Exploring Strategic Alternatives. On September 27, the Company announced its Board “formed a Special Committee to explore strategic alternatives to enhance value and to accelerate the utilization of FRX’s Nofia brand of fire retardants”.  The Special Committee includes CEO Marc Lebel, CFO Mark Lotz, Director Jim Cassina, Director Ekaterina Terskin, and Director Patrick Muezers (appointed to the Board in August).  Since the announcement, management has been unwilling to give any indication what the strategic alternatives being explored may be or what a timeline for this may be.  At this time, our best guess would be either a strategic financing and/or partnership in some form from a large current or potential customer, like LANXESS [XETR: LXS], which signed a MOU with FRX in late August.  Another potential option could be an attempt at a go-private management buyout, given the current market value being far below what we see as fair value, although we would be surprised if this would pass absent a substantial offer premium.  We see the Company being sold to a third party as the least likely alternative based on the current share price, the time and capital invested over the last roughly 15 years, and the rapid growth expected in the coming years.  In any event, we would expect the outcome from this process to be a net positive to FRX and its shareholders.    

Q2 Results Slightly Better Than Estimates.  FRX reported second quarter results with Revenue of $1.48 million, ahead of the year ago period and well above the last three quarters, due to increasing demand from new and existing customers.  Demand from new customers seeking to meet updated regulations and best standards continues to grow, with 41 new customer wins in 2023, through the end of August.  Reduced raw material costs enabled gross margin to increase to 31.8%.  Total operating expenses of $1.5 million were slightly less than expected.  EBITDA was -$820,000, while Net Loss was $1.18 million, or $0.01 per share, both better than our estimate for the quarter.

Model Update. With Q2 results coming in slightly better than expected and new customer wins continuing to come through, we are confident FRX should continue to post Revenue growth and move towards profitability in the coming quarters, especially if it is able to sign a larger client.  With no major customer news announced, we are leaving our estimates unchanged.

Maintaining Rating & Target Price. The strategic alternatives announcement shortly after signing the MOU with LANXESS could be indicative of a big step for FRX going forward, whether it be a cash infusion, manufacturing, sales or a mix of these with LANXESS or another party.  In any case, the demand for Nofia continues to increase and we expect management will make the best decision for shareholders regarding any deals being made in the near future.  We are maintaining our Buy rating and C$0.75 target price on FRX Innovations.  Our target price is based on a mix of an EV/EBITDA multiple of roughly 10 times our 2025 EBITDA estimate of $6.8 million and a P/E multiple of 20 times our 2025 Diluted EPS estimate of $0.04, both discounted back one year at 20%.