Flexible Solutions International, Inc. (FSI) Q4 2021 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today’s Flexible Solutions International Full Year 2021 Financials Call. 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 also note that this call may be recorded. . It is now my pleasure to turn today’s program over to Mr. Dan O’Brien. Sir, please begin. Daniel O’Brien: Good morning. This is Dan O’Brien, CEO of Flexible Solutions. Safe Harbor provision: 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 full year conference call for 2021. Before discussing our financials, I’d like to update our company condition and our product lines, along with what, in our opinion, might occur in early 2022. COVID virus: The NanoChem subsidiary, the ENP subsidiary and the Florida LLC investments are all engaged in racing for the agriculture and/or the cleaning product sector. Therefore, we’re considered essential services and are likely to remain so even if restrictions are. Virtually all our employees are fully vaccinated. COVID 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 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 items in the soil, bolting in the fertilizer remaining available longer plants to use. TPA is also a biodegradable way of treating oilfield water to prevent pipes from plugging 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 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 that can be lost through bacterial breakdown, evaporation and soil run-off. SUN 27 is used to conserve nitrogen from attack by soil bacteria, while N Savr 30 is directed towards reducing nitrogen loss through leaching and evaporation. ENP division: ENP represents most of our other revenue. ENP is focused on sales into the greenhouse, turf and golf markets, while our NCS sales are into row crop agriculture. Q4 was strong as we hoped. Q1 has started well, and we expect similar growth in 2022 as was experienced in 2021. Our Florida LLC investment: Once again, this investment was profitable for the full year. The company is focused on international sales into multiple countries, all of which are facing different issues and responding in varied ways. Q4 2021 was less than hoped for. However, we’ve seen a very strong rebound in ‘22. Indications are the growth by the LLC in the 30% range is possible for 2022. Our 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 aspartic acid using corn sugar as a feedstock. FSI would be the major user of aspartic acid derived this way and believes that sustainable aspartic acid would allow us to obtain large new customers and develop valuable new products. Lygos’ scientific team have already successfully developed other organic assets 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 very high confidence in their ability to achieve sustainable aspartic acid through fermentation. Once the economic microbial route is fully developed, we plan to work with Lygos to build capacity to produce aspartic acid, then polymerize into sustainable polyaspartates. Q1 and 2 in 2022: TPA, SUN 27, N Savr 30 for agricultural use have 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 inventory to service customers will be key to maximizing sales. And as one would expect, shipping delays are not helping. To date, our preordering of inventory has made sure that no sales have been lost. Oil, gas and industrial sales of TPA experienced increased sales in late Q4 ‘21 and on into ‘22. This is driven by shortfalls of competing products and high oil prices. Likely to continue through the first half of ‘22, 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 ‘19. U.S. customers received price increases from us as this inventory entered production. International customers are not charged with tariffs, because we’ve applied for the export rebates available to recover the tariffs. Accumulating tariff payments to government are affecting our cost of goods, our cash flow and our profits negatively so we get the rebates back. It’s going to take many months. It’s now been almost 4 years, 4 years in September. We submitted our completed applications more than 3.5 years ago. The total dollar amount due back to us is well over $1 million, and it continues. Rebates will increase profitability and cash flow while decreasing cost of goods for future quarters when rebates are received. We learned 5 months ago that our application is sent to a government lab so that our formula-based calculations can be verified. There is still no timeframe available for completion. Shipping and inventory: Ocean shipping from Asia to the U.S. and ocean shipments from U.S. to international ports continue to take much longer. Prices per container are more than triple the normal. Land transport inside the U.S. is taking much longer than usual and pricing is extremely high there. We’re doing our best to cope with shipping issues by ordering far ahead. But be warned that some disruption will be unavoidable, and some of the extra costs will to be borne by us in order to retain customers. Raw material prices have also increased substantially over the last 6 months. Passing price increases along to customers takes several months and results in temporarily constrained margins. Large proportion of these adjustments were begun in late Q4 2021 and not completed until early March this year. Our Q4 profits show the effect of raw material costs advancing far quicker than selling prices can be revised. This effect will be less visible in Q1 2022, still present, while we expect profits to return to normal levels for the rest of ‘22. We expect revenue, operating cash flow and profit to grow as fast or faster than it did. Highlights of the financial results: We’re very pleased with the results for 2021. Revenue, profits and operating cash flow are all up significantly. These results were achieved in a year when shipping costs were double the crop prices. Raw material prices increased pretty round. It’s due to the skill and hard work of the whole FSI team. Throughout 2021, we engaged with new prospective customers and introduced additional products to our existing customers. We anticipate that much of this preparation will result in new sales in 2020. We estimate that we will exceed last year’s growth rate in all the above metrics for the coming year. Sales for the year increased 10% to $34.4 million compared with $31.4 million. Increased sales are mostly the result of new business. It’s small proportion of price increases. Profits: The result was a profit of $3.45 million or $0.28 a share in 2021, up 16% from a gain of $2.98 million or $0.24 share in 2020. Operating cash flow: This non-GAAP number is useful to show our progress with noncash items removed for clarity. For 2021, it was $5.65 million, $0.46 a share, up 24% from $4.5 million or $0.37 per share in the 2020. Long-term debt: We continue to pay down our long-term debt according to the terms of loans. Working capital: It’s adequate for all our purposes, and it’s 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’re 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 operation. The text of this speech will be available as an 8-K filing on www.sec.gov by Monday, April 4 and request e-mail or fax copies from Jason Bloom at jason@flexiblesolutions.com. Thank you. The floor is open for questions. Chelsea, would you give the explanation and set it up?

