Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the EcoSynthetix's 2024 First Quarter Results Conference Call. Listeners are reminded that a portion of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on EcoSynthetix's risks and uncertainties related to these forward-looking statements, please refer to the company's annual information form dated February 27, 2024, which is posted on SEDAR. This morning's call is being recorded on Tuesday, May 7, 2024 at 8:30 a.m. Eastern Time. I would now like to turn the call over to Mr. Jeff MacDonald, Chief Executive Officer of EcoSynthetix.

Thank you. Good morning, and thank you for joining us. Sorry for the little technical glitch there at the beginning. Yesterday afternoon, we reported sales of $4.7 million, up 53% from Q1 2023 and up 65% on a sequential basis. That's an improvement from what we reported through the course of 2023. While we still expect some lumpiness from time to time, we believe the business is on the path to achieving the potential we see in the opportunities ahead of us and that our diversification strategy is beginning to take hold. Why do we believe this? Literally, all of our markets showed growth, but the vast majority of the growth we're seeing in the quarter is coming from our new markets. We're seeing momentum build across the business. Within the improved results are some important indicators that tell us we're on the right track. For example, there is a good level of trial revenue coming from our newer products in the Q1 results. We're building and advancing the pipeline, and that has us excited. There are dollars flowing from that activity today, which are now showing up in our numbers. We’re seeing strong trial activity in Europe, where prospects across the pipeline have advanced, specifically within the tissue and packaging end markets. The pipeline is also broader as we're now engaged with North American prospects in the tissue and packaging end markets, largely as a result of our marketing activity at industry conferences like Tissue World. During Q1, we booked our largest trial order of product ever with a large global pulp producer. This product is being used in the next phase of a significant trial and test marketing program. Based on the successful results from the previous stage in the fall, the prospect placed this larger order with us in Q1. This stage of the trial, which is currently underway, includes production at multiple facilities within the pulp producer’s asset base. We expect this trial stage to be completed in June or July. Depending on the outcome, it would set up for larger volume trials supporting expanded marketing activities. This prospect has already set up a customer support team internally, specifically to support the product launch. The current trial underway represents millions of dollars of end product for the prospect from a $300,000 order for SurfLock, and they’ve made a multimillion-dollar investment in the process to get to this stage. That gives you a sense of how material the trial is to the prospect. Based on this program and the success to date, we believe the pulp end market represents a significant opportunity for us in the near term. We're often asked why the trials take so long and why we're not converting trials into commercial accounts faster. We agree they are long processes, and it's frustrating to be patient. Industrial change takes time. To give you a sense of the complexity involved in producing recycled linerboard, for example, the quality and variability of the feedstock that our customers deal with is incredibly diverse. The conveyor feeding raw feedstock into the line looks almost like a garbage compactor made up entirely of different types of waste fiber materials. That's the input end. At the other end of the line, it produces multiple different grades of packaging board in terms of quality, thickness, and end use. Our SurfLock has to work across all of these variable inputs and across all of these end-use applications. In order to achieve that, we have to optimize the formulation. Additional additives or chemicals may be used, and process parameters are dialed in. This is all done through a step-by-step process. Each step provides results that are measured, adjustments are made, and more trial product is ordered from us. Then the next trial is scheduled alongside the commercial production already taking place. Usually, it’s a couple of months between each step. We support the prospects through the entire process, usually with one of our established distribution partners. With larger prospects, we typically have a team on-site while the trial is being run. As an example, during a week-long second-stage trial at a packaging prospect two weeks ago, the team was on-site for some very positive results alongside some further questions to be answered, and they left the week with a new larger order in hand for additional material for the next trial step. So while it's complex and time-consuming, we're excited about the progress we're making with our SurfLock products in pulp and wet end applications and what this could represent for us. On the wood composites front, progress is going well with a key strategic account that is an international retailer backward integrated into wood panel production. They increased their usage modestly in Q1 at the first line. They've also set out an internal schedule to expand the use of DuraBind in that line and into a second production facility where we've been working with them on a successful trial program for several months now. An organization this large moves slowly and cautiously, but their commitment to the program is steadfast. DuraBind eliminates the use of