EcoSynthetix Inc. - Third Quarter 2026 Earnings Call - DEFI TECHNOLOGIES INC

Financial Performance:

• Q3 2026 net sales reached $3.6 million, representing a 38% year-over-year decline of $2.2 million driven by reduced volumes from two key strategic customers.
• Adjusted EBITDA was essentially break-even at $39,000, a decrease from $200,000 in the prior year period, primarily due to lower gross profit.
• Gross profit improved to 37.8% of sales (from 34.2% YoY) due to a higher average selling price and product mix, though total gross profit fell $620,000 to $1.1 million due to volume losses.
• Operating expenses decreased: SG&A fell $420,000 to $1.4 million and R&D dropped $120,000 to $270,000 (7% of sales), largely due to reduced variable compensation and higher refundable tax credits.
• Cash position remained robust at $29.4 million as of September 30, 2026 (down slightly from $29.6 million at year-end), providing capital flexibility.
• Share buybacks under the NCIB totaled $33,000 in Q3 and $766,000 year-to-date, with the Board committing an additional $500,000 for Q4 purchases.

Guidance and Future Outlook:

• Management does not expect immediate market recovery, citing continued macroeconomic headwinds and narrow pricing spreads between hardwood and softwood pulp in the near term.
• Long-term confidence remains high in the $60 million opportunity with the wood panel retailer and broader market potential as price spreads historically exceed $200/ton.
• Near-term focus is on accelerating commercialization of proven products (Surf-Lok) and new Durabind formulations rather than waiting for cyclical shifts.
• Expected commercialization timelines: Tissue projects may convert quickly in 2027; packaging is longer-term; pulp opportunities may return once spreads normalize.
• Management views current results as unacceptable and is committed to restoring growth through innovation and expanded commercial reach.

Business Segments and Product Lines:

• Wood Composites (Durabind): The international retailer (backward integrated into wood panel) reduced usage due to cost pressures despite remaining committed to 2030 sustainability goals; a trial for an enhanced, cost-reduced Durabind formulation is planned for later this year.
• Pulp & Paper (Surf-Lok): The top hardwood pulp producer continues commercial use despite narrow spreads; the product enables replacement of higher-cost softwood pulp and improves line speeds.
• Tissue: First commercial win achieved with a top-five global tissue producer in early 2026 (one line), representing $200,000–$300,000 annual opportunity per line; two additional lines are in trial.
• Packaging: Progress with a major packaging producer showing promising trial results in North America.
• Personal Care: Continued collaboration with partner Dow to launch a new MaizeCare product next spring for all-natural ingredient applications.
• R&D Initiatives: Development of next-generation Durabind with significant cost/sustainability improvements and variations of Surf-Lok tailored for specific geographies and fiber furnishes.

Market and Competitive Landscape:

• Pulp Market Dynamics: Narrowed hardwood-softwood price spreads (historically >$200/ton, now minimal) have temporarily reduced the economic incentive for enhanced pulp, with some softwood pulp sold below cash costs.
• Industrial Trends: Shift toward larger-scale hardwood capacity in Brazil and Indonesia; softwood capacity is declining due to inefficiency.
• Distribution Strategy: Successfully pivoted to a distribution model; first two distributors are now significant customers, with new partners in South America and progressing relationships in Asia, US, and Canada.
• Competitive Position: Durabind faces cost competition but offers formaldehyde-free and lower carbon footprint benefits; Surf-Lok offers value beyond price spreads via energy reduction and improved runnability in tissue.

Risks and Challenges:

• Customer Concentration: Two strategic customers account for over 100% of the YoY sales decline, creating significant revenue volatility.
• Macroeconomic Sensitivity: The wood panel retailer's focus on cost reduction and operational simplicity disproportionately impacted the lower-volume Durabind supplier.
• Market Timing: Rapid shifts in pulp pricing spreads and global economic conditions are delaying broader commercial adoption timelines.
• Adoption Friction: Industrial processes require geographically specific trials; converting one line does not guarantee immediate scale across multi-line mills without proof points.

Management Commentary and Tone:

• Tone is transparent about current difficulties, acknowledging "unacceptable" results and "challenging year" while maintaining strategic confidence.
• Management emphasizes a dual-priority strategy: Innovation (improving product cost/value) and Commercialization (leveraging distribution partners).
• CEO Jeff McDonald highlighted that the "proof points" with market leaders remain valid and are being used proactively to drive broader activity despite current volume gaps.
• CFO Rob McDonald noted disciplined capital allocation, favoring measured share repurchases to preserve cash for growth initiatives under uncertain conditions.

Analyst Questions and Answers:

• Jeff Schecter (TD): Asked about the disconnect between innovation/trials and direct sales; management explained that while trial activity has increased with new distributors, general market conditions dampen pace. Confirmed a top-five tissue producer has expanded from one line to trials on multiple others.
• Trial Conversion Speed: Confirmed the first tissue line went from trial to commercial in ~8 months (Jan-Aug), which is faster than industry norms, and similar pace expected for new North American trials.
• Customer Scope: The wood panel client has 17 lines of capacity representing a $60 million opportunity; once converted, operations are sticky, though volumes fluctuate.
• Cost vs. Oil Prices: Durabind's oil-based components remain exposed to input costs, but legacy styrene-based latex products face supply/security risks in Asia, creating new entry opportunities for Durabind.
• Market Recovery Timing: Management indicated that if pulp pricing spreads normalize, business should return quickly ("pump primed"), with tissue likely converting to commercial in 2027.

Other Key Points:

• The retailer's 2030 sustainability goals (40% reduction in fossil-based glue) remain intact, though volume is lower pending the new formulation.
• Distribution partners are actively bringing the company more inbound interest ("knocking on our doors") due to successful beachhead wins.
• The company is tailoring Surf-Lok formulations to address specific fiber furnishes in different geographies (Asia, North America) to overcome technical adoption barriers.
• The pulp customer is also a major player in tissue, opening a secondary avenue for Surf-Lok adoption within their owned mills.