. And our first question will come from William Gregozeski.

Hey, Dan. I’ve got a handful of questions for you. In regards to the Florida LLC, you mentioned the fourth quarter wasn’t what you expected and it should kind of get back to normal. Is there some isolated event in the fourth quarter? And should we expect kind of the margins to go back to normal for all of ‘22? Daniel O’Brien: Thanks, Bill. Yes, it was an event through the year or a pair of events through the year. The LLC has a high proportion of its business in Brazil. Brazil had a terrible drought last year and also had a falling currency versus the U.S. dollar. What that resulted in is temporary oversupply to the Brazilian customers. And in Q4, they normalized their inventories for the year, and that was where the slowdown happened. As I said in my remarks, the rebound has been substantial, and the margin is expected to be similar in 2022 was in 2020. 2021 was an aberrant year for the LLC.

Okay. All right. Great. You mentioned on the margins, it’s starting to improve in the first quarter. And do you expect them by the end of the year, you’ll be back to kind of your normal margin levels with passing costs on and everything? Daniel O’Brien: I think it will be earlier than the end of the year. I think it will be by the middle of the year.

Okay. With Lygos, I know last call you had said that you expected some samples in the first quarter of this year. Did you get that? Or what’s the update on getting test samples. Daniel O’Brien: The samples have been delayed by -- into the second quarter, but we’re still expecting them. And it’s not a technical problem. It’s a test for some size, and difficult for them to send it out to contracts terms.

All right. I know you typically don’t like talking about customers, but since it’s in the filing, I’m going to ask anyways. One of your customers is customer A, which I think was an oil customer, was down quite a bit on revenue. Is there any chance that will come back? And then you had another one that jumped from $1.5 million to $4 million in sales. Is that repeatable? Daniel O’Brien: I’m not going to specify which businesses these groups are in, but the one that was down is rebounding. And we see it both rebounding and growing for the 2022 year. The second one you pointed out that we had a very large increase, that is repeatable, and we are working to put in place a supply contract with that customer that will cause it to continue to increase.

Okay. Great, great. In the past, you’ve talked about equipment you put into Peru to -- for a new line of business, and you kept it very vague. Can you give an update on how that’s going? Daniel O’Brien: Yes. Absolutely. And we’re quite proud of it. Some of our products require spray drying before they can be sold on fully to the customer. And in the past, we have had our spray drying done by contract. Machine, we bought and we have activated. We’re using it for all our internal spray drying requirements now, several million pounds a year. This has dropped our costs. It has increased our flexibility, and it is preventing -- it has saved us the hassle of finding about 80 trucks a year of in Illinois, which is an enormous reduction in our operations. Now the capacity of the equipment is much, much more than what we’re using it for. And this is actually one of the reasons for the margin compression in Q4 on top of price increases that didn’t get pushed through both. We have on one more step and had our whole factory approved as a GMP facility with manufacturing practices. We’re waiting for the inspectors to come and confirm that, that also will give us with great approvals. We intend to use this particular spray drying machine for a high-value, high-margin spraying of products. So this is an expanding field that we needed to be in for our current products, but we’re now finding that it has some high-profit opportunities for the excess capacity. We don’t have significant full contracts yet, but we’re expecting them in the second half.

