EcoSynthetix Inc. (ECO) Earnings Call Transcript & Summary

Good afternoon, and welcome to EcoSynthetix Annual and Special Meeting being held May 17, 2021, at 1 p.m. I would like to introduce Mr. Paul Lucas, Chair of the Board. Please go ahead, Mr. Lucas.

Good afternoon, ladies and gentlemen, and welcome to the Annual Meeting of the shareholders of EcoSynthetix, Inc. The meeting will come to order. My name is Paul Lucas, as you've heard, and I'm Chair of the Board of EcoSynthetix. And pursuant to EcoSynthetix bylaws, I'll chair this meeting. Robert Haire, the Chief Financial Officer and Corporate Secretary of the company will act as the Secretary. We would also like to welcome those who are attending via conference call to listen into the meeting today. And after the meeting, Jeff MacDonald, our Chief Executive Officer, will make a presentation after which we'll allow for some questions. For the purposes of this meeting, I have appointed AST Trust Company through its representatives, Radha Mulchan-Singh and Carol Pineda to act as scrutineer. Ms. Mulchan-Singh and Ms. Pineda are attending the meeting via telephone conference call. We'll now proceed with the business of the meeting. I've been advised that the notice calling this meeting and related management proxy material were mailed to shareholders of record in accordance with applicable law. AST Trust Company has filed with me proof of service of such mailing, and I direct that a copy of such proof of service be annexed to the minutes of this meeting as a schedule. I will dispense with calling for a reading of the notice of meeting. The scrutineer has also advised me that prior to the meeting, proxies were received from the holders of a sufficient number of common shares to constitute a quorum. And accordingly, I declare that a quorum is present and that the meeting can be regularly called and properly constituted for the transaction of business. I direct that the formal report of the scrutineer be annexed to the minutes of this meeting as a schedule. We are asking the meeting participants present in person here today to complete the provided attendance sheet, indicating the name and address of the shareholder and proxy holder, if applicable. Once completed, we will ask each person to leave the attendance sheet on the table at the end of the meeting in the designated area. The attendance sheet will be collected and provided to the scrutineer and to the other representatives of our transfer agent as required. I'd like to take a moment to comment on the voting procedures to be used at today's meeting. Voting will proceed by way of a show of hands, except that voting for the directors of the company will proceed by a way of ballot. If you are a registered shareholder or a proxy holder, you will be required to complete the ballot that has been placed in front of you. With respect to each matter to be considered at today's meeting, I will ask for a motion. Only registered shareholders or duly appointed proxy holders can make a motion or address the meeting with respect to a pending motion. Shareholders attending the meeting by telephone conference call will be able to listen to the meeting and ask questions but will not be able to vote over the phone. As the first item of business of this meeting, I now present to the meeting the company's consolidated financial statements as at and for the financial year ended December 31, 2020. Copies of the financial statements were mailed to shareholders in accordance with applicable law. The next item of business is the appointment of auditors for the ensuing year and the authorization for the Board to fix their remuneration. I would ask for a motion for an ordinary resolution that PricewaterhouseCoopers LLP, chartered accountants, be appointed as auditors of the company to hold office for the ensuing year or until their successor is appointed at such remuneration as may be fixed by the Board of Directors. Will someone move the resolution?

I so move.

Martin Hubbes, thank you. The motion is now on the floor. All shareholders and proxy holders in favor of the resolution, please so signify by raising your hand. [Voting]

And are there any contrary? [Voting]

Hearing none, I declare the resolution carried. The next item of business is the election of directors. The meeting is now open for the nomination of the 5 directors to be elected by the company's shareholders to hold office until the close of the first Annual Meeting of Shareholders following such election or until their successors are elected or appointed. No notice of director nominations is outstanding pursuant to the company's advanced notice bylaw. Accordingly, at the meeting, the only persons eligible to be nominated for election to the Board are the management nominees. Management nominates Paul Lucas, Jeff MacDonald, Susan Allen, Martin Hubbes and Jeffrey Nodland as Directors for the ensuing year or until their successors are elected or appointed. I will now call for a motion to elect the directors. Will someone move the motion, please?

I so move.

