Good day, and welcome to the Flexible Solutions International Second Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dan O'Brien. Please go ahead, sir.

Thank you, Madison. Good morning, this is Dan O'Brien, CEO of Flexible Solutions. The 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 the 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 2020 Q2 call. Prior to addressing our financials, I would like to talk about 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 ENP subsidiary, and the Florida LLC investment are all engaged in producing for the agriculture and/or the cleaning products sectors. Therefore, we are considered essential services and likely to remain so if restrictions are reinstated. Productions and sales are continuing to meet customer orders. We continue to shrink our inventory and increase our cash position in Q2 by ordering less inventory than we consumed. This tactic has been successful and we feel that we now have the right level of inventory to suit the risks of COVID, while still having the ability to service our customers. Our NanoChem division, NCS represents more than one half the revenue of FSI. This division makes thermal polyaspartic acid, called TPA for short, 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. TPA is used in agriculture to significantly increase crop yield. The method of action is by slowing…

[Operator Instructions] We can go ahead and take our first question. Please go ahead.

Hi, Dan. It looks like the Florida LLC is doing very well so far this year. Are you able to talk at all about what’s driving their top-line growth? And if the margins are going to be anywhere near where they were in the second quarter?

Hi, Bill, and good to hear from you. The Florida LLC had issues last year in Q1 and Q2 that were related to international currency specifically, the Brazil, I believe it’s the Real. Those have not been repeated and the customers that were normally serviced, ordered on time and then volumes expected rather than playing games with running down inventory. Definitely, the margins are likely to remain similar. They won’t be increasing, but similar to down a little bit depending on our cost of goods which is of course, because we manufacture many of the products for the LLC. Our cost of goods flows through to their cost of goods and to their margin, as well. So, I would say, as a decent prediction, we are tracking in a normal canyon right now. But I can’t promise that something will kick us out.

Okay. So, I mean, even though like a net margin and over 10% is something that we can expect positive going forward from there?

I would think so. That’s something that our company showed in Q1 and again in Q2 as a whole. And that will be something we would aim for excluding extraordinary circumstances.

Okay. Alright. And then, a last question, you spent about $0.5 million on CapEx, what was that for? And do you have any others expenditures planned for the rest of this year and next year?

Yes. We have been over the past year-and-a-half, we have been installing new equipment in our plants in Peru. I don’t want to disclose what the equipment is for, for fear of leading competitors to the same conclusion we have which is this equipment is going to be very profitable over time. But, it is nearly finished installation. We expect it to go live by the end of the year and the CapEx will then be allowed to be expensed by the end of the year according to the Trump tax changes. So, yes, that’s what we are up to. There is about another, and I guess, it may another $500,000 before we go live.

Okay. And then, with that new equipment then, I know you don’t want to talk about it, but is there any kind of – I mean, should we be expecting gross margin improvement because of that?

Small gross margin improvement, because it will reduce our cost of doing certain products and then over future time, we will use it for both tool manufacturing and for the expansion of certain products that were not possible to expand without access – direct access to this machinery. Until now, we’ve been using tool manufacturers and by moving away from that, we are going to be able to expand certain products that just didn’t make sense with the tool.

Alright. Great. Thanks, Dan.

Thank you, Bill.

[Operator Instructions] We can go ahead and take our next question. Please go ahead.

Hi, Dan. Congrats on a great quarter.

Thank you.

So, just to kind of follow-up on your tariff comment. So, kind of wanted to confirm that, the amount that you guys are expecting roughly $0.5 million to $1 million, would that amount for quarter in terms of a reduction in total cost of goods, is that what you guys are still expecting?

No. Here is what has happened. Over the, almost two years, that these – that we’ve been pursuing these rebates, the accumulated amount is between $500,000 and $1 million that we expect back. And that material or that amount of money is likely to come back across a one to two quarter period. Whenever it starts, those historic ones should come back across one to two quarters. But let’s also remember that every pound of raw material we are buying out of China continues to have a tariff applied. So, what we are trying to do here with the first set of rebates is get back into a situation where we don’t have historical rebates due to us. We only have the last quarter or the last four months perhaps. So we want to get into a position where instead of having a very large chunk of historical rebates due to us, we only have the three months – the most recent three months that we’ve been paying. And we are frustrated, I can imagine the U.S. shareholders are frustrated and I imagine even the government is frustrated that they can’t get organized enough to rubber stamp our application and let this go forward. But that’s what’s happening. So, expect at some point to have one to two quarters where there is an extra $500 million – sorry, $500,000 to $1 million and then a normal period thereafter where we put out a couple of $100,000 in tariffs in one quarter but get the previous quarter’s tariff rebates back. That make a lot of sense or not?