Okay. Great, great. And then any plans on resuming the dividend? Daniel O’Brien: The Board is reviewing that regularly. We like the idea of a dividend. Are still concerned with things like happened this week with Shanghai being shut down. And we had several -- we’ve got several truckloads of raw materials trapped at Shanghai port that won’t get loaded until the city opens up again. And then, of course, the Ukraine mess. We are watching. I don’t think things are stable enough at this point. But when they may become stable, we’ll go in that direction.

And our next question will come from .

First of all, I want to ask you about Lygos. You said you made an equity investment. Is that into like a special-purpose entity with Lygos? Or is that in Lygos itself, whereby you’d benefit by -- from Ligos’ all their other activity? Daniel O’Brien: Thanks, Greg. It is a full equity investment in the eventual shares of Lygos. It’s in the form of a safe. But yes, we would share in the success of Lygos as a whole.

Okay. And do you own more than 10% of Lygos at this point? Daniel O’Brien: We do not. The valuation of the safe values Lygos from a low of $100 million to a high of $150 million. We don’t know which of those numbers will be applied to our shareholding, the actual share.

Okay. That’s a pretty big range. And then what is Lygos doing to protect its intellectual property? And what’s your attitude towards patents in general versus just expertise and manufacturing things and whatnot that’s not patented? Daniel O’Brien: Lygos actually maintains a high-quality -- an exceptionally high-quality patent lawyer on staff, and they are extremely diligent in making sure that everything they do is well covered. I approve what they’re doing wholeheartedly because they are at the absolute cutting edge of using cell modification technology to produce organic acids. And organic acids are enormously -- an enormously large part of our economy, everything from malic acid to fumaric acid for bread and aspartic acid, it goes on and on. And my understanding of their technology is the seminal platform technology that will eventually allow all of the organic assets to be produced using plant-based lots. And patenting that at the beginning is a wonderful strategy. For a company like Flexible Solutions, where our seminal technology was in the ‘90s and the -- all the seminal patents have worn out, we rely much more on trade secret and our engineering expertise and, of course, our installed plant as protection from competition. However, I will say, we’ve been making strides in the areas of nitrogen protection or nitrogen loss protection for agriculture. And we are filing provisional patents in several areas that we think are brand new, and we’re publishing the patents. We’ll protect the entire field rather than simply teaching competitors where simply been and where they should go.

Okay. Good. And then another thing about that product that you have, that silicon product to prevent humification in farm ponds. Can you just explain what it is and how it works and what its potential is and how you’re going to go to market with it? Daniel O’Brien: Yes. This is an ENP product, and to explain it in the posed simple terms. In every body of natural water, you have regular algae and diatoms. Diatoms produce oxygen, and that’s very valuable to the fish. Algae, who also produce oxygen, but they tend to reduce the light transmission. And what happens -- and there needs to be a balance between these 2 species in order to have a healthy body of water that remains clear, oxygen-rich and enjoyable for swimming, let’s say. Diatoms are often limited in their growth by dissolved silica in the water. And that silica, they use to make their shells. And if they can’t make shells, they can’t -- the algae win the competition and the water turns green or, in some cases, blue or bluegreen, can even become poisonous to pets and of course, to the fish living in the lake. The silica-based product invented by ENP is capable of allowing the diatoms to compete properly and results in a good algae-diatom balance and results in clear, clean and nonpoisonous lake water or pond water, if you happen to own a golf course or a farm. This is an economic way of doing things. And as to going to market, it’s already on the market. It’s already got a few hundred thousand dollars in sales in the Southeast, and using select employees to bring it to other areas so that we’re controlling the message as well as possible. As like all things out of a silver bullet is got to be used, right? And you need to bring your sales staff to do a little bit of extra testing. I hope I got all your questions.

Our next question will come from .

