Flexible Solutions International Inc (FSI) Q2 2021 Earnings Call Transcript

Good day everyone and welcome to today’s Second Quarter 2021 Financial Results. 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. Please note this call may be recorded. It is now my pleasure to turn the program over to Dan O’Brien. Please go ahead.

Thank you, Carlette. 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 FSI conference call for Q2 2021. Prior to the discussion of 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 virus, the NanoChem subsidiary, the ENP subsidiary, and the Florida LLC investments 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. Nearly all our employees are now fully vaccinated. Our NanoChem division: NCS represents more than half of 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. It acts by slowing the 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 here is that it prevents the scaling out of minerals that are part of the water fraction of oil as it exits the water-rock formation. The scale must be prevented to keep the oil recovery pipes from clogging. SUN 27 and N Savr 30 are nitrogen conservation products. Nitrogen is a critical fertilizer, but it can be lost through bacterial breakdown, evaporation, and soil run-off. SUN 27 is used to conserve nitrogen from attack by soil bacterial enzymes while N Savr 30 reduces nitrogen loss through leaching and evaporation. ENP division: ENP is focused on sales into the greenhouse, turf, and golf markets, while NCS sales are into row crop agriculture. These two markets are very distinct. Q2 was strong, as expected, and we predict Q3 as being another good quarter. Depending on early sales for the 2022 season, Q4 looks to be either moderate or good. If Q4 is moderate, Q1 ‘22 will be good and vice versa. The Florida LLC investment: This investment was profitable again. This company is focused on international sales into multiple countries, all of which are facing different issues and responding in varied ways. This investment is expected to have a strong second half and continue growing in 2022. Strategic investment in Lygos: In December, FSI invested $500,000 in Lygos in return for equity. We made a second investment in June, also for equity. Lygos is using the investment to complete the development of a microbial route to aspartic acid using corn sugar as a feedstock. FSI would be the major user of aspartic acid produced this way and believes that sustainable aspartic acid will allow us to obtain large new customers and develop valuable new products. Lygos’ scientific team has already successfully developed other organic acids and cannabinoids from sustainable feedstock and are recognized as one of the world leaders in synthetic biology by their peers in 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 Lygos to build capacity and produce aspartic acid which we can then polymerize into sustainable polyaspartates. Q3: TPA, SUN 27, and N Savr 30 for agricultural use had peak uptake in Q1 and Q2. Q3 will be lower but still good. In Q4, early order sales are likely to result in a strong quarter. Oil, gas, and industrial sales of TPA are expected to be flat in Q3 2021 and then increase slowly in Q4 and into Q1 ‘22. Tariffs: Since September 30, 2018, several of our raw materials imported from China have included a 10% additional tariff, which rose to 25% in ‘19. U.S. customers have all received the price increases from us as the inventory entered production. International customers are not charged with tariff because we’ve applied for the export rebates available to recover the tariffs. The accumulating tariff payments to the government are affecting our cost of goods, cash flow, and profits negatively until the rebates are received. Rebates can take many months to arrive. We submitted our applications over 1.5 years ago. The total dollar amount going back to us now exceeds $1 million and continues to increase quarterly. The rebates will increase profitability and cash flow while decreasing the cost of goods for the future quarters in which the rebates are received. In early July, we received a response to our revised application of January, and we responded overnight and have not heard back yet. 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 more than triple the normal price. Land transport inside the United States is also taking much longer than usual and pricing is extremely high. We’re doing our best to cope with shipping issues by ordering far ahead, but we warn that some disruption will be unavoidable. Some of the extra costs will have to be borne by us in order to retain customers. Raw materials have also increased substantially over the last four months. Passing the price increases along to customers can take several months and result in temporarily constrained margins. We expect to see this effect continue in Q3 and Q4. New equipment: 2.5 years ago, we began the purchase and installation of new equipment that will enable us to make additional products and increase sales. The machinery went live in December of 2020 and will contribute to sales and profits in ‘21 and onward. Revenue from this equipment is expected to be significant by 2022. Highlights of the financial results: Sales for the quarter increased to $8.54 million compared with $7.62 million in Q2 2020. The increased sales can be attributed to shipping of orders that missed cutoff for the first quarter of 2021, along with sales that could not be shipped in Q1 as a result of lack of raw materials due to inbound shipping delays. Profits: The result is a profit of $1.18 million or $0.10 a share in 2021 compared to a profit of $1.13 million or $0.09 a share in Q2 2020. Operating cash flow: This non-GAAP number is useful to show our progress because it takes non-cash items out for clarity. For the first half of 2021, it was $3.3 million or $0.27 a share compared to $3.04 million or $0.25 per share. Long-term debt: We continue to pay our debt down according to the terms of the loan. Working capital is adequate for all our purposes and is increasing continuously as we book retained profit from sales. We have a line of credit with Midland States Bank, and we are very confident that we can execute our plans with our existing capital. The equity investment in Lygos was made with cash on hand provided by FSL, our Canadian operating subsidiary. The text of this speech will be available as an 8-K filing on www.sec.gov by Tuesday, August 17th. Email or fax copies can be requested from Jason Bloom, [email protected]. Thank you. The floor is open for questions, and Carlette, would you please give the instructions.

