay down our debt according to the terms of the loan. We have consolidated all our debt for ENP and NCS with Stock Yards Bank. This has resulted in increased lines of credit with lower interest rates and reduced interest rates on the long-term debt. At the same time, we brought all the units we did not already own in ENP Peru Investments LLC and guaranteed its mortgage. The LLC owns the 5 acres and 60,000 square foot building in Peru, Illinois, that's on the Southwest corner of our other properties. This action returns full ownership of the 20-acre parcel and 120,000 square feet of buildings to FSI and the mortgages at favorable terms. Additional factory space in Illinois. In the second quarter, we invested to acquire 80% of an LLC called 317 Mendota. That in return -- that in turn purchased a large building on 37 acres of land in Mendota, Illinois. We have determined that 240,000 square feet is available for our use or for rental. The ENP division will move all its operations to 60,000 square feet of the build. The remaining 180,000 square feet will be rented as suitable tenants are found. The NCS division will then recover the use of 30,000 square feet in Peru, Illinois from ENP, making room for its possible growth in 2024 and beyond. Working capital is adequate for all our purposes. We have our lines of credit with Stock Yards Bank for both ENP and NCS. We're confident that we can execute our plans with our existing capital. The text of this speech will be available as an 8-K filing on www.sec.gov by Wednesday, August 16. E-mail or fax copies can be requested from Jason Bloom at jason@flexiblesolutions.com. Thank you. The floor is open for questions. Jennifer, will you set this up for us, please?

[Operator Instructions] And we will take our first question from William Gregozeski with Greenridge Global. Please go ahead.

Hi, Dan. I just wanted to clarify on the revenue for the second half. Are you saying that it's going to be less than the second half of last year or less than the first half of this year? Dan O'Brien: We believe it will be less than the second half of last year, but that may be the same number. And of course, we don't know. You're very aware that our customers drive sales and they order - when they order, we do our best to convince them to let us know what they're doing, but that's not always possible.

Okay. And then on the Florida LLC, it looks like the margins have been going back up closer to more historic levels or at least better than the last six quarters. Is maintaining around the 30% gross margin something that you think they can hold on to for the foreseeable future? Dan O'Brien: I think that they can. I don't know if it's - again, that's customer-driven and competition driven. It's good to see that they have recovered some of the margins and that they're increasing volume. I believe that their goal is to continue to increase volume as rapidly as they can and work towards recovering margins, but accept that it may take quite some time to win the competitive battle and get their margins back.

Okay. And last question was, with SG&A going up, is that - it's been $0.75 million per quarter a good number to use kind of as a base going forward? Dan O'Brien: You're talking about the profits in the $0.75 million range?

Your SG&A has been going up. It's like $1.75 million to $2 million a good number to look at going forward? Dan O'Brien: I think it's fair. We're not going to let the pull strings to let go of them. We will try and find ways to reduce that or maintain it at that level. I don't foresee it going up from here unless we can also increase our revenue dramatically. So your plan to use that as your number is probably accurate.

All right. Great. Thanks Dan. Dan O'Brien: Thanks Bill.

[Operator Instructions] We'll take our next question from Raymond Howe with Comprehensive Financial. Your line is now open.

Good morning, Dan. How're you? Dan O'Brien: I'm well Raymond. How're you?

I'm good. Let me jump back to the previous caller's Florida LLC question. Gross profit was up about $600,000, but net income was actually down $100,000 or so. Is there an unusual SG&A item over the 6 months? Dan O'Brien: Well, they are having to retain employees. They also are finding themselves in a situation where, in order to grow their volume and make sure that they get into the countries that they want to be in, they're having to do what they're having to do, and I don't delve into their management choices. Obviously, we are 50% owners. But they are intending to continue to grow their volume. And I would suggest that their additional costs are related to the growth that they're seeing. And they're doing their best. It's a tough world out there right now.

Yes. Understood. I missed some of what you were - when you mentioned the new building. You said 37 acres, how many square feet? Dan O'Brien: We believe that there's 240,000 square feet that are fully functional. There's more than that, but some of it is - it needs renovation, and we're not going to spend the money to renovate it at this time. So we're going to use 60,000 of it for ENP. We're going to put walls up to the stuff that we're not going to renovate, and we're going to, as quickly as possible, rent the other 180,000 square feet to different costs.

Got you. And the 20% owner, is that the same as the 35% ENP owner? Dan O'Brien: No, it's individuals, but many of them have relationships with the ENP owner, but it's not the ENP, it's not ATS, it's individual human beings.

Got you. And is it fairly close to take it to your existing facility? Dan O'Brien: Yes. Mendota is, I think, 14 miles of a straight road from our Peru facility. It's extremely close, and it has all the advantages that our Peru facility has in terms of labor and transport access. It's two miles from Interstate 39. Very good piece of property. The reason we got it was that the company that had it before us, Seneca Foods, was consolidating their operations, too. I believe they have one plant in New York and one in the Midwest, and they were going to consolidate everything into those two operations and their Mendota plant became extraneous. So we got it, and we feel we've got at fair price.

Got you. And the financing on that, I know it's interest only for the first 12 months, but I don't think I saw the actual interest rate in the Q. Can you tell me what that is off the top of your head? Dan O'Brien: I believe it's 6.25. It is floating. So if Mr. Powell continues to add to our costs, it will cost us as well, but it will flow downwards whenever we reach the peak and start that downside.

A couple of other just P&L type questions Trio, I know you added another $470,000 to that investment. Where does that income hit the P&L from Trio? Dan O'Brien: That - let's see. We invest in that through our Cayman subsidiary. Cayman subsidiary reports its income directly to FSI, but it's not split out, so it would show up in FSI parent. And don't quote me on this because, of course, I don't do our audit or our accounting, but I believe that's exactly how it happens.

Okay. And I'm sorry, jumping back. So am I correct to know that you own all of your manufacturing facilities? Dan O'Brien: We own everything now. But all of Peru, which is actually 127,000 square feet, not 120, but we own all the land, 20 acres. Our mortgages are relatively small, as you've seen our debts. Our debt is now largely for real estate, which is much safer than unsecured debt for other reasons. I feel that we're doing a good job of reducing our exposure to the interest world.

I guess the bright news of the slowdown in sales is it looks like cash flow was up dramatically for the six months. Are inventories about where you want them? Or are they still higher than you think they'll end up? Dan O'Brien: I think they will get a different - sorry to interrupt. I didn't mean to do that. Yes.

No, go ahead. Dan O'Brien: Yes. I think that we're probably in the right range for inventory. Pushing on $10 million was too high. The $7 million plus is probably about right. But one of the things - one of our goals will be to watch for buying opportunities. Just as we're facing headwinds from time to time, it happens that suppliers face headwinds. And we can work a deal that we know is highly probable to be less than the average volume price, in which case it makes sense for us to opportunistically increase inventory for temporary amounts.

Got you. That's all I've got. Thank you. Dan O'Brien: Thank you, Raymond. Have a great day.

You too.

And at this time, we have no further questions. I'll turn the call back over to the speaker for any closing comments or remarks. Dan O'Brien: Thank you. Everybody, thanks for coming on the call today, and I appreciate your support. I look forward to talking again in about three months, and thank you very much. Goodbye.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.