Many of my questions have been answered, particularly the Lygos relationship. Obviously, that’s a big part of your operations. I guess just a general question. Some of the challenges, I guess, headwinds you mentioned, obviously, you intimately know your business, but it appears as though a lot of those headwinds are some of the same headwinds that a lot of the other companies -- competitors are facing. So I’m wondering if you can add to give some color on what headwinds do you think are specific to your company? And what are just some of the ones, as far as COVID and things like that, that I think maybe headwinds that pretty much every company in your industry? And I guess on the flip side, are there any tailwinds that you suspect heading into 2022? Daniel O’Brien: Actually an interesting question. The headwinds that we face would be shipping, increasing chemical costs and general inflation. It is -- as we’ve always experienced, it’s very hard to raise prices. In this cycle, we found that raising prices was not easy, but it was understood. So what may appear to be a headwind is actually possibly either no wind or tailwind on that area. But definitely the whole disruption of the world’s shipping organization, it affects companies differently because paying $15,000 for a container from Asia to Chicago is -- compared to $3,500 a year before. It makes a huge difference to a company whose average value of gained goods in the container are, say, $50,000. That’s an enormous change in your cost of goods, whereas if your average container contains $1 million worth of product, it becomes much closer to a rounding error. We’re in the $50,000 of product or inventory for containers, so it’s significant to us. Our competitors in our specific world are in the similar boat, so it’s equivalent. One tailwind that I’d like to identify is that it looks to me as though crop prices and fertilizer prices and agricultural input prices in general are going to remain high for quite some time. That’s going to allow us to find new customers and get them well used to using our conservation yield increased products at a time when multiples are much more in favor. When your urea costs $1,000 a ton instead of $300 or $400, spending $50 a ton to protect it from loss is a much easier sell. Likewise, when your crop is selling for $14 or $16 a bushel for soybeans and $10 for corn or $9 for corn, it is an easier sale say, "Well, look, we can get you an extra 10 bushels. You can have those 10 bushels for $20." These are the tailwinds that we expect to have going with us in the agriculture market.

Our next question will come again from .

Dan, concerning the management team at the company, I was just wondering how hard it is to execute your business plan in terms of whether you need like a Chief Operating Officer or more salespeople or people either in investment banking and do acquisition to do -- or to help you with acquisitions. And I was just wondering if you could just talk about what you think the overall strategy of the company is or should be and how your current master talent coincides with that strategy. Daniel O’Brien: Well, and -- boy, I could talk for a couple of hours, but I’ll try keep it down. First thing we did, I think I said this before on speeches: buying ENP wasn’t just about the revenue and the synergies between the company. It was a very calculated behavior to bring George Murray, the CEO of ENP, into the Flexible Solutions. Mr. Murray is going to be. In the next 3 to 6 months, he will be fully trained, and I’ll be promoting him to Chief Operating Officer for the company while continuing to use him as CEO of ENP. Obviously, that’s going to cause us to backfill in various places, but we’re intending to do it in areas of making our best people more efficient. One of the things we’ve discovered about our businesses, whether it’s oil or agriculture, is that the relationships between the selling team and the buying people has to be extremely high level and extremely deep. Myself, George, Jason Bloom, Grace Fan, Joe Fan, our team and of course, 2 more people in the ag industry, Bob and Jason Kerbs, they have those relationships. They can pass them on over a period of time, and we intend to do those things. But someone mentioned a $4 million customer up from $1.75 million. That was relationship building attributable to George and me working together. When it goes to $6 million or $8 million, again, it will be relationship management. And the new customers that we expect to bring in over the next several years, they’ll be done in a similar manner. So making me better and making George better is going to be our first backfilling process. And I would say that perhaps a year out, we’ll be looking for a next layer, whether it comes in an acquisition, which we’re very, very interested in, but we don’t want to bring in more problems for ourselves. We know that we need to backfill and then grow. But at the moment, we can see a forward plan that allows us to grow as quick as we are now or faster what I’ve just mentioned, and backfilling make us all a little bit more efficient.

And there are currently no further questions in the queue at this time. Daniel O’Brien: Chelsea, can I ask you to close the meeting? And before you do so, everyone who joined us today, thank you very, very much. And this is the time of the year when I’ll be talking to you again in 6 weeks. We’ll have a very good 6 weeks, and we’ll talk again soon.

Thank you, sir. Ladies and gentlemen, this does conclude today’s program, and we thank you for your participation. You may disconnect at any time.