ELI Eco Logic Inc. (ELI)
Interview with:
Fred T. Arnold, Ph.D., Chief Executive Officer
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
patented Gas-Phase Chemical Reduction™ (“GPCR”) technology for the treatment of toxic materials.

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With patented technology and years of experience Eco Logic is poised for growth

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Environmental Services
Hazardous Waste Destruction

(TSX: ELI)

ELI Eco Logic Inc.

143 Dennis Street
Rockwood, Ontario NOB 2K0
Phone: 519-856-9591

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Fred T. Arnold, Ph.D.
Chief Executive Officer

Interview conducted by:
Lynn Fosse, Editor

CEOCFOinterviews.com
March 2003

Bio of CEO,

Since December 1997, Dr. Arnold has held the positions of Chief Executive Officer and Vice-Chairman of ELI Eco Logic Inc., a TSX listed Canadian corporation.  From 1994 to 1996, he was Executive Vice President, Defense Practice, for ICF Kaiser Consulting of Fairfax, Virginia. He previously served as President and Chief Executive Officer of Jane’s Information Group, Inc., the world’s largest provider of defense and aerospace information, and Group Vice President of McGraw Hill’s Data Resources Inc. (DRI), where he directed their government and defense practices.  Dr. Arnold began his professional career with the US Environmental Protection Agency in the early 1970s where he had responsibility for pesticide regulation.   He received his undergraduate training from Colorado State University and graduate degrees from the University of Maryland in agricultural economics and operations research. He resides with his family on their farm on Chesapeake Bay's western shore near Annapolis.

Company Profile:

ELI Eco Logic Inc. (TSX: ELI), headquartered in Rockwood, Ontario, Canada is an engineering technology company that licenses and supports commercial applications of its patented Gas-Phase Chemical Reduction™ (“GPCR”) technology for the treatment of toxic materials in a safe, permanent, cost effective manner. Using this technology, Eco Logic's customers convert organic hazardous waste and contaminated material into reusable or disposable products. The world-wide market for Eco Logic's GPCR technology includes systems to treat POPs chemicals in industrial waste streams, systems for the treatment of hazardous waste stockpiles including polychlorinated biphenyls (PCBs), hexachlorobenzene, pesticides, dioxin, contaminated electrical equipment, contaminated soils, chemical warfare agents, CFCs, and petrochemical wastes, and systems for the regeneration of contaminated carbon filters. GPCR technology is a proven solution for organic hazardous waste remediation, pollution prevention and waste minimization. Eco Logic provides a mobile, commercial-scale technology with proven performance, throughput and regulatory acceptance.

Eco Logic's GPCR™ technology highlights:

Robust technology for treatment of chlorinated and other halogenated hydrocarbons in various matrices

Operated large-scale systems at sites worldwide

Committed to continual improvement of the core technology

Permitted by regulatory authorities in four countries

Internationally accepted by the environmental community

Extensively vetted and approved for chemical weapon destruction

Selected as the non-incineration alternative by international donor organizations in support of the objectives of the Stockholm Treaty

Business Markets:
Chemical Demilitarization
 

GPCR technology was successfully tested for all US chemical weapon agents and all contamination matrices under the Assembled Chemical Weapons Assessment Program.  The company is currently in the final stages of the competitive process for design, construction and operation of a chemical demilitarization facility in the US. It pursues other work in this area with agencies of the Departments of Defense and Homeland Security in the US, and the Canadian program that supports weapon destruction in Russia.

Military Wastes, Energetic Materials and Munitions

Military bases around the world are contaminated with industrial hazardous wastes including PCBs and other toxic hydrocarbons.  They are also characterized by unique soil contamination caused by open burning or detonation of stockpiled munitions and chemicals.  Bases near urban areas are particular priorities for remediation. Eco Logic has conducted demonstrations of the GPCR technology on hazardous wastes, radioactive low-level mixed wastes, and energetics for the US Department of Energy and DoD.

 Energetic materials include explosives used in military shells and mortars, and propellants such as liquid and solid fuels used in missile and rocket systems.  These materials, which are stored on most military bases, contain contaminants capable of creating highly toxic emissions. Eco Logic has successfully conducted demonstrations of the GPCR technology on most defense-specific waste streams and energetics.