urea-formaldehyde from their production and improves the carbon footprint of their organization. As we've referenced before, they've identified bio-based glues as a key driver to achieve their overall climate goals by 2030. As part of our program with this key account, we are continuously working to improve the value proposition of DuraBind. The technical capabilities and the carbon footprint reduction benefits are proven. We're actively working to improve the economics, which are comparable to formaldehyde over the longer term. We believe we could achieve faster and greater market penetration by proving a cost benefit for the use of DuraBind compared to formaldehyde in addition to the performance and carbon benefits we bring to customers. One side of that equation is outside of our control, specifically the commodity pricing of formaldehyde and pMDI, the co-binder that works with our DuraBind. Our development team is working on opportunities that don't just reduce the cost of our actual product but, just as importantly, reduce the cost of using the product. We believe there are multiple solutions available to us on this front, which we're pursuing from an R&D and supply chain perspective. Another critical component of our work with this key account is expanding beyond the production they own and into their supply chain partners that manufacture approximately 70% of the particle board the key account consumes annually. They have actively engaged their supply chain and communicated their climate targets and the key drivers that will enable them to achieve these targets by 2030. Together with the key account, we've identified the first supply chain partner to work with. The supply chain partner has prior familiarity with DuraBind. They were actually ahead of their time in trialing earlier generations of the technology in the past. At that time, they produced niche products, which they have supplied to their customer base. We have a trial program in progress that we're working on together with the prospect and the key account. Each of us is contributing our learning and experience. Just like our discussion on the pulp end market, wood composites trials are complicated; they are a step-by-step process that requires time. However, the progress we're making with the support of the key account into their supply chain is another example of the momentum building across the business. Last month, we agreed to a five-year contract renewal with Dow as the exclusive marketing and development partner for the use of our technology in the personal care space. As part of that negotiation, they shared with us their bold but achievable targets for success. These targets demonstrate their ongoing commitment to bringing all-natural ingredients to personal care and the importance of the all-natural offering to their customer base and their growth. They continue to market MaizeCare, and we see steady progress in the results of these efforts. Both companies are optimistic that some of the larger opportunities that Dow has been working on in the longer term are near at hand. Today, the contribution of the personal care end market to our top line is modest, but both Dow and we believe that MaizeCare in the hair fixative market and new formulations that Dow is developing beyond hair care can make a meaningful contribution to our earnings over time as some of these larger accounts are converted. The contract renewal is evidence of Dow's conviction. That's the update on our markets. A couple of final topics before we review the financials. The internalization of our North American production is going well here at our center of innovation in Burlington. Having production, R&D, and management all under the same roof has already generated more benefits than we originally envisioned. The collaboration and the cycle velocity of learning, development work, and testing is everything that we wanted it to be. As with any new line, we experienced hiccups that we worked through, but the net benefit of having everything under one roof has been a success. At the same time, I would be remiss if I didn't mention how positive a working relationship we have with our toll production partner in the Netherlands. That facility continues to be the workhorse of our production, especially given the concentration and importance of the accounts we serve in Europe and Asia. Just briefly on the feedstock situation, the challenges we endured as it relates to the availability of feedstock are behind us. However, pricing levels remain elevated. Suppliers are trying to hold on to the pricing gains they established during the period of short supply. However, the supply available in the market is chipping away at that strategy. In the meantime, we've made significant progress in the use of alternative feedstocks. Last year, we commercialized the version of SurfLock that uses an alternative feedstock, and we have two new prospects trialing different products produced with other alternative feedstocks. It's another example of the positive momentum. We're going to continue to introduce alternative feedstock products as a means of improving our supply chain resilience with less dependence on specific higher-cost grades of feedstock. Earlier this quarter, we received a Platinum designation from EcoVadis, a globally recognized agency that rates the ESG attributes of companies and their supply chains. It's the third year in a row we've received this designation, which places us in the top 1% of the 125,000 companies they rate. Just recently, a commercial account mentioned to us how important it is to them that we've consistently achieved this rating. With that, I'll turn it over to Rob to review the financials.