Jeffrey Nodland, thank you. The motion is now on the floor. As a result of the company's majority voting policy, it is necessary to vote by ballot for the election of each director. I therefore direct that a poll be taken. Each shareholder or proxy nominee should record his or her vote in respect of the election of each director nominee by marking the appropriate box beside each director's name and by signing and printing his or her name on the ballot. Once you have completed your ballot, I will ask you to place your ballots on the designated table so that they can be scanned and transmitted to the scrutineer. Prior to the meeting, I was advised by the scrutineers that the proxies deposited for the meeting were sufficiently voted for the election of each of the directors nominated. Therefore, I declare Paul Lucas, Jeff MacDonald, Susan Allen, Martin Hubbes and Jeffrey Nodland to be elected as your Board of Directors to serve in that capacity until the company's next Annual General Meeting or until their successors are elected or appointed. Rather than hold up the business of this meeting for the final tabulation of votes cast, I direct that the results of the poll for the election of the directors be included with the minutes of this meeting and filed on SEDAR. The next item of business is the approval of an amendment to the company's 2011 stock option plan to increase the maximum number of common shares of the company issuable under such plan from 10% to 13.5% of the issued and outstanding common shares at the time of the grant, less the number of common shares to be issued upon the exercise of awards outstanding under the company's other security based compensation arrangements, excluding the Rollover Plan as more particularly described in the Management Information Circular. In order to be effective, this resolution must be approved by the affirmative vote of not less than the majority of the votes cast at this meeting. I will now call for a motion to approve the resolution set out under the heading Approval of an Amendment to the 2011 Plan on Pages 14 to 15 of the Management Information Circular. Will someone move the resolution.

I so move.

Susan Allen, thank you. The motion is now on the floor. All shareholders and proxy holders in favor of the resolution, please so signify by raising your hand. [Voting]

Any contrary? [Voting]

I declare the resolution carried. The next item of business is the approval of an amendment to the company's restricted share unit plan to increase the maximum number of common shares of the company issuable under such plan from 1 million to 2 million as more particularly described in the Management Information Circular. In order to be effective, this resolution must be approved by the affirmative vote of not less than a majority of the votes cast at this meeting. I will now call for a motion to approve the resolution set out under the heading Approval of an Amendment to the RSU Plan on Pages 15 to 16 of the Management Information Circular. Will someone move the resolution?

I so move.

Susan Allen, thank you. The motion is now on the floor. All shareholders and proxy holders in favor of the resolution, please so signify by raising your hand. [Voting]

Any contrary? [Voting]

I declare the resolution carried. The next item of business is the approval of an amendment to the company's deferred share unit plan to increase the maximum number of common shares of the company issuable under such plan from 1 million to 2 million as more particularly described in the Management Information Circular. In order to be effective, this resolution must be approved by the affirmative vote of not less than the majority of the votes cast at this meeting. I will now call for a motion to approve the resolution set out under the heading, Approval of an Amendment to the DSU Plan on Pages 16 to 17 of the Management Information Circular. Will someone move the resolution, please?

I so move.

Jeffrey Nodland, thank you. The motion is now on the floor. All shareholders and proxy holders in favor of the resolution, please so signify by raising your hand. [Voting]

Any contrary? [Voting]

I declare the resolution carried. As there is no further business, I ask that someone move a resolution that this meeting now terminate.

I so move.

Thank you, Susan Allen. All shareholders and proxy holders in favor of the resolution, please so signify by raising your hand. [Voting]

Contrary, if any? [Voting]

I declare that this meeting is now terminated. Thank you. I'll now turn it over to Jeff MacDonald, our CEO, who will deliver a short presentation and then open it up for questions.

