Prepared remarks
Good day, everyone, and welcome to today's Flexible Solutions International First Quarter 2025 Financials Conference Call. At this time, all participants are in a listen-only mode. Please note, this call is being recorded, and I'll be standing by if you need any assistance. It is now my pleasure to turn the conference over to Dan O'Brien. Please go ahead, Dan.
Thank you, Rob. 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 involves 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 first quarter conference call. I would like to discuss our company condition and our product lines first, along with what we think might occur in Q2 and Q3 2025. I'll comment on our financials in the second part of the speech.
NanoChem division, NCS, represents approximately 70% of FSI's revenue. 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. In 2022, NCS started food-grade toll operations. TPA is used in agriculture to significantly increase crop yield. It acts by allowing the fertilizer to remain available longer for the plants to use. TPA is a biodegradable way of treating oilfield water to prevent scale and keep oil recovery pipes from clogging. TPA is also sold as a biodegradable ingredient in cleaning products and as a water treatment chemical. In our food division, a special version of TPA is sold as a wine stability aid. SUN 27 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 conserve nitrogen from attack by soil bacterial enzymes and evaporation. N Savr 30 is effective at reducing nitrogen loss from runoff. Food products. Our Illinois plant is FDA and SQF certified. We've commercialized one food product, the wine additive based on polyaspartates that was developed fully in-house. In January, we announced a new food-grade contract. In order to achieve the objectives of that contract, there are certain actions that must be completed. For example, we need to install new specialized equipment capable of manufacturing the product. In addition, we need to install a new clean room because our current clean rooms are not suitable for the processes. There will be CapEx associated with our efforts to run this business because our food-grade improvements over the last two years did not anticipate this new product category. We estimate additional CapEx of approximately $4 million for equipment and plant improvements combined.
And we have substantial cash on hand in our U.S. subsidiaries and access to a mostly unused line of credit. There will be no equity financing needed. CapEx involving equipment and improvements requires lead time for delivery and installation prior to testing, leading hopefully to purchase orders from production. These lead times are being reduced as much as we can control, and our estimate is that the earliest production could begin is Q4. After we are satisfied that we can manufacture the product at scale, and assuming that we can still meet our customers' pricing expectations, we then hope to begin receiving purchase orders. As such, we believe that revenue could begin in Q4 and could reach significant levels by the start of 2026. Earning these future purchase orders and hopefully growing them to the estimated maximum revenue of $30 million per year is the critical goal for the next 4 quarters to 6 quarters.
We hope to execute this to the customers' absolute satisfaction and obtain orders before taking on additional major projects. As part of the clean room and equipment expansion program, we expect to be able to quickly increase capacity by adding duplicate equipment. In addition, we have extra capacity in certain food product categories available. And we've done R&D towards significant business in several products. We could accept new business from these potential customers in 2025, provided it does not interfere with our primary efforts. The ENP division. ENP represents most of our other revenue. And ENP is focused on sales into the greenhouse, turf, and golf markets. We expect growth to continue in 2025 with the growth occurring in the second half of the year. The Florida LLC investment. The LLC was profitable in Q1. The company focuses on international agriculture sales into multiple countries.
Its management has advised us that they estimate a return to growth in 2025, which should translate into increased revenue for FSI. Agricultural products in the U.S. are under pressure. Crop prices are still not increasing at the rate of inflation and extreme uncertainty is present due to tariff changes. Growers are facing a conflict between rising costs and low crop prices, aggravated by political actions. In some cases, crop sales were lost for the whole season, while China maintained a tariff of 125%. As a result, we are unable to predict sales. Food division. Sales are projected to grow in '25, depending on how early production of the new food-grade product might begin and any increased uptake for our existing polymer-wine food product. Tariffs. The current tariff on all imports of raw materials from China into the United States is between 30% and 58.5% depending on the material. We will be very careful not to import materials unless we are sure that the U.S. customers are certain to purchase and are aware that increased tariffs will be added to their invoices once any remaining inventory is consumed.