Thanks, Jeff, and good morning. Net sales were $4.7 million in Q1 2024, up 53% compared to the same period in 2023. The primary driver of the improvement was increased demand across all end markets as volumes were up $1.9 million or 63%. This was partially offset by a lower average selling price, which decreased sales by $300,000 or 10%. The increased sales included the $300,000 in trial material that Jeff mentioned earlier, as well as approximately $600,000 of restocking by distributors, which worked off their inventory in 2023. The lower average selling price was primarily due to lower manufacturing costs, which were passed on to customers, as well as changes in product mix. Gross profit was $1.1 million in the quarter, an increase of $520,000 from the same period last year. The improvement was primarily due to higher volumes, partially offset by the lower average selling price. Net of manufacturing depreciation, gross profit as a percentage of sales was 29.2% in the quarter compared to 32.6% in the same period in 2023. The change was primarily due to the lower average selling price due to product mix. SG&A expenses were $1.7 million during the quarter, an increase of $470,000 from the prior year period. The change was primarily due to $300,000 of asset relocation costs associated with the internalization of our North American production to Burlington. R&D expenses were $450,000 in the quarter compared to $600,000 in the same period in 2023. The decrease was primarily due to lower new product scale-up costs incurred during the current quarter. Adjusted EBITDA loss was $530,000 in the quarter compared to $590,000 in the same period in 2023. The improvement was primarily due to higher gross profit, offset by the higher operating costs in comparison to the prior year period. Cash provided by operating activities was $1.1 million in the quarter compared to $290,000 in the prior period. This increase was primarily due to improved working capital. As of March 31, 2024, we had $33.7 million of cash in term deposits compared to $33.3 million as of year-end 2023. During Q1, we invested $600,000 in the NCIB to purchase and retire 166,000 shares. We have demonstrated our ability to responsibly manage our cash reserves through multiple cycles while we continue to invest in our long-term growth strategy.

With that, I'll turn it back to Jeff for closing comments. In the Q1 results compared to 2023 is one step. But we're not on the trajectory that we want to be in. The business is capable of more. Our next goal is achieving $100 million in sales. When we first set that goal in 2021, we originally believed that this was achievable in 3 to 5 years. With the setbacks of COVID, supply chain issues, and simply development timelines, that timeframe has proven optimistic. But we remain committed to the $100 million goal. We have the capital and capacity on hand to achieve it. Most importantly, we're working with the right accounts and prospects to exceed that target without uncovering any new ones, and we intend to win new accounts. Our opportunity set is growing. Our key wood composites account takes its time, but it's going to deliver over the long term. The large global pulp prospect we're working with has the ability to make a material lift in our top line in the near term. They see the commercial benefits within their customer base. The success of our strength aids technology would be a game changer for them and therefore, for us. The traction we've gained with our key accounts and prospects sets the stage for us to deliver long-term sustainable returns for investors. With that, I'll ask the operator to open up the call to your questions. Thank you.

Ladies and gentlemen, we will now conduct the question-and-answer session. Your first question comes from the line of Brian Morrison.

Jeff, maybe before we get to the details, we can tackle the main question head-on here. It sounds like within each vertical, your trials are really achieving desired results, and you're seeing nice growth from new products, but we're still waiting for contract announcements. I know you're saying it takes time. But can you perhaps reconcile the activity to order disconnect and provide comfort that the movement is shifting in your favor? What needs to happen to get these contracts across the finish line?

Yes. So one of the things I tried to allude to is there's not necessarily an activity to order disconnect the way we're seeing it so far. We're actually seeing some revenue from trials. So that's part of the growth that we're happy to see in this quarter. But otherwise, it is just more of pursuing the activity that is progressing on a step-by-step basis with these customers to the point where that becomes recurring revenue to us, not intermittent revenue sort of on a monthly trial basis. We want customers ordering and using our product every day of the week like the first several accounts that we commercialized with the SurfLock product have been for over a year now. So further validation points obviously are required for us to be able to give the rest of the customer base and our distribution partners confidence. But those distribution partners are the ones that are alongside us at these trials, and they're growing ever more enthusiastic, and that distribution partner network is growing as a result of that as well. So I mean, one of the things that gives us confidence is that these guys are investing; they know the wet end better than us. It’s what they've lived for their business lives. So that gives us confidence we're on the right track, and they wouldn't be doing this if there weren't commercial orders at the end of this as well. It's taken more time, but it is what we're learning. It is the time that it takes.