No. That’s helpful. No. That’s super helpful. I appreciate the color. And just as a last question, you know the fact that water – kind of the – you guys break out the two segments in your filing. I noticed in the WaterSavr kind of segment you guys kind of broke even in terms of profitability and you guys had – you guys have lost kind of a immaterial amount in previous quarters. But have actually shrunk profitability. Is that something you can kind of expect going forward?

Our focus on that division, because of the intense difficulty of selling to governments who essentially have shown over 15 years that they are not interested in our products even though it works. We have been left with a small sales into swimming pools and small sales into the oil and gas industry in North America who are using it to keep water in their fracking ponds. I am very happy with the water conservation. We don’t want to give up the product line, but we are not going to extend capital trying to grow it. So, I think what you can expect to see is similar results that where the revenue exceeds the cost of goods and the cost of keeping the divisions open is actually a value to us because it does support employees who have secondary responsibilities in accounting and other areas of our company. So it’s going to be valuable. It’s going to be free cost. But it’s not going to be a focus going forward.

That makes sense. And on the TPA side, it seems like, kind of looking at the environment, the planning – the planting kind of season go up better because of weather. Is that something you guys are seeing that’s probably helping you guys on the NanoChem side of things?

Yes. A normalized spring is always better. Customers and our customers’ customers will find themselves in predicaments where they don’t know what – if it’s an odd spring where floods or other weather events, they won’t know when to order something and then something just don’t get ordered and used that year. So, this year has been much more favorable. The same thing could be said, Bill asked earlier about our LLC investment. That has, when it’s normalized, which it was this year, that’s very beneficial to us, as well. Because the planting seasons internationally are far different from North America and there is even a second planting season in the fall for South America for many of the acres. They get two crops a year. So, there is a second planting season in South America that’s getting ready to begin now.

Got it. Thanks a lot. And great job.

Thank you.

We can go ahead and take our next question. Please go ahead.

Yes, Dan. Dan?

Yes, I am here waiting.

Yes, hi. It’s great. Hey. A couple questions. About the Florida LLC, there was an earn out of – like, I think $1 million a year for couple of years. Were those payments - did they hit the targets and were those payments made?

Yes. The first term payment was made. The next one is coming up in December. The first one was earned and then some and then the second one was – as though it will be earned. Although there is only six months. I am confident that they will earn out their position then they are very pleased that they will.

Okay. Good. And the question about resuming the dividend and your relationship with the bank, I think your bank told you to hold off on it. What’s your thoughts on the dividend on a go-forward basis?

Well, as well as the bank, I think we all have to recognize that COVID has become more of a long-term problem than it was expected in February and March. And, all of us are waiting for a reliable vaccine or a guaranteed cure if you get it. So, - and I read two very instructive magazines weekly is Chemical Engineering News and The Economist. My understanding is that we are at least a year away from a reliable vaccine applied to enough human beings that normalized operations across the world will take place. The FSI Board is feeling very strongly that that no resumption of a dividend should happen until that vaccine or let’s be honest, maybe vaccine is never achieved, but a reliable cure for people who get sick is in place. So, we are going to be quite conservative if the world hadn’t changed back in February, we obviously would have had enough money and capacity to continue a dividend. But we would not want to be in a situation of paying out our cash and then discovering that for some reason or other our bank loans were no longer available and we didn’t have the cash to repay them.

Okay. Good. And it seems that your most M&A activity, the Florida LLC and that other company, ENP have done pretty well and they are good acquisitions. But could you just maybe give me a sense about, basically, the adoption of TPA and the nitrogen stabilizers, how is that occurring domestically worldwide? And what you need to do to speed that up through acquisitions or internal marketing efforts?

Okay. Well, yes. It’s a good question. I like these ones. The adoption of nitrogen stabilizers in the North American market is about 20% to 25% of nitrogen fertilizer used right now and growing reasonably rapidly. So, we expect to earn our share in that market. Internationally, which was another reason why we made the Florida acquisition. It’s only 10% and certain countries are much greater than that. But certain countries are much less. So, internationally, there is an even bigger opportunity than there is in the United States. Nitrogen stabilizers aren’t just about yield anymore. They are also about the amount of urea and other nitrogen products that end up in our groundwater and in our river systems. If you really want to scare yourselves sometime, have a look at algae blooms in the Gulf of Mexico that are 45% due to nitrogen fertilizer runoff from the corn and soybean producing states. And then obviously we have to produce food, but we should be doing a better job of making sure that the fertilizers we need to produce the amount of food we want to eat or staying where we put them. And so, over time, nitrogen stabilizers we expect them to be mandated. But waiting for government action is not our plan. And I’ll just move before talking about sales techniques, I’ll move to the TPA project. TPA is less of a pollution solution and more of a yield enhancer. So, that one will take more sales effort and has taken more sales effort over the years. But it’s a great product, great margins on it. And it works virtually for every farmer that tries it. So they are now backing up to the – is the first stage of your question, we will look to organic growth just over the next few quarters to make sure we understand exactly what we are doing. One of the reasons for the two very specific acquisitions after 15 years of doing nothing was people. Each of these acquisitions brought with us people we believe are part of the next phase of Flexible Solutions and its growth. We’ve lowered our average age. We’ve increased our average IQ. And we’ve brought to our company, what I feel is an increased exuberance and optimism. So, we want to – we would love to acquire more companies, but it has to match a very harsh set of rules for us. One, it doesn’t end up on my shoulders running the new group. I have enough on my shoulders. Two, it’s accretive immediately. Three, it’s reasonably priced. And four, it brings to our company people that can be part of the next generation, because, we don’t want to make our job harder. We want to make it more fun. And if we find acquisitions that suit all of that, we will make them. If we can’t find them, we will find ways to grow organically. Sorry about the long answer.

