A trip to OBJ HQ

On the morning of Thursday, 9 November 2017 I made my way to the airport for the red-eye flight from Melbourne to Perth, a trip that would take well over 3 hours. For me, this has been an annual pilgrimage since 2014 when I first decided to attend the Annual General Meeting (“AGM”) of OBJ Limited (“Company”). I have reached the point where I now consider there to be a regular 5-Step formula associated with the Company’s AGMs. I have set out these steps as applied to this year’s AGM below. Because of this expectation, I was not planning to attend this year’s AGM. However, I ultimately did attend. That is because this year I was presented with an additional “Step 6”.

Step 1 – Announcement of AGM

The first step leading up to the AGM is the Company’s release of the annual report followed by the notice of AGM. This occurs about one month prior to the date of the AGM. There is usually some controversy identified (sometimes minor, sometimes major) that generates debate amongst shareholders on Hotcopper with varying degrees of concern and outrage expressed by various personalities on the forum. Most of the time these are very legitimate concerns, which have arisen from some questionable decision-making on the part of Company management. I admit that I have been a regular contributor to these debates and have started a few of them myself. My engagement in these debates has never been for the sake of “stirring the pot”. I am typically drawn to critical discussion of Company management when I have perceived some departure from the essential rules relating to corporate governance. I’m a stickler for “going by the book”. Regrettably, there have been quite a few departures from “the book” since I have been a shareholder of the Company, such that I now expect to engage in a bit of robust criticism of management every now and then. I say “regrettably” because, beyond this primary complaint of mine, I have formed the view that the current Board has achieved many great things for the Company over the last decade that has resulted in it being in an exceptional commercial position in 2017. Because of my personal belief of the huge potential for the commercialization of the company’s technology platforms, I continue to scrutinise every aspect of the company’s activities insofar as my spare time and analytical capabilities permit.

This year was no different, with the principal concern lying with Resolution #6 (the consolidation of the directors and employee share scheme) and Resolution #1 (the annual financials and whether shareholders should vote it down because of the abysmal share price performance over the last 12 months). The interesting thing about the issues arising this year is that there was a prevailing anger amongst many shareholders that couldn’t be shaken. This arose from:

• the dwindling share price that has spiralled downwards all year;
• management ‘stumbles’ with some important decisions being made about directors claiming milestones having been met, with a lack of transparency in communicating explanations of these claims to the market; and
• lack of effective communication about the company’s performance to the market more generally.

One shareholder on Hotcopper even sought to gauge whether shareholders might desire a “poll” to be conducted at the AGM (rather than the default “show of hands”) to vote down resolutions. It was a very shrewd post, and it was reasonably clear that it had come to the attention of Company management by the time the AGM commenced. When the Chairman of the Board, Glyn Denison (“Glyn”), commenced the formal proceedings at the AGM, he announced (as a chairman is entitled to do under the Corporations Act 2001 (Cth)) that a poll would be conducted. He knew a poll would inevitably be demanded, so he appropriately took control and said one would take place in any event. This meant that all shareholders’ votes would be counted and weighted according to their shareholdings and/or the discretions exercised by their proxies.

It was very telling that Resolution #1 clearly failed to be carried. That outcome in relation to Resolution #1 sent a very clear message to the Board that the owners of the company (i.e. us the shareholders) do not have confidence in the way they have governed the company’s affairs in the financial year gone by.

I should add that, while this poll was anticipated, I did not expect the overwhelming “against” result for Resolution #1. It is also not the reason I went to this year’s AGM.

Step 2 – The formal AGM proceedings

The formal AGM proceedings are administered by Glyn. This is actually the most boring part of the AGM (a finding that is consistent with all AGMs of all corporate institutions). The only interesting thing this time was the issue relating to Glyn calling a poll (see above). Again, it’s certainly not what I got on the plane for.