On the wet end, you have been up against some destocking in the packaging side with existing customers. Where does that stand? Are we past the trough? Or are we seeing current customers reaccelerate their SurfLock lines? You have disclosed in your MD&A here that you have global leaders that have conducted multiple trials. Can you just walk me through the penetration of trialing in general? Is it up 10%, 20%, 50%? I don't think you want to give trial numbers anymore, but any sort of benchmark would help.

Yes, it's safe to say that the significant destocking we observed throughout most of 2023 and part of 2022 is behind our customers. However, they have had to adjust to a different level of business, as we witnessed new operations being established during the peak growth of packaging materials. We're beginning to see closures as capacity is rationalized. The market remains somewhat uncertain, and customers are still navigating their positions. What excites us is that in such an environment, cost savings become crucial, and that's precisely what we offer. This is why we are experiencing strong trial activity. The growth we are seeing spans all areas, including our established SurfLock customers, which are contributing to this growth. There is still significant potential for us to expand on the packaging side of what we have already commercialized. Part of our trialing efforts is aimed at tapping into this potential. Our distribution partner base has increased, enhancing our trialing program's effectiveness. We are heavily involved in these trials and are learning a great deal. Since the beginning of the year, we have had to make decisions regarding our trials, observing a clear intent from customers to validate the results we provide and move towards commercialization. We have already confirmed the technology's effectiveness, and our focus is now on engaging customers who will regularly purchase our product.

And have you expanded the number of service providers? Is this sales avenue making progress on increasing the breadth of new opportunities and getting trials implemented in the mills? It sounds like it is.

Yes, for sure. So I mean, we have some longer established ones that have multiple trial programs in place, probably close to what we would have had as our initial report of trial activity within one longer established partner. And then we have some new ones that are working on their very first trial program, where in one case, in particular, they’ve seen some pretty good results and some pretty fast progress. So yes, the base of distribution partners has continued to grow. I think the industry through that kind of word of mouth needs, but also through us being at some of these conferences promoting what we've accomplished, we're getting noticed out there as to what we have.

Can I turn to the major pulp trial that you've been discussing here? There’s obviously a structural gap in softwood lumber and this one large customer is obviously making investments. My math is that this vertical could be game-changing. So have you received any updates on the current trial success relative to prior? How should we think about success here? Is it in terms of both cost savings to the mill or the pulp provider, pardon me, and product quality to meet that gap? How are we thinking about it?

Yes. I think success is going to depend really on two things. One is the sustained technical performance that we and the customer believe can deliver that commercial advantage, and through multiple trials now, including the beginning part of the trial program, those results have been achieved consistently. What we're seeing through the current larger trial program is the customer taking on more responsibility for their part of this, both in terms of equipment and people and capability, and knowledge of how to work with our product. That ownership level is definitely ramped up. So that's a success criterion that we look for on our side when customers put the right people in place that are taking ownership and the real change agents are there. That’s when good things happen. So we’re definitely seeing that happen. In the case of this one, though, just the magnitude of the investment. I mean they are a massive company, but this still represents a pretty significant investment. They wouldn't be doing that unless they saw success in the first steps of this. We're pretty much midway through the current program. By all indications, it's gone as well or better than their expectations.

And there's a downtime investment as well, but how much could one line be worth here? Further to that, are there now more pulp players that are reaching out, trialing, progressing towards commercial terms?