Pollution Prevention/Waste Minimization

Industries today face increasing pressure from regulators and environmentally conscious consumers to reduce or prevent the generation of hazardous wastes during plant operations. In particular, the USEPA called for voluntary partnerships between the EPA, state regulators, and industry that will facilitate a reduction or elimination in the generation of 53 persistent, bioaccumulative and toxic (PBT) chemicals.   Additional USEPA reduction goals exist for 12 special chemicals of concern, including PCBs, HCB, dioxins, pesticides, etc., all of which have been successfully treated using GPCR.

Industrial Hazardous Wastes Including PCBs

Eco Logic has operated full-scale, commercial waste processing systems in Kwinana, Western Australia and Ontario, Canada, successfully treating over 3,000 tons of high strength PCB oil, PCB-contaminated electrical equipment and pesticides.  Eco Logic’s GPCR technology has been approved for commercial use in Japan, Australia and Canada, and has received many R&D permits in support of US Army and EPA programs in the US.  No requested permits have ever been denied, and during over 30,000 hours of operation, none have been rescinded or otherwise restricted.

Site Remediation

The site remediation market involves the treatment of soil, sludge and sediment contaminated with a variety of toxic organic contaminants at industrial and manufacturing facilities, contaminated landfills and harbors.  Contaminated sites are frequently the location at which high strength industrial hazardous wastes are stockpiled

In September 1997, Eco Logic completed waste treatment operations at a General Motors plant in St. Catharines, Ontario.  During this project, the company successfully treated PCB-contaminated electrical equipment, soil, and PCB oil using the GPCR technology.  Eco Logic has also successfully demonstrated the technology on PCB-contaminated harbor sediment.

CEOCFOinterviews: Mr. Arnold, please tell us about the current direction of Eco Logic.

Mr. Arnold: A redirection of the company began in 1998. Prior to that time, the company pursued strategy of commercializing its invention, Gas-Phase Chemical Reduction, or GPCR, a non-incineration method for destruction of hazardous waste, in a vertically integrated business model.  It did that in Canada and in Australia by constructing and operating plants for multi-client, multi-waste stream applications.   The problem that we encountered was that it placed all of the financial risk for the still evolving market with the company and its shareholders.  Hazardous waste treatment is a very difficult market to predict in the short and near term.  It tends to be politically controversial because of the type of work performed and the history of past practices.  And it is one with excess capacity for conventional waste destruction solutions, which are increasingly at odds with public and regulatory preference.  To limit future risk for the company, in 1998 and continuing today, we redirected toward partnerships and licenses with organizations that were in, or wanted to enter, the hazardous waste business, and who required a technology that could be used for many years in the future.  We also sought partners for large, customer-specific jobs like chemical weapon destruction in the United States, where our GPCR process was demonstrably preferred or an important tie-breaker in a competitive market. Through pursuit of these strategies, we developed a fairly significant backlog of opportunity that we are working through in terms of contract negotiations and competition.

CEOCFOinterviews: What is it about your process that differentiates ELI from others in your industry? 

Mr. Arnold: In general, the waste for which our technology was developed is classified as “hazardous organic” waste.  Here we refer to obsolete pesticides like DDT and other chlorine-based pesticides that have been cancelled or prohibited in the US and many other countries, PCBs that at one time served broadly as insulators in the utility and telecommunication industry for transformers and capacitors, and chemical weapon munitions, which are being destroyed in accordance with international convention.  All have been restricted in countries that comprise our markets, are subject to national and international treaties for disposal, and require non-incineration-based technology for safe, publicly acceptable destruction.  For most of recorded history, and certainly for the majority of the history where destruction of these chemicals has been regulated by national authority, incineration has been the approved and accepted method. But, incineration comes with a cost.  First, incinerators have varying degrees of ability to completely destroy waste and second, when the waste contains chlorine, incineration can and does lead to the creation of more toxic chemicals.  These are dioxins and furans; they are the products of incomplete combustion, or PICs.   Advanced incinerator design does a better job of controlling PIC production, but it is a chemical reality that PICs result from incineration. Eco Logic’s GPCR technology is a non-oxidizing (non-combustion) method of accomplishing complete destruction of hazardous organic waste, and because our GPCR reactions occur in the absence of oxygen, the reactions do not create dioxins or other PICs.  So, we are positioned in the market as the supplier of a proven and patented destruction method for specialized waste streams, which in the past have been incinerated, often with unacceptable consequences.

