Flexible Solutions International Inc (FSI) 2022 Q1 法說會逐字稿

Good day, everyone, and welcome to today's program on Flexible Solutions International First Quarter 2022 Financial Results. (Operator Instructions) Please note this call may be recorded. (Operator Instructions) It is now my pleasure to turn the conference over to Dan O'Brien.

Thank you, Bobby. 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 potential factors that could affect the company are detailed from time to time in the company's reports filed with the Securities and Exchange Commission.

Welcome to the Q1 FSI conference call. Prior to discussing our financials, I'd like to update our company condition and our product lines, along with what, in our opinion, might occur in the second and third quarter of 2022.

COVID virus. The NanoChem subsidiary, the ENP subsidiary and the Florida LLC investment are all engaged in producing for agriculture and/or the cleaning product sector. All our employees are -- virtually all our employees are totally vaccinated. COVID lockdowns in China will have effects on our supply chains out of Asia that may cause delays from time to time.

Our NanoChem division. NCS represents more than half of the revenue of FSI. 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. 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 clogging with mineral scale. TPA's effect is that it prevents the scaling out of minerals that are part of the water fraction of oil as it exits the rock formation. The scale has to be prevented to keep oil recovery pipes from clogging.

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, while N Savr 30 is directed towards reducing nitrogen loss through leaching and evaporation.

The ENP division. ENP represents most of our other revenue, and it's focused on sales into the greenhouse, turfs and golf markets, while NCS sales are focused on row crop agriculture. The year has started well, and we expect similar growth in 2022 as was experienced in 2021.

Florida LLC investment. Once again, this investment was profitable. The company is focused on international sales into multiple countries, all of which face different issues and respond in varied ways. We saw a very strong rebound in Q1 2022 compared to fourth quarter of 2021. Indications are that growth by the LLC in the 30% range is possible for 2022 as a whole.

Strategic investment in Lygos. In December 2020, FSI invested $500,000 in Lygos in return for equity. We made a second investment of $500,000 in June 2021. Lygos is using the investment to complete development of a microbial route to the 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.

Lygos' scientific team have already successfully developed other organic acids from sustainable feedstock and are recognized as one of the world's 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 this route is fully developed, we plan to work with Lygos to build capacity and produce aspartic acid, which we will then polymerize into sustainable polyaspartates.

The merger with Lygos. On April 18, FSI and Lygos announced their intent to merge, subject to shareholder approval. Details of this plan are included in the news release from that day. The companies are preparing to file an even more detailed document with the securities commission called an S-4. Until this document is publicly available, we will not be able to comment on what has been disclosed in the April 18 news release and the 8-K document that is already public at www.sec.gov.

Q2 and Q3. TPA, SUN 27 and N Savr 30 for agricultural use had peak uptake in Q1 and Q2. This year is somewhat different due to high crop and fertilizer prices. We're seeing increased interest in our products and stronger ordering. Maintaining the inventory to service the customers remains key to maximizing the sales and as one would expect, the shipping delays are not helping there. To date, our preordering of inventory has made sure that no sales have been lost. If the momentum continues throughout Q2 as it has to the end of April, sales for the first half will be significantly higher than the year earlier period. They will probably slow a little in Q3 and then accelerate again during the Q4 early buy season.

Oil, gas and industrial sales of TPA experienced increased sales in late Q4 and on into Q1 '22. This was driven by shortfalls of competing products and the high oil prices. We see it continuing in Q2, but we don't consider it a permanent effect at this time.

Tariffs. Since September 30, 2018, several of our raw materials imported from China have included a 10% additional tariff, which then rose to 25% in 2019. International customers are not charged the tariffs because we have applied for the export rebates available to recover them. The accumulating tariff payments to the government are affecting our cost of goods, our cash flow and our profits negatively until we receive the rebates. Rebates can take many months to arrive. We submitted our initial application more than 3.5 years ago. The total dollar amount due back to us exceeds $1 million and is continuing to increase.

The rebates will increase profitability and cash flow while decreasing cost of goods for the future quarters in which rebates are received. We learned 6.5 months ago that our application has been sent to a government lab so that our formula-based calculations can be verified. The most recent information is that a response will be provided within 30 days, and we may be able to submit finished rebate applications soon after.

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 than normal. Land transport inside the U.S. is also taking much longer than usual, and pricing is extremely high. We are doing our best to cope with shipping issues by ordering far ahead. We continue to warn that some disruption will be unavoidable, and some extra costs will have to be borne by us in order to retain our customers.

Raw material prices have also increased systemically over the last 9 months. Passing price increases along to customers can take several months and result in temporarily constrained margins. A large proportion of these adjustments were begun in Q4 2021, and they were not completed until early March this year. Our Q4 '21 profits showed the effect of raw material costs advancing much quicker than selling prices can be revised. This effect is less visible in Q1, but it's still present. And it should move towards normal levels over the rest of 2022. We expect revenue, operating cash flow and profit to grow as fast or faster than it did in 2021.