Thanks, Paul, and good afternoon, everyone. Thanks for joining us today. I'm just going to give a short business update. This is a message that we used actually prior to the pandemic highlighting the health and safety benefits and the green nature of our products, but it certainly has taken on new meaning in the last 14 months as we've been under pandemic conditions. But we are happy to report that our entire team has remained healthy while continuing to serve our customers effectively. We haven't missed a commitment, and we've continued to push our strategic opportunities forward despite the challenging conditions. So what is it we do? We create polymers from green chemistry. Our products start in the field. We derive the main feedstock from our products from corn starch, which we then transform into a polymer through a proprietary reactive extrusion process. From the end of that process comes a dry polymer, which is one of our product benefits in that we're providing a dry powder like product that we then transport around the world in that form, and it's then made down into a resin by our customers using water on site. We're typically competing with products that are oil-based and have a high content of moisture or water. And therefore, we have not only a green advantage in preserving the water and the shipping costs associated with it, both economic and environmental, but it's also a benefit to the customer to be able to make that product down into the resin that they use on site. And because we are offering disruptive chemistries into industries which have been using existing oil-based chemistries in many cases for years and decades, we provide proprietary engineering solutions to help our customers easily implement our products into their operations. The biopolymer at the heart of all of our products is universal in its application. So the same building block that we use for paper is the building block we also use for wood composites is the same building block that we use for our personal care products. We make modifications to the polymer through our reactive extrusion process, but we are leveraging the same manufacturing processes and the same input chemistries in order to produce our product. Benefits of our product are its proven nature to put it very simply. Very early on in our development as a company, we proved our biopolymer as a cost stable, cost competitive product and we fully scaled its manufacturing at our 2 large-scale manufacturing locations. Product performance needed to be at the equivalent or better than the oil-based products that we are replacing; that was also proven early on. So biopolymer at the heart of our -- of all of our chemistries is quite universal in its potential application. And in fact, early on, our challenge was not so much how broad it could go because we recognize the breadth of the opportunity in serving multiple industries, we were, in fact, working on most of those opportunities simultaneously in our early days, and what we needed to do was actually to be able to focus on a few of those where we saw the most promise to be able to get traction and scale the business and with the prospect of eventually coming back to some of these opportunities to tap into new spaces. So in focusing, we brought our focus to 3 markets. One in which we had our initial traction in the paper and packaging market, where we provide a bio-latex coating, which replaces oil-based latex products in the coating of paper and paperboard. The second market that we chose to focus on is the wood composites market, where our resins hold together wood fibers in the form of a panel. And I'll spend some more time describing that opportunity in more detail. The third market that we're focused on more recently is the personal care market, where, at least initially, our biopolymer is being used as a hair fixative ingredient. Our products had to stand on their own in terms of performance and cost, have a competitive value proposition, and they tended to carry along the green benefits. So it's kind of an added side benefit. But really in the last 18 months, the drive for change in businesses around the world and to be committing to greenhouse gas reduction hurdles has just simply taken off. The amount of inbound inquiries that we're getting on a weekly basis from companies that are looking to reduce their carbon footprint has been unprecedented for us. And it's actually right up there now with performance and cost in terms of the value proposition that we bring to our customers. So you're all familiar with statements such as these large companies have been making. Closer to home in the industries that we serve in the wood composite space, there is no more important name than IKEA. And they've come out with some very strong messages on goals that they would -- are targeting to achieve by 2030. Within their most recent sustainability report, they highlighted that glues represent about 6% of the carbon footprint of their entire value chain. And so that's exactly the problem that we're working with them to try to solve is to reduce the carbon footprint of the glues that they use in their products as well as bringing their formaldehyde use down using a no-added formaldehyde resin that we're working with them on. Similarly, in the paper industry, we've been working with one of our major customers in the paper space to try to quantify the carbon footprint advantage that we can bring to them by replacing their oil-based latex, and we've honed in on a pretty substantial advantage in that. When we make a meaningful substitution within our customers' products, we're actually helping them to save at least 5% of the total carbon footprint of the entire paper mill. So with the change of 1 ingredient, we can have a very substantial impact. In the European market, where the carbon trading system is now quite active and has euro values tied to it, this can be a very substantial not only greenhouse gas emission reduction that feels good, it actually has bottom line impact as well. On the right-hand side of the slide, you can see that since our inception as a company, with the amount of biopolymer we've delivered around the world, we've actually taken the equivalent of over 67,000 vehicles off of the road. So those attributes on a discrete basis are what allows us to solve some of our customers' problems, but that's only really meaningful if we're chasing large enough markets. The 3 target markets that we're going after are substantial markets. So the market for wood-based resins is $15 billion, mostly dominated by urea formaldehyde, which I'll talk about more in a