CEOCFOinterviews: When you compare your process to incineration is cost a factor?  Are government and environmental considerations a factor?

Mr. Arnold: Cost is always a factor; Adam Smith is alive and well in the environmental technology marketplace. On a life cycle basis, and with a level playing field, which requires clear regulatory standards and enforcement, our technology competes effectively with alternatives.  There is a growing realization on the part of regulatory authorities that incineration, when employed for waste destruction in our markets, has unacceptably negative consequences.  As a result, incineration of hazardous organic waste has been restricted through regulatory actions.  For example, in the mid-90s, Australia banned incineration for hazardous waste treatment. In another example, over 90% of the medical waste incinerators that were permitted in the United States in 1990, a significant source of dioxin creation in metropolitan areas, are no longer permitted today. In another notable case, destruction of the stockpile of chemical weapons in the US, scientific concerns voiced by citizens and legislators led to public law that mandated consideration and incorporation of non-combustion technologies as alternatives to incineration. In all countries, proposals to permit new incinerators result in public demand for consideration and use of alternative methods of waste destruction and management.  Eco Logic’s GPCR process always comes to the fore when this occurs. Advocacy groups who seek alternatives to incineration favor our process, and our history of performance has resulted in excellent relations with regulators.   We are building a business as an alternative to the system that the scientific, regulatory, and NGO communities have come to question in terms of environmental stewardship and public health consequences.

CEOCFOinterviews: Do you envision an end to incineration?

Mr. Arnold: Incineration will always be a tool for waste disposal.  It will continue to be challenged for the chlorinated and other halogenated waste streams where incineration is incapable of accomplishing complete destruction and where it has the potential for creation of toxic PICs.  Industrial processes that create dioxins and furans, the most toxic PICs, are specifically prohibited in many countries, and with adoption of the Stockholm Treaty dealing with POPs, the international community has substantially tightened the standards that define our marketplace.  As a result, the waste streams we have quietly dealt with over the last decade are now called the “Dirty Dozen”, and incineration as a solution to destruction of these compounds can be most appropriately viewed from the rear view mirror.   We are working today with international donor organizations in fulfillment of treaty obligations where non-incineration destruction technology is a specific goal.     Getting a country or organization to the point where they will allocate funding to alternative, environmentally sound technologies that do not pose adverse secondary impacts, externalities in the economic sense, is a long-term process, and the regulatory structures in individual countries are critical drivers for our success.

CEOCFOinterviews: Why choose your method when moving from incineration?

Mr. Arnold: There are many non-incineration approaches to hazardous waste destruction, each offering technical and/or cost advantages for particular applications.   They range from bio-remediation in the simplest case to complex chemical processing technology like GPCR and others like plasma torch, electro-chemical oxidation and super critical water oxidation.  Of course, the most effective long-term solution is modification of the manufacturing base that creates hazardous waste in the first place, and regulators are increasingly focused on this approach, pollution prevention and hazardous waste minimization, as the preferred long-term solution.  We have developed several GPCR applications that support this long-term solution. We live, however, in the present, and for many years waste owners and technology providers will collectively deal with the legacy of past actions. The advantages that we bring to the market are several.  First, we deal effectively and predictably with all organic waste, whether in high or low concentration.  When GPCR is utilized there are no lingering residues that require subsequent treatment technologies or long term storage in regulated landfills.  Second, we deal with the hazardous waste in all matrices – drums of liquid, contaminated electrical equipment, munitions and their components, and soil.  GPCR is a chemical process, and our technology packages include varying front-end appliances, which efficiently remove the hazardous organic waste from its surrounding media or container for conveyance to the GPCR system’s reactor.   Third, through chemical reduction we create re-usable energy, methane to power the system, and clean metal parts that can be recycled.   Both of these results contribute to lower cost and enhanced environmental stewardship for our customers.   Lastly, GPCR is a scalable, mature and certain system.

