Flexible Solutions International Inc (FSI) 2021 Q2 法說會逐字稿

Good day, everyone, and welcome to today's second quarter 2021 financial results. (Operator Instructions) 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, Coraline. 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 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 2 quarters.

The 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 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 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's 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 was -- 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 either bacterial breakdown, evaporation and soil runoff. SUN 27 conserves 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 2 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. Once again, this investment was profitable. 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 development of a microbial route to aspartic acid using corn sugar as a feedstock. FSI would be the major user of aspartic acid drive this way and believes that sustainable aspartic acid will allow us to obtain large new customers and develop valuable new products.

Lygos' scientific team have 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. And 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, 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, our cash flow and our profits negatively until the rebates are received.

Rebates can take many months to arrive. We submitted our applications more than 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 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 as well. We're doing our best to cope with shipping issues by ordering far ahead, but we warn that some disruption will be unavoidable. And 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 4 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 make us able to make additional products and increase sales. The machinery went live in December 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 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. Result is a profit of 1.8 -- $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 noncash item -- items out for clarity. For first half 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 terms of the loan. Working capital is adequate for all our financial -- all our purpose and is increasing continuously as we work and retain 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 with -- 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 17. E-mail or fax copies can be requested from Jason Bloom, jason@flexiblesolutions.com.

Thank you. The floor is open for questions, and Coraline, would you please give the instructions?

(Operator 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 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 timeline about the reinstatement of the dividend?

It would be nice to have a date in mind, but every time we seem to think we're getting out of something, we thought were coming out of COVID, we may be going back in. We thought that last year that COVID was not going to have massive effects on shipping, and lo and behold this year, we're told that every container is in the wrong country. And it's going to be a year or more before they get it organized.

I wouldn't -- I'm positively in favor, and our Board is in favor of reinstating a dividend, but the timing is going to have to wait. And I'm not prepared to make us a guess at this point.

That's fine. Are -- does Midland's -- 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 are -- they do not have a negative covenant against a dividend.

(Operator Instructions) And we will take our next question from William Gregozeski from Greenridge Global.

Dan, the supply chain issues we talked about, how big of an impact do you think we're looking at? I mean, because you're -- 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, 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 is about $0.01 per quarter in these 2 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 first half this year versus first half last year. Any expectations if they're going to have growth or even be able to exceed 2020 revenue?

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 answer the question but probably not exactly as usual. We do one -- part 1. No, we do not have any further obligations, and Lygos is obligated to continue the development to completion.

Part 2, we invested in the form of a safe, which has capped the value of Lygos at no more than $150 million. So depending on what their next capital raise price is, whether it's at $150 million or higher, we will have 1/150 million of their equity. If it is below $150 million capital -- sorry, below $150 million business valuation in the next -- in their next capital raise, our equity would be valued as a percentage of what that number is. So let's take a number like $100 million for ease of calculation in my head. Our $1 million would represent 1% of Lygos in the event they did a capital raise with a -- an imputed value of their company of $100 million.

It appears we have no further questions at this time.

Coraline, would you please end the conversation? And -- or shall I just thank everybody and hit over?

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.