second. The SB latex market for paper coatings is a $4 billion market. And then our start within personal care, which is focused exclusively on the hair fixative binder market, so far that addressable market is $350 million. So large opportunities for us to be pursuing our own growth agendas. It not only works if we have blue-chip partners, and I think as a small company, we couldn't be more pleased with the kind of blue-chip partners that we've been able to work with to get our disruptive technologies to market. Within the wood composite space, our first customer was the SWISS KRONO Group, a very progressive company that's looking to not only take formaldehyde down in its use within their products, but also be a leader when it comes to carbon footprint within the wood panel space. We work closely with Stora Enso, a leading paper and packaging company in Europe, again, on the replacement of styrene-based latexes, but also in pursuit of their own climate change goals. We're working with a leading global retailer in the furniture space, and our partner within the personal care space is one of the world's largest chemical companies that's taking our product to market on an exclusive development and marketing arrangement. So all this fits into a road map that we were very deliberate in setting out for ourselves when we came together as a team. We had initial success in the paper market, working with several of the world's leading paper companies but we have not yet demonstrated that, that business on a stand-alone basis could be profitable. So that was job 1 for us. We had this biopolymer that was working. It was saving customers money, but could we turn it into a viable business ourselves? And in a fairly short order, we did that and that gave us the confidence that as we expanded then into new markets that we could do that from a profitable footing and expect to make increased returns in new markets. And so we selected then the wood composite market as our second market to focus on and managed to establish the relationship with SWISS KRONO and have commercial sales with them now for over 4 years. On the basis of that initial success in the wood panel market on top of what we were doing in paper, our next objective was really to get ourselves to cash flow positive, and we've been cash flow positive now for the past 2 years. So we have the business on a very sound footing from a financial perspective and from the perspective of the value proposition that we've introduced to customers. And it's really up to us now to bring home some of these large strategic opportunities in the wood composite space and in the newer personal care market. So a little bit more about wood composites. I mentioned our objective is to replace formaldehyde-based resins that represent over 90% of the resin used in wood panels. That's simply because formaldehyde has been around for decades, it works really well, and it's really cheap. But it comes with problems and those problems have been recognized now for many years, in fact, that formaldehyde is a well-known carcinogen. And so the challenge within that industry has been to regulate it and ratchet down its use, in fact, to safer and safer levels on a regular basis. The latest round of restrictions having recently come in both North America and going through a round of change in Europe currently. And we were lucky to establish this relationship with SWISS KRONO, who had set an early objective ahead of those regulatory changes to be able to offer the safest and healthiest and now greenest products into the market. So as you can see from this graphic, they've called the product BE.YOND and they're targeting, in fact, have achieved a level of formaldehyde emissions that's far beyond the leading standards around the world. And so our objective is simply to take our DuraBind resin and be the catalyst for change, ultimately, once and for all away from formaldehyde and in doing so, offer our customers a substantial improvement in their carbon footprint. Our biopolymer DuraBind works together with the synthetic chemistry called MDI, which is a very large chemistry used in multiple industries. It's about a $22 billion chemistry. About $1 billion of it is used in the wood composite resin market so far, primarily in OSB, but it's controlled by 5 major players around the world. And they have their sights set on an increasing share of the wood resin market as they continue to grow their businesses, and we happen to be the enabler to them to allow that growth. So we're a willing partner, they're willing partners of ours in pursuit of this no-added formaldehyde agenda. And the reason is that it's a $15 billion opportunity for them if they can crack this market together with us. The market's broken down into 3 segments. I mentioned oriented strand board, you can see by the white section there that it has a substantial share of that market already of the MDI chemistry. As a result of being introduced quite early on back in the late 1980s into this space, it brought improved moisture resistance for oriented strand board, and it allowed the production lines to run faster. So it very quickly became a leading resin within that space. But when the MDI suppliers tried to pursue the other 2 larger segments, they ran into some significant limitations in applying their resin to those spaces, partly because of the applications and partly because of the production processes. And it's those limitations that our DuraBind product targets to overcome, and we've been successful in doing that in our first customer cases, primarily with SWISS KRONO. We are working with several of the top 15 global wood panel manufacturers, and they represent a substantial part of what we see as over 1,000 lines around the world which are addressable to us to convert over to DuraBind. Each 1 of those lines represent somewhere between $0.5 million to $3 million opportunity for us when converted. And so with the value proposition proven, some great partners lined up that we're working with and success seeming to be close at hand for us in terms of cracking new opportunities, our #1 priority is to make those strategic wins in the wood composites market and to make some of our first inroads in the personal care market with our partner. With that, I'd be happy to answer any questions anyone has.

[Operator Instructions] I have no questions in queue. I turn the call back over to Jeff MacDonald.

Thank you very much again for joining us today, and we look forward to talking to you again soon.

Thank you, everyone, for joining. This will conclude today's conference call. You may now disconnect.