Highlights of the financial results. We're very pleased with the results for Q1. Revenue and operating cash flows were up significantly. Net profit, which did not include any PPP forgiveness in 2022, exceeded the 2021 amount, which had more than $500,000 in forgiveness. We estimate that we will exceed last year's growth rate in all of the above metrics for the coming year.

Sales for the quarter increased 41% to $10.78 million compared with $7.62 million for Q1 2021.

Profits. We had a profit of $1.53 million or $0.12 a share in 2021, up slightly from a gain of $1.45 million or $0.12 per share in -- sorry, $0.12 a share in 2022, up slightly from a gain of $1.45 million or $0.12 a share in 2021.

Operating cash flow. This non-GAAP number is useful to show our progress with noncash items with removed for clarity. For Q1, it was $2.47 million or $0.20 a share, up from $1.43 million or $0.12 a share in the '21 period.

Long-term debt. We are continuing to pay down our long-term debt according to the terms of the loans.

Our working capital is adequate for all of our purposes and is increasing continuously as we book retained profit from sales. We also have lines of credit with Midland States Bank for the ENP and NCS subsidiaries. We are confident that we can execute our plans with our existing capital. The equity investment in Lygos was made with cash on hand through FSL, our Canadian operating company.

Now with that, text of this speech will be available as an 8-K filing on www.sec.gov by Wednesday, May 18. E-mail or fax copies can be requested from Jason Bloom, jason@flexiblesolutions.com.

Thank you. The floor is open for questions. Bobby, will you set that up for me, please?

(Operator Instructions) Let's take our first question from William Gregozeski with Greenridge Global.

Dan, the sales to the Florida LLC only accounted for 16% this quarter, which is among the lowest despite a record revenue for the quarter for the company as a whole. Do you think demand for the LLC revenue will continue to grow this fast? Or is a lot of that related to the more onetime oil-related sales you just mentioned?

Well, it's 2 things. First thing, Bill, 2 things are, are we absolutely certain we've got the right customer? Because we don't declare by name. And then the second point and really to the number of your question, we saw very significant increases in many of our agricultural customers in Q1. We're seeing a continuation of that in Q2. And we expect that because of the good work we're doing for these people, that we will be able to continue along this way over the years.

The actual mix is going to be whatever the actual mix comes. And that will be related to the ratio of growth that's existing in new customers compared to the ratio of growth at the LLC. So I really can't predict whether the percentage will stay the same.

Okay. You mentioned though about the Florida LLC, 30% year-over-year growth is what they're looking for, for '22 over '21?

Correct. That's their internal target.

Okay. And then gross margin still -- when you talk about returning to a normal level, kind of the rest of the year, what do you define as a normal level?

I'm not going to put a number on it, Bill. But I would say that compared to -- if you look at Q4 versus Q1, you can see that in Q4, we were really hurting. We were, in some cases -- some very, very few cases, we were only breakeven for customers. We've come most of the way back. I think there's still a little bit left, but we're -- it's not going to be a massive change between now and the end of the year.

Okay. And then looks like you've been building inventory as you mentioned. Do you expect any shortages or the way you have been getting products from China that might impact sales at some point this year?

It's possible. Why? The reason we've been building inventory is that obtaining product is not the problem, it's obtaining it on time. And the bottlenecks don't necessarily always occur in China. The most recent ones have been Shanghai port, which we've managed to circumvent. But back in February, we had an issue with a rail strike in Prince Rupert, Canada. So the world's shipping -- world of shipping is fairly messed up and you're never quite sure where the next problem will occur. So when we have cash available or as we have cash available and our suppliers have raw material available, we will continue to build inventory, because we would expect the opportunity to sell it in the future.

Now that may mean that we hold on to any particular kilogram a little longer, but that is much better than losing the customer due to reduced ability to perform. As of right now, we're not short of anything, but that doesn't mean it won't change tomorrow.

Okay. Great. And last question is, do you have any estimate on when the S-4 might be able to be filed?

I kind of expected this question coming, and I think I'm actually not supposed to answer. What I do know from my experience is that everybody is working really hard on it. So nobody is trying to delay it. It's just -- it's going to be done to the best possible level of quality, and everyone is working as fast as we can.

(Operator Instructions) We'll take our next question from [Tim Clark] from (inaudible).

I'm Tim Clark. I started watching your company maybe a year or so ago and then got really interested with all the changes in the fertilizer business, and I'm very interested in the fact that it's green technology. So all in all, I bought a bunch of it. And then the kind of the deal has changed now with this Lygos merger and as an investor, we're going from a company that's profitable to a company that's potentially developmentally -- kind of a developmental company. And obviously, you're all in on it, and you're making a huge bet personally. I guess, I mean, the question is, you must be convinced this is going to turn into a profitable venture?