This is a very large player. Converting one pulp mill, which would be in line with the objectives they've put out there to put this premium pulp product out in the market, would be worth in the $50 million-$60 million range in revenue to us. That would be aligned with them achieving the goals that they've publicly stated. Other players are at a much earlier stage. We've been working with this customer for quite some time now, but we do have other players in two different geographies that have begun programs as well. Yes, that pipeline, although smaller and earlier, is advancing as are the end application ones that we talked about earlier.

Dow, obviously, you've got the five-year exclusive contract, a nice endorsement to advancing this vertical. They continue to invest; that’s a good sign. I think you said that potentially some contracts could be near or at hand. How good is your visibility on something meaningful on the horizon here?

Not great. I mean we're not in the application lab, and we're not in front of those customers. So we're relying on their enthusiasm. But through their work at the in-cosmetics Personal Care Show last month in April and the feedback we get from them on continued expansion of the pipeline, it shows continued progress with some of their key accounts. The fact that they really dug in on getting back with our contract for another five-year term shows the conviction in what they believe this can be. The hair fixative market alone, not to mention the new things they're getting into, is about a $450 million chemistry space. They continue to say they wouldn't have gone after this space if they couldn't take a meaningful position in it, like they typically have to be #1, #2, maybe #3 in a space like that. So 10% of that is pretty attractive to both sides. I think that’s the kind of thing they're still focused on.

For sure. But I think your comment was near or at hand. Can you maybe just elaborate? Also, you referenced that there are new verticals trialing and being evaluated. I’m not sure if that's in this vertical, but any insight into what those end markets are and their stage of evolution?

Yes. Some of the things that they were showing at in-cosmetics was moving away from hair and into more skin-focused products, color cosmetics, really anywhere in the personal care space where you need to form a film that is all natural and has some humidity resistance. That’s where they're trying to navigate our product into. When I talk about near term on a quarterly basis, we're seeing new demand usually from smaller wins that they're racking up. But I think what everybody is waiting for, them, us, and you all, are some of the bigger ones that they've been working on since almost the start of our work together. When you’re talking about major changes with somebody who has a lot of shelf space, the rigor and the work that has to go into it, like the other trial programs we've been discussing, takes them longer as well.

Sorry, were there other verticals aside from cosmetics that you were referencing in new trials?

No, it's all personal care.

I guess one or more of these contracts are going to start to drive really nice free cash flow. You have positive free cash flow in the quarter; you're aided by working capital a little bit, but your CapEx is now complete. When we start to see these revenues take hold, you're going to get some pretty exciting free cash flow. Have you and the Board thought about allocation intentions? Based on the size of the opportunities you're talking about, is NCIB certainly one that looks like an attractive avenue for you?

Yes. I mean we've continued on consistently with the NCIB. We don't see changing that in the near term. But I think once we get to free cash flow positive, that's going to be driven by growth, and I think we'll have to show that we're on a trajectory we all believe the business can be on in order to achieve that on a sustained basis. We're very confident we're going to get there. Yes, we have talked about capital allocation. I'm not going to walk you through all of our possible scenarios, but supporting growth is first and foremost, and we want to ensure that we have the capital to do so. We have some fairly concentrated customers in the markets we're pursuing and some of the ones we've just talked about, and that may require deploying assets closer to them. In some cases, we could consider closer to feedstocks. So we want to grow in a smart way that may require expanding our footprint. We want to ensure we have capital for that, and it will certainly take some working capital. We feel pretty fortunate to have this cash base in a market where other emerging companies are struggling, not necessarily because they don't have something interesting for the mid- to longer term, but they are struggling because they can't find cash today. We just want to make sure we stay on the right side of that and that any growth opportunities we have, we can drive with our cash.

And the last comment, you said that restock accounted for a certain amount. I just want to make sure I understand that correctly. Does that mean that almost 70% of the growth is from new products and new product trialing then?

Yes, you are correct. If you round it, it is 70%.

Your next question comes from the line of Daniel Marks from Stonehouse Capital.

Jeff, could you revisit the differences in trialing with your large pulp customer compared to the tissue mills or packaging board mills? You've mentioned some of the challenges when going individually. How does the trialing process differ with your large customer? I remember that they need to process it through their mill for pulp, which then goes to a direct end customer. What complications arise? Is one process easier than the other, or are they similar? Can you elaborate on that?