The Panama factory for international sales. We are developing a duplicate agriculture and polymer factory in the country of Panama. That will be capable of producing nearly all the products we sell to international customers. We estimate that first production from this factory will begin in Q3 2025. Equipment has begun to arrive, and installation will begin soon. CapEx and operational costs to develop the new plant have been funded by cash flow and retained earnings. There will be no need for debt or equity financing. Once operational, nearly all our products for international sales will be made in Panama using raw materials sourced without the U.S. tariffs. There will also be advantages related to shipping. The new plant is 30 minutes from a port. Inbound raw materials and outbound finished goods will not have to be shipped across the U.S. to and from Illinois for our international customers.
Delivery times will be shortened by many days. Reduced shipping times and no exposure to U.S. tariffs on international sales could allow us to increase sales to existing customers and obtain new customers over the next 2 years. Moving most agriculture and polymer production to Panama frees space at the Illinois plant so that food-grade production in the U.S. can be optimized and expanded substantially as U.S. customers are found. Shipping and inventory. Shipping prices are stable, but higher than before COVID. Shipping times are reasonable on the routes we use. During the transition of agriculture and polymer production from Illinois to Panama, we may still need to bring some raw materials into the U.S. provided the U.S. customers are willing to pay the extra tariffs. The raw material prices are stable, but increasing with inflation. GLP-1 drug production line. The drug compounding industry is a logical long-term progression for FSI.
So when a production line for injectable drugs became available at an extremely low price, we bought it. We intend to derisk our possible entry into this market by securing sales prior to further expenditure and by finding partners. We will proceed only when we have reduced the risk sufficiently. Highlights of the financial results. Sales for the quarter were down 19% compared to 2024, $7.47 million versus $9.22 million. Profits in Q1 2025 were a loss of $278,000 or $0.02 a share, compared to a gain of $457,000 or $0.04 a share in Q1 2024. Two large customers engaged in inventory reductions during the quarter, and our ENP division had reduced sales compared to the year earlier period. We expect all of these weaknesses to end in Q2. In addition, some costs incurred to prepare for the potential new revenue from the contract announced in January negatively affected Q1 profits because they are being expensed as they occur.
Some costs for the Panama factory are also being expensed quarter-by-quarter. This will continue in Q2 for Panama expenses, and in Q2 and Q3 for food products. Thereafter, we expect profits to revert to past levels and increase as revenue grows. Operating cash flow. This is a non-GAAP number, useful to show our progress, especially with noncash items removed for clarity. For Q1 2025, it was $480,000 or $0.04 a share, down from $1.38 million or $0.11 a share in 2024. Long-term debt, we continue to pay down our long-term debt according to the terms of the loans. The loan we used to buy our ENP division is paid in full this June this year. Our 3-year note for equipment is fully paid in December 2025. This will free up over $2 million in cash flow per year for other purposes. Working capital is adequate for all our purposes. We've got lines of credit with Stock Yards Bank for the ENP and NCS subsidiaries.
We are 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 Monday, May 19. Email or fax copies can be requested from Jason Bloom at jason@flexiblesolutions.com. Thank you. The floor is open for questions. And Rob, will you set that up, please?
Questions and answers
At this time, we will open the question-and-answer session. Our first question comes from Manny from GEO investments. Please go ahead, Manny.
Thank you. I was wondering if you could talk more about the financial responsibility of building out the clean room required to start generating revenue from the new contract that you announced in January. Are you solely responsible for the capital expenditures for the clean room? Or is your client also putting up some of the money?
We are responsible for the clean room. The client is putting up some money towards equipment.
Okay. Can you discuss whether you expect the margins on the new food business to be more stable than those of the previous business? What are your expectations for the gross margin of the contract beyond the initial costs you have?
Yes. We are not sharing the actual margins, but in response to your first question, I appreciate it. We expect the margin to remain very stable because it is linked to inflation. Both parties are focused on ensuring that production, once initiated, is not affected by pricing negotiations. The pricing follows a specific formula.
And you'll follow a similar model on any future contracts on that line, I guess. Would that be a fair assessment?
With this particular client, all future expansion would follow the same equation. In similar production situations, we will try to guide our customers into agreements, let us call them, that prevent stoppages and starts due to pricing changes of raw materials. I can't promise that every customer will be as logical as the first one, but that's the way we would like to grow.