We will take our first question from Raymond Hao from Comprehensive.

Couple of questions for you. The new equipment, I know that most of the CapEx, I guess, was last year that has gone live this year and more so next year, and you said it will produce substantial revenue. Is that revenue that is new revenue, or is that revenue that’s just taking from some other component of the business?

No. It’s a combination. The largest proportion of it will be new revenue from new business, and to a small extent relatively, we will be able to reduce our reliance on toll manufacturing. So, it will cut our costs for our existing product lines. So, that’s how we’re utilizing the equipment.

Okay. And secondly, any thoughts on the timeline about the reinstatement of the dividend?

It would be helpful to have a timeline, but whenever we think we're past a challenge, like COVID, we find ourselves facing another setback. Last year, we believed COVID would not significantly impact shipping, yet this year we’ve learned that containers are stranded in the wrong locations, and it will take a year or more to sort it out. I am in favor of reinstating a dividend, and our Board is as well, but we need to wait on the timing. At this moment, I cannot provide an estimate.

That’s fine. Are there any restrictions on the Midland’s line of credit that would prevent you from doing so?

We would have to let them know of our intentions. But our loans and line of credit do not have a negative covenant against a dividend.

And we will take our next question from William Gregozeski from Greenridge Global.

Hey Dan. The supply chain issues you talked about, how big of an impact do you think we’re looking at? I mean, because you mentioned top-line hits from delays and then margin hits on you having to eat some cost. I mean, how big of a net impact do you think this is going to be on at least the second half of the year?

Well, good morning, Bill. I can point to the fact that it would seem likely that our earnings for Q2 would have been about $0.01 higher. So, I think that’s the general area of damage that we’re taking, which is about $0.01 per quarter in these two categories. Now, I wouldn’t want to be held to that estimate. It could be a little higher, or some of these issues could drop away a little more rapidly. But, I don’t think you’d be wrong in estimating anywhere from $0.005 to $0.015. We’re not being beaten up and knocked unconscious; we are being slowed down in our growth plans.

Okay, okay. With regard to the Florida LLC, they had big growth last year, and we were kind of expecting that this year. And they’re down a little bit in the first half this year versus the first half last year. Any expectations if they’re going to have growth or even be able to exceed 2020 revenue?

The strong expectations; they were damaged in the first half of this year by the drought in Brazil and slow ordering out of that country as a result. Their second half is likely to more than make up for the slow first half. And yes, as the speech says, I’m expecting growth out of them in the second half. And I’m expecting the growth for the year to be positive for the year as a whole.

Okay, last question is about Lygos. I haven’t seen any of the terms of that investment. You put $1 million in now. Are you guys obligated to put any more in, and that $1 million has gone towards equity in Lygos? Can you disclose the percentage you own of that?

I can address the question, but I may not provide an exact answer, as is often the case. First, we do not have any further obligations, and Lygos is responsible for completing their development. Second, our investment took the form of a safe, which has capped Lygos' value at a maximum of $150 million. Depending on the price of their next capital raise—whether it’s at or above $150 million—we will acquire $150 worth of their equity. If the valuation in their next capital raise is below $150 million, our equity will be valued based on that lower figure. For example, if their company is valued at $100 million during the next capital raise, our $1 million investment would represent 1% of Lygos.

Okay, perfect, perfect. Thanks, Dan.

Good to talk to you, Bill.

It appears we have no further questions at this time.

Carlette, would you please end the conversation or shall I just thank everybody and sign off?

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

All right. Thank you very much.

Thank you.