Yes. I think they both have their challenges, and the challenges are different. One is the challenge of scale. Sorry, this one is just coming to me as I'm thinking about it. But if you think about the pulp mill being the big factory making vanilla ice cream, and they have to do that super efficiently to supply that vanilla to a bunch of different ice cream shops around the world that then mix it into other flavors, you want to be able to make that vanilla factory work at scale super efficiently with a product that can be universally used by everybody else. So there it's a challenge of scale and consistency, and that's what we're working with together with the large pulp producer. When you get down to the next level, those guys that are formulating the different flavors, be it tissue or packaging board, are dealing with a bunch of different feedstocks. They're dealing with a bunch of different end product applications that have different requirements from a chemistry perspective and from a performance perspective. You’re then getting down into the details, but on a smaller scale. That’s where you need just an intimate understanding of the product mix within those mills and the wet end chemistry. The service providers who have done this as their business or in most cases, as long as they've been in existence, they're super important to us in being able to get in there with some prior knowledge of that mill, what it's doing, and what needs to change, and then just supporting us in making that change. If you had to put all of your eggs in one basket, you would try to modify all the pulp in the world. You would get more bang for your buck and probably do it at lower margins but at much higher volumes. At the end of the day, there’s a lot of value to be had in the end markets as well. Until one emerges as the way to do this, we’re going to continue pursuing both.

A tissue mill brand new comes to you today and says they can either do this directly with you or they have a relationship with your large pulp customer. Which would get them to their end product faster? Buying regular pulp and adding your mix or buying the enhanced pulp from your big player?

So that we don't know yet. Those paths have not crossed, so we don’t know whether the benefit of the enhanced pulp is additive to the end application results. If those two worlds end up colliding at some point and we have to sort that out, that's a really good problem to have. That means there’s a lot of volume of our product going out there one way or the other. But we don’t know if that’s additive at this point.

Your large pulp customer, as I understand the trial process, they are running it through their lines, and then they ship that product out to some of their select customers who are trialing it to see how effective it is performance-wise, etc. That’s correct, right?

Yes. That’s right.

How big would their end customer trialing base be relative to your direct trialing base? Like are they just sending to a couple of guys that they’ve worked with? Or have they gone out with wider numbers as well?

We do know that they started out in a more concentrated way, let's say, through last fall. So it would be more in the few customers. We don’t have really good visibility on how much broader they’ve taken it from there, but it’s definitely broader. They’re doing pretty broad marketing of this now in order to attract new customers to their pipeline. We know the activity that we have on the go with them right now is feeding that pipeline. But we don’t have visibility on how many or how large or small they are. It’s definitely a global customer base, and I think it’s across different end markets. But we don't have visibility into their pipeline otherwise.

So you are not sending your team to their customers; they're handling if there's any integration issues using the enhanced pulp, they're dealing with that themselves?

Yes, for sure.

Have you received any feedback from them regarding how that's progressing? Are their customers finding it easy to implement, or is it as complicated as doing it on their own?

In simple terms, we hear so far so good. The other thing that showed that it is going pretty well is just the time gap between the fall trials and then receiving the order in Q1. Everybody involved thought that the time gap in between those would be larger, but they’ve obviously seen some demand that pulled that ahead, which would say it’s going pretty well.

If you were trying to get to the target $100 million revenue as fast as possible, would it be faster through one very, very large guy than a bunch of individual guys, ignoring the profitability, just revenue faster through your pulp partner as opposed to a large number of other individual tissue or packaging board guys. Would that be fair to say?

100% fair to say. Converting one pulp mill, which would be in line with the objectives that they've put out there, would be worth about $50 million-$60 million in revenue to us. We want to get both, obviously, and we're pursuing both, but one is much more concentrated and has the potential to drive us to the $100 million a lot faster if that continues to go well.

There are no further questions at this time. I will now turn the call over to Mr. Jeff MacDonald.

Thanks again to everyone for joining us, and we look forward to talking to you again soon.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.