Okay, great. I’ll hop back in queue. I appreciate it. Thank you.
And our next question comes from William Gregozeski from Greenridge Global. Please go ahead, William.
Hi Dan, I have a couple of questions for you. It seems that you didn't purchase any of the very high tariff products or raw materials during that period. Is it correct to assume that there won’t be a significant margin impact from that?
Correct. There won't be any significant impact, but I do know that some product came in at about 20 to 28%. It wasn't a lot, but we did receive at least two truckloads that were in transit when the tariff was implemented.
Okay. And then you mentioned that you had some kind of more onetime expenses related to expanding Peru and then building out Panama. Is there any expectation for sustained operating expenses that will be added once those are both done?
We are facing continuous cost increases, and we will require more accounting assistance as we integrate between $10 million and $30 million of complex products into our operations. This will necessitate hiring accounting personnel and upgrading our software. These expenditures will form part of our operating costs and will be scalable as we acquire new customers. Additionally, during this transitional phase, we are maintaining a workforce in both Panama and Illinois that we will retain for future needs. While these employees are essential for the transition, they are not yet generating additional revenue, leading to that cost being classified as an expense instead of a capital expenditure.
Okay. All right. And last question is on the dividend. You've done a special dividend around this time, each of the last three years. Do you think you'll ever go to a more formalized dividend policy like you had before? Or just stay with the flexibility that you have now?
The flexibility is great. If the Board determines that a little more transparency would be beneficial to our shareholders, a regular dividend is possible, but I think we would have to be, as a Board, my feeling is that we would be very adamant that any regular dividend would be so small that we can pay for it even during strange events like the COVID issue that cut our previous dividend because our bankers went crazy on us. I think we'd have to be careful and do something like a very small dividend augmented by special dividends. That might be a logical next step, but I wouldn't want to put words in the Board's mouth until we've had plenty of time to talk and think about it.
Okay, all right. Thank you Dan.
And our next question comes from Tim Clarkson from Van Clemens Capital. Please go ahead Tim.
Dan, I just want to check. So you expect that the second quarter results will be better than the first quarter's results then?
Absolutely.
Okay. And other than buying the equipment, what would you say are the risk challenges to making this contract work?
Equipment, clean room, timing. And although we feel that we are very, very good at this, there is always a risk as you go into high production mode, measured in millions of units per year execution. We are pretty good. So I'm going to say that the probability of failure is quite low. And I don't have the statistical skills to try and put a percentage on it, but it's pretty low.
Sure, sure. So essentially, you are going to be doing something that you've already done successfully before. You're just going to be doing it in much higher volumes.
Yes.
Okay. And how did you come up with this idea of shifting your manufacturing to Panama?
Back in 2017, when the first set of tariffs drastically impacted our international sales, we started thinking about what we could do differently. A couple of years ago, when it seemed fairly likely, even 50-50, that Trump would be reelected and the tariffs were a big thing on his mind, that's when we began to choose an international site for production that could be used for our international sales. I didn't speak about it in the body of the speech, but we are still increasing as we build and sell for international customers. We are increasing our tariff rebate account, which is now 6 years old, and we are trying to get our money back. There's no interest paid by the U.S. government for this money that's been held for 6 years and that we are legally entitled to. We've got an almost full-time person inside our group working on nothing but this, and we've now had to hire a contractor. That sort of experience over the last 6 years educated us that the United States is having difficulty competing as an export country, and that if we wanted to compete properly, we needed to have another plan.
Right, right. I shouldn't ask this question, but I mean what's your way looking at it from the outside in or as a businessman? Do you think these tariff policies have made a lot of sense?
Interesting. I'm a Canadian citizen, living in a Caribbean country, operating an American-based international company. My opinion is, especially as a Republican, is that a lot needs to change in the United States, but there could have been better ways to do it. For instance, a simple change where materials that are intended for remanufacturing inside the United States are not tariffed. And materials that are finished goods intended for sale should be tariffed. But it would appear nobody asked me.