Step 3 – Presentation and Q&A session

Immediately following the formal proceedings of the AGM, Glyn and the Managing Director/CEO, Jeffrey Edwards (“Jeff”), each give a presentation as to the Company’s affairs and commercial progress which includes a description of anticipated commercial events in the foreseeable future. This is usually the most interesting and exciting part of the AGM proceedings. It’s where Glyn and Jeff speak to the power point presentation that has usually been posted on the ASX about an hour beforehand.

Other posters have already reported on this presentation. I also mentioned a few essential points on Hotcopper a few days ago. I don’t have anything to add now.

Although I usually look forward to this part of the presentation each year, I was not particularly excited about what Glyn and Jeff were going to say this year. That is primarily because of the update that had been given by Glyn and Jeff during the Investor Conference Call less than a month ago. What more were they really going to tell us now? Probably not much, I thought. And I don’t think there were any significant new gems that came out of this part of the presentation. That also probably explains why there were only about 20 retail investors who attended the AGM this year (last year there were about 60).

Step 4 – Coffee and cake

Things start to get better here. This is when the presentation stops and one-on-one chats are instigated between Board members, Company staff and individual shareholders. Jeff in particular has a habit of speaking much more openly one-on-one and his excitement in explaining the Company’s technological innovations can be very infectious. Many shareholders wanted to secure his time, but I didn’t bother at this point because I knew Step 6 was coming (see below). I did, however, get a chance to meet Heather Wright (Benson) (“Heather”) and Tony Wright (academics/scientists) who are conducting the Curtin University trial. I spoke to Heather for some time. Obviously she couldn’t tell me anything specifically about how the trials were going, but she was very open about her views of the Company’s technology platforms. Many may recall that Heather has a specialty in micro-needles and published an article about combining micro-needles with the Company’s magnetophoresis technology earlier this year. Heather is a firm believer in the Company’s science. She also agreed with me that the Company’s technology platforms represent a potentially infinite number of commercial applications – the company is the antithesis of a 1-trick pony.

I also got a chance to speak to the Company Secretary, John Palermo (“John”). John reiterated what had been said by Glyn in the AGM presentation about the Company being on an active drive to recruit a suitable chairman who can take the Company to the next level. I don’t think they are dithering with this as I was given the impression that the recruitment consultant company, Omera, is under an obligation to complete the task within a tight timeframe. So I’m hoping that we will hear something more about this by the end of the year.

While Step 4 is always interesting for the purpose of gleaning a bit more non-material information not available to the general public, as it was this year, it certainly was not enough to make me go all the way to Perth.

Step 5 – Shareholder drinks

This is an opportunity for shareholders who attended the AGM to catch-up and talk amongst themselves. It’s always great to catch up, especially with the non-Melburnians such as teamwilly, blackiwi and ric45 who are all based in Perth. But I’m afraid they were not the reason that I went to Perth this year.

This year there was an additional step for me…

Step 6 – A special invitation to OBJ HQ

The reason I went to Perth this year was because I, along with a few other long-term Melburnian shareholders, had been invited to a private meeting with Jeff and Glyn, which included a tour of the Company’s offices and laboratory facilities. There were four of us who were invited – myself, kiwidub, attitudes and another shareholder who does not post on Hotcopper. We all caught a taxi together and arrived at the offices of the Company in Leederville at about 11.00am on the morning of Friday, 10 November 2017.

For those of us who thought the existence of the office and laboratory might be a sham, I can now confirm that the office does indeed exist and the laboratory and scientists working within them also exist. They also appear to be doing all the work that they purport to be doing. I took this photograph before we went inside.


The meeting begins

We were obviously expected. As we approached the security entrance, we saw Jeff boldly come out with a beaming smile to greet us. He took us into the Company boardroom and we took a seat at the table as Jeff went to get Glyn. It’s a small boardroom, not extravagant but what one might expect of a small ASX-listed company moving towards commercial growth and whose board is managing its finances responsibly. Indeed, my impression of the premises, including the lab, was that the Company is certainly not wasting money on lavish expenses. They utilise the office and lab space pretty efficiently, which is impressive given what they are doing in the lab for their international partners (more on that below).