Okay. Great. And then, then you mentioned government, is there anything that the government could do to accelerate your sales? You mentioned the thing about the algae blooms and things like that, but that will be one thing, but what’s your take on anything the government might do and...

Well, you know, sometimes, it’s – not just, I don’t know how if you’ve done much reading on the economy, but it’s often just making it better for the farmer to do the right thing rather than beating him to with a new set of regulations. If I were king of the world, perhaps I’d be trying something like saying, there is a green credit of some type for reducing the amount of nitrogen that you apply to your fields through the use of nitrogen stabilizers. That’s the sort of thing that I think would work with growers. Farmers are pretty tough individuals and threatening them with stuff usually just means they go around you.

Okay. Okay. That’s really helpful. And actually, Dan, just one other thing, the former TPA, the nitrogen stabilizer, are those both available in granules and liquids?

The nitrogen stabilizers are liquid only and they are applied to the nitrogen either – liquid nitrogen helian or to urea pellets. TPA is available in a powder form, as well as a liquid form. The powder form is quite a bit more expensive and it doesn’t sell normally into the agriculture industry.

Okay. Okay. Thanks very much for your comments.

Welcome.

And we will go ahead and take our next question. Please go ahead.

Good morning, Dan. It’s Raymond Howe [Ph]. How are you?

I am fine, Simon.

Question for you, I am trying not to make too much as the prepared comments in your press release, but you said something the fact that you were busy making products for essential services in agriculture and cleaning products and combined with normal operations, very strong quarter. Should I read anything into the combined with normal operations? Was there a new consumer care product related to COVID that was in there?

No. I am turning a fine line. It’s arrogant and obnoxious to brag during a world pandemic. And we did possibly see some of our customers ordering more than they would have.

Okay.

So, if – and I am sorry, if it was misunderstood. For instance, in cleaning products, we have seen a small rise and I am sure it’s because people are washing their hands more and washing their dishes and their laundry and we supply products that go into all those finished goods. Likewise, in agriculture, perhaps there were increased orders I’d owe that in agriculture, I think we just saw just in time and perhaps something that wasn’t ordered in the fourth quarter last year, that ordered in second quarter.

And all in all, you are supply chain is still functioning smoothly?

It is. It’s a little slower, but we always carry three to four months of inventory for most of our products. So, a three to four week delay in deliveries, really just tied into our hands to reduce a six month inventory to a four month.

Got you. And last question from me, small item but, Trio Opportunity Corp, what do they do?

Interesting company. I know of them because, one of our directors is also a director in their corporation. It’s a private Seattle-based company with an international arm. We invested in the international arm. They lease houses – lease their own houses in the United States in three or four of the states. They are doing very well. They pay an 8% interest, which of course, because it’s being paid into our Cayman subsidiary has a tax advantage. They have been growing rapidly. And we are very pleased with our investment. Every month we get the interest and, yes, highly recommend them.

Great. That’s all I got. Thank you very much. Great quarter.

Thank you.

Alright. It appears there are no further questions. Actually we just got one more. Let’s go ahead and take our next question. Please go ahead.

Dan, for the Florida LLC or one of the companies you just bought, what’s ornamental agriculture?

Turf and ornamentals, ornamental part is, plants and lawns and small trees, all the things that you see around a mall or in a property development.

Okay. Got it. They sell into that market, like for fertilizers and things that help them, okay. Okay.

Absolutely. That’s their focus. Golf, turf and the ornamentals, which is the things that are bigger than grass.

And I take it that’s growing faster than the economy, that has a decent growth rate, that market.

As a market, I think it’s probably growing faster than the economy. But our skill set and the person that we acquired in that acquisition man named George Murray, they are good at gaining market share, as well.

Okay. Okay, got it. Okay. Thanks very much.

You are welcome.

Alright. Now there appears to be no further questions. Mr. O'Brien, I’d like to turn the conference back to you for any additional or closing remarks.

Thanks Madison. Well, everybody, thank you for joining us and hopefully you’ll be back again in three months for the next conference call. Until then, thanks very much for your attention. Bye.

This concludes today's call. Thank you for your participation. You may now disconnect.