Yeah. Alright. Well, anyhow, I we all have to deal with these frustrations. Well, I appreciate that. So the end of my questions. Thank you.
Thanks, Jim.
Our next question comes from Ron Richards, an Investor. Please go ahead, Ron.
Dan, I was just wondering if you have any other food deals coming up in the pipeline that you could talk about?
We have potential deals that I can't discuss, including their size. I regret putting investors in this position, but for about 95% of our food-grade business, we're restricted by contract from revealing customer details or specific products. The opportunities we are considering are similar to what we announced in January. We aren't looking at any new contracts that would require additional capital investments; instead, we are focused on securing the significant contract from January, and any other deals must align with that.
Okay. And I also wonder if you have any comment like if the price of oil continues to decline, do you have any idea like how it might affect your business negatively if it gets to a certain point as far as the price of oil itself.
Oil prices are loosely linked to our cost for aspartic acid, one of our primary raw materials for polymer sales. The lower the oil price goes, if it stays down for quite some time, our raw material prices drop, our shipping prices drop, and our energy prices drop. So unless oil fields start shutting down, and all of our customers are in Norway and the British North Sea, it's unlikely that there will be a significant drop in our revenue, and there might be a slight increase in our margins. Oil price is just something to watch. It is not something to worry about for our company.
Alright. Thanks for the color. Appreciate it. That’s it from me.
Thank you, Ron.
Our next question comes from Greg Hillman, investor. Please go ahead, Greg.
Hi Dan. First of all, do any other organizations in the world have the same, the main expertise in TPA that Flexible Solutions has in general or in ag and food specifically?
Good morning, Greg. In the food sector, we have a unique expertise in this specific wine ingredient. Our customer holds patents that restrict others from participating in this area. Regarding our polyaspartic acid, there are expert companies in China, but no one else globally competes with us. They are often willing to accept lower margins, which is partly why our margins aren't expandable. However, we are effective in competing against them. I believe that moving away from the tariff rebate program and relocating to Panama will significantly enhance our competitiveness for many years ahead.
That's good. And Dan, in terms of SUN 27 and N Savr 30, what percentage of farmers in the U.S. know what it is?
Perhaps not under those names because we also manufacture white label products for multiple customers. Those are our trade names when we are selling direct to distribution. But of the farmers in North America who grow corn, beans, and any other major crops, 100% of them know about nitrogen conservation products, perhaps only 5% use them. But I think everyone knows my stock answer for this. We’re not good retail salespeople at Flexible Solutions. And we are good at either white labeling or direct to distribution manufacturing. So the key for us is finding good distribution.
Okay. And just a question about keeping the same name. If a lot of distributors have various names for it, wouldn't that hurt the use of it as opposed to just using one name anywhere? Is there any way you could get your distributors to use one name to increase recognition or use of the product and still maintain their margin?
We know of no way to get people to give up their trade names in favor of our trade names, sorry.
Okay. And finally, regarding your balance sheet, I think you keep Trio and Lygos set your cost, which is like $1 million in each one. How do you know you shouldn't have written that down to lower the value or the current value of your investment in those two entities?
What was the first entity?
One is Trio and the other is Lygos.
I apologize, I didn't catch that correctly. Trio is definitely not something we would ever write down because it has consistently provided an 8% monthly return on investment for several years. Every three years, there is a top-up payment that, in the last cycle, raised the average return for the three years to 11%. So it’s clear that this is a solid investment and should not be written down. As for Lygos, we review it every quarter. To clarify, they are well-funded for future projects, having secured $165 million in funding. However, they are using that up. Their funding consists of convertible debentures, and when they get close to depleting those funds, we will definitely have to consider writing it down, as that could lead to a change in ownership or bankruptcy. We are monitoring the situation and will take action when necessary.
Okay, thanks. I appreciate the comments.
And Dan, it seems there are no more questions. I'll pass it back to you for your closing remarks.
Thanks, Rob. Everybody, thanks very much for joining us today. Looking forward to talking to you in three months and telling you about how we're moving forward. Everybody, take care and bye.
This does conclude today's Flexible Solutions International first quarter financial call. Thank you for your participation. You may now disconnect.