Tim, thanks for the question. Yes, I am. And I also believe it's the right thing for the company. If any company goes on in simply doing what it's done before, in a world that is changing as rapidly as ours is, your risk is increasing even if it's not obvious. So how I feel about this change, it's not even the change in the direction. We tried to do this 15 years ago, and the technology was not ready. We failed. I directed that. We used old technology, it was uneconomic. So sustainable aspartic acid has been something that -- something of a quest for FSI for almost 2 decades.

Lygos is the next generation of this. They modify the microbes themselves. They have produced aspartic acid for us in small amounts already. The goal of switching most of our supply for aspartic acid from oil-based aspartic acid out of China to corn sugar-based aspartic acid out of America, essentially solved almost all the problems that I was speaking about earlier in the speech. How do we get products into our factory on time and how do we get it reliably? And how do we deal with the shipping issues? They all get solved at least to a large extent by moving forward into sustainable work.

And then I guess the last one I'd like to say about this is, the customers that we have now are measured in millions of dollars. The customers that are available for polyaspartates and other specialty chemicals that we can make from sustainable aspartic acid are measured in tens of millions of dollars a year and hundreds of millions of dollars a year. So yes, we are temporarily increasing risk, but I believe that we're also increasing the magnitude of the eventual reward by orders of magnitude.

Sure. Now in terms of the risk, is the risk more in terms of being able to produce this product cheaply, inexpensively? Or is it more in terms of being able to produce it in volume?

It's the classic issue of finishing microbial development, which is well underway. The second part of the problem will be building the production capacity and getting it operating. These are time risks, not what I would call, existential risks, because these fermentations have already been successful, and we've already tested the output. This is something that is not if, it's when, and I think you may have noticed that there's $160 million being invested that is available immediately on approval of the merger. All the evidence that I can see indicates that that amount of funding is going to allow us to get to the end of the process.

Okay. And I suppose that you don't even know how long it's going to take before this is going to be profitable?

I don't know. And I would -- it would be against my -- it will be a bad idea for me to speculate.

Right, right. I get it. All right. Well, I'm very enthusiastic about what you're trying to do there, and this is the absolute home run if you can pull it off. So I'd like to give it some time and see how it all develops out.

Thanks, Tim. I'm going to continue to work the way I have always worked, which is to solve the problems as they come up and then move on to the next one.

And your next question comes from [David James], investor.

I just note that someone has just asked a lot of the questions I was curious about. And I have been following the Biospace recently and spent some time looking at Amyris and Solazyme and those kind of people. I know Amyris has thrown about $3 billion into the process of scaling, which they always have said is they are -- doing it on small scale is one thing, but scaling it to hundreds of thousands of liters is an entire another problem. So if you could -- I don't know if you can talk to that idea that they have spent so much money, and still are running a lot of negative gross margins and how -- what would be confidence that Lygos can do this with $160 million?

Absolutely brilliant question, and I don't have enough data to answer for what Amyris has done, but I am aware that there's a lot of failure in this marketplace. Much of this failure tends to be in the back end of what are you going to do with it. In this case, we've already got customers saying -- our existing customers all specifically want this sustainable product. So in the process of scaling, we're going to be able to go through steps that will -- at each step, let's say at 10,000 kilograms a year, we'll be able to show at that level that the customer (inaudible) you've got are being supplied technically with material that's costing less than what they saw in the finished products before.

And as we gain the larger customers, I think we're going to be able to prove the same at each stage. I'm also relatively sure that the business plan will use both infrastructure built by us and infrastructure contracted through others. And I think the reason that this will be possible is that -- and this is actually probably the key to the merger is that we don't just make a sustainable organic acid that might be considered a commodity chemical. We sell it through our next division, the FSI division. And it is made into a much more valuable specialty chemical that's already accepted and customers are clamoring for.

So this is quite different. I mean if you were in a company that was going to make diesel through oil well, at the end, we're going to take whatever price there is for diesel fuel. We're more of a price maker because we expect to be the only sustainable producer of polyaspartates in the world, and we expect to be doing this just as certain very large customers in the detergent industry, are trying to make their entire product sustainable.

So yes, other companies have blown a lot of money. And $160 million doesn't look very big compared to them. But I think this is very, very different. It's a merger of people who know how to invent things, with people who know how to make and sell things, and who are not at the bottom end of the price chain. We're in the middle to the top end of the price chain. So it's a much different situation.

All right. I appreciate that. And just like the other guy said it's just such a change from a company that was growing profitably and now the risk not only in the tech, but in the debt, just kind of really changes the calculation. So yes, it's an interesting time for you guys clearly.

Absolutely. But as I keep saying, I believe this is something that needs to be done and we're going to do it right. And as you pointed out or the previous man, I've taken a whole lot of personal risk as well.

There are no further questions at this time. I'll turn the call back to Dan O'Brien for closing remarks.

Thank you, Bobby. Everybody, thanks for coming in today and listening, and I appreciate the questions and the opportunity to explain to you, what we are doing and why we are doing it to the best of my ability. Look forward to talking to you again in 3 months. Bye for now.

Thank you for your participation. This does conclude today's program. You may now disconnect.