Jeff and Glyn came in and sat at the boardroom table. John was also there briefly but had to attend to other business so was not there for most of the talk. I expected the meeting with Jeff and Glyn to be the kind of one-on-one chat that I could have had with them after the AGM the day before, where we discuss non-material Company matters and ask them further questions to gain a better understanding of the progress and future prospects of the Company. That expectation was met, although the benefit of the more intimate setting was that it resulted in both Jeff and Glyn putting aside their public persona adopted at the AGM. When I say “public persona”, just think of how they presented during the Investor Conference Call last month – very formally and at arms-length – where there is great care and precision taken with what they say and how they say it. I do the same when I speak publicly. But now we were in the comfort of their very own boardroom and they were both very conversational.

Of the four of us who attended, I knew I was always going to be the most inquisitive with my questions. I suspect the other shareholders I was with were a bit nervous before we went in because they thought I might “derail” the meeting by being interrogational. They never said so, but I knew they were thinking it. I knew that was never going to happen. I asked questions that any respectful and very curious shareholder would ask if presented with such an opportunity. More to the point, Jeff and Glyn graciously answered all of my questions insofar as their confidentiality obligations permitted them to do so.

Jeff

I have said this before, but I’m reminded of the fact every time I meet Jeff and talk to him in person – he really is quite extraordinary. His scientific inventions are revolutionary. His creative ability to adapt the technology to problems presented by commercial partners and come up with new commercial solutions is, I think, second to none. His ability to distil the technical science and explain it simply such that any reasonably intelligent non-scientist can understand it is also remarkable. I’m not surprised that Jeff is the one who has formed very strong relationships with the likes of P&G and other internationals. He is obviously very well respected for good reason.

The only real ‘negative’ I have to say about Jeff is that he appears to be involved in absolutely EVERYTHING the company does – developing the science, solving partners’ problems, corporate governance, and negotiating with partners and securing company-making deals. I don’t like this. It’s just not feasible in the long-term. He should be focusing solely on the science and commercial applications and, perhaps to some extent, maintaining the relationships with the company’s clients. That’s all he should be doing. The Company needs someone else to take over the “sales” role. Jeff freely admitted that this is what the new chairman’s focus will be – selling the technology and commercial applications at a global level.

Glyn

I have never had a chance to speak to Glyn in such a small group setting prior to Friday. Previously, I have always communicated with him via email or by putting questions to him at an AGM or roadshow. He has always been very conservative with his responses which have tended to import a “defensive” approach to sharing facts, often leaving me with a frustratingly small amount of information elicited. I put this down to him being overly cautious in preserving matters of confidentiality.

However, on Friday I found Glyn to be much more responsive and remarkably congenial. I also discerned that Glyn has been significantly involved this year in negotiating further agreements with P&G and other international partners, which has likely benefited the company substantially in the long-term. Glyn is definitely commercially savvy and said enough in response to my queries to make me realise that he has probably been working extremely hard this year much to the significant benefit of the Company and its dealings with international partners. My estimation of him went a fair way up after this meeting as a consequence. But that then made me think it was a real shame that he and the rest of Company management have not been able to direct their obvious skills and competencies to the nurturing and maintenance of corporate governance issues, which has singularly been the Company’s undoing this year.

Take-away points from meeting

It’s always difficult to remember everything that’s going on with the Company because there is so much. And this meeting was not the right forum in which I could pull out my note pad and start taking notes. So my focus was to try and collect just a few new pieces of information about the Company which I didn’t already have. So here they are:

• Glyn mentioned in the Investor Conference Call that he had “carved out” some commercial opportunities from the Master Licensing Agreement with P&G. He downplayed this I think during the conference call so I asked him to explain. He could not say a great deal for confidentiality reasons. However, there was enough said to make me wonder and speculate whether the P&G “exclusivity” in relation to each product is very much temporally-defined on a case-by-case basis, and not necessarily for “the life of the patent”. This has potentially huge financial benefits for OBJ when, for example, P&G decides to abandon a product after a relatively short period of time to pursue a second-generation product, which then leaves OBJ to make the most of selling the first-generation product to other interested parties for a significantly greater profit than is currently received by way of P&G royalties. So for those shareholders have been annoyed about there being a 2 year life-span on a P&G product, take comfort in knowing that this is unlikely to be where it ends for OBJ. There are likely to be others in the queue waiting to jump on the magnetophoresis skin care wave. A low-cost money spinner for the Company for at least another 5 or so years IMHO.
• Following on from the above point, the manufacturing process associated with the Company’s magnetic micro-array production is top secret. Even P&G don’t know how it works. OBJ engages a third-party (whose name shall remain a closely guarded secret no doubt) to manufacture the micro-arrays which are then sent to P&G for incorporation into an end product.
• The “second technology” agreement is the Company’s worst kept secret. All of my suppositions, speculation and predictions about this relating to the Company’s personalisation patents and possibly being incorporated into the evolution of the Olay Skin Advisor have been cemented IMHO (see my previous posts). I didn’t bother to put these specific propositions to Glyn and Jeff at the meeting because I knew it remained strictly confidential. However, I asked enough questions concerning peripheral matters relating to the technology’s implementation and the upcoming consumer testing trials which allowed me to satisfy myself of my previous hypothesis. The Company has described this technology and its implementation by P&G as a “game changer”. I agree with that assessment. There is nothing else comparable to this technology in the beauty & grooming market. I have surmised that the purpose of the huge consumer testing trials to be undertaken by P&G in 2018 has nothing to do whether P&G deciding whether they are actually going to use it – that I think has already been decided clearly in the affirmative. Rather, the consumer testing is to allow P&G to navigate their way through all of the complexities of the technology, and its use by humans, to work out what business model to adopt when it comes to roll-out. Presently, they don’t have a great deal of certainty about this because there is simply NOTHING on the market to compare it to. This is what happens when you’re an innovation leader like P&G. The technology is truly remarkable and it really should stun the market when it finally hits the shelves.

The lab tour

We got a tour of the lab. It’s small but it has a lot of equipment and testing facilities that appears to be working 24-7. The scientists were beavering away in their lab coats. The lead scientist (Jeff’s chief lab scientist), Matt McIldowie, was there and in good spirits. He gave us a demonstration of what they do when they get a new formulation from a client which they are asked to develop a micro-array for. It’s as simple as peeling off layers of skin samples from staff (no pain, we’re told, as it’s like applying Sellotape to your forearm and then removing it), combining the sample with the active ingredient and a micro-array and subject all of this to various machine processes for analysis over a protracted period of time. They plot the with/without micro-array samples and this produces a final result. This is where I think all of the initial “proof of concept” trials take place. It’s basically what the lab does all day. I surmised that when the lab scientists are finally satisfied they’ve developed the most efficient micro-array (there are probably many “fails” before a final “success”), they go back to the client with the results. The client then makes the decision to progress to their own in-house trial to validate OBJ’s findings, and so on and so on until a product hits the shelves.
I was very satisfied with the lab facilities and the mood of the scientists (there were only 3) appeared to be pretty relaxed and happy. Very pleasing to see.

Conclusion

My general revised assessment of the Company’s state of affairs given my trip to Perth last week may be summarised as follows:

• The Company’s proprietary technologies and technical capabilities for the purposes of commercialization are ground-breaking and the potential for future revenue generation is phenomenal.
• Company management has to date been concentrating on the execution of backroom commercial deals thereby laying the groundwork that will inevitably put the Company in an excellent position commercially in the long-term. However, this concentrated effort would appear to have been at the expense of maintaining a satisfactory standard of corporate governance that has led to the overwhelming “against” vote for Resolution #1 at the AGM this year.
• The Company needs to appoint a chairman whose focus will be on global sales and expansion of the implementation of the Company’s technology platforms. The Company is currently under-resourced in this regard. With the right Chairman, and the right executive team, I firmly believe that OBJ can transform into Australia’s very own Apple or Google.

Perhaps I’m a little too optimistic. Well, so be it.

J