CEOCFOinterviews: How do you get most of your clients?

Mr. Arnold: As I said earlier, we operate in a long-term market building environment.   Successful business development requires that we adopt a problem-seeking attitude, one where we can assist the customer in the full definition of their requirement and their options. When we are successful, we work with the customer in the configuration of our technology that best solves their problems.   This requires an intimate understanding of the customers’ operations and strategic objectives, their procurement procedures, and the regulatory structures in which they operate today and expect to operate in the future. In our BD process, we attempt to select from among the many potential customers who have a requirement to those where our solutions can successfully overcome known hurdles.  We must be cognizant of the customers’ commitment to improved destruction of hazardous waste, their time horizon, and capital constraints.  When these and other factors align, we make the investment in business development to convert market potential to fulfillment reality. We are in the development stage that all new capital suppliers must traverse, and in our case it is slightly more tedious because, from a strict accounting perspective, our customers’ expenditure to address legacy problems does not result in positive increments to their income statement in the near term. Capital expenditures for GPCR do, however, remove a potentially large liability from the customers’ balance sheet, and over time, result in lower cost for their continuing operations.  By illustration, the US chemical weapon demilitarization market reflects our business development process.  When we began investing in trial and demonstration work in the mid-90s to prove that GPCR was capable of playing an important role in satisfying the customer’s requirement, our technology was one of many alternatives to incineration, which was the preferred destruction solution.  Today, our technology is a key component to a non-incineration approach that was vetted through multiple external reviews and the EIS process, and subsequently mandated by the Department of Defence.  In collaboration with our partners, we are in the final stages of a competitive procurement process to design, build and operate our technical solution at a chemical weapon storage site in the US. The path we have taken for this market required that we modify various engineering aspects of our system to accommodate unique customer requirements, out-perform over a dozen competitors, and form an alliance team with complementary technology providers.  Most importantly, we also had to convince an Engineering & Construction integrator of the efficacy of our process, and nourish the tenacity required from many groups to overcome the status quo.  Our path to becoming the preferred non-incineration solution for international POPs elimination has been similar, and like the military market above, we believe we can clearly see the weather mark, if I can use a sailing analogy, and we expect to be first around.  These opportunities, each very important for our company this year, and each reinforcing the feasibility of using a new technology to deal with an age old problem, will contribute to market maturity and a more efficient business development model in the future.

CEOCFOinterviews: It sounds as if being able to deal with the regulatory and environmental people is just as important as having the right technology.

Mr. Arnold: These relationships and the support they engender are essential.  The work our technology supports never happens until there is a forcing action.  The reality of hazardous waste management is that the owners of the liability, whether public or private, tend almost always to employ the least cost, permitted solution. We and other suppliers of new solutions operate in a competitive environment with an excess supply of older, less efficient approaches to hazardous waste management, like regulated landfills, deep well injection, and incineration.  The competitive response of the in-place industry to a new market entrant is to reduce price in the short term, and since their capital base is often fully depreciated, this gives them a significant competitive advantage. We, on the other hand, define market opportunities where we expect to provide the low cost, long-term solution for particular applications, but where new capital investment is required.  We must, therefore, perceive compelling evidence for our partners, our customers, and ourselves that the opportunity allows full cost recovery and a reasonable profit. Given this disparate economic view of the world (and anecdotal evidence suggests that it is correct because history has shown that our competitors lower their prices for hazardous waste services when we enter the multi-customer market as we did in Canada and Australia and raise prices when we exit), it is essential that national authorities define and communicate long term, acceptable standards. A level playing field leads, we believe, to improved environmental stewardship and lower long-term costs, but with the reality of external forces that drive the need for regulation, any company that thinks a better solution will, in and of itself, dominate the market is in for a very rude awakening.  There is no environmental stewardship component on most customers’ balance sheets.

CEOCFOinterviews:   Tell me a little bit about the cash and credit position of the company today.

Mr. Arnold: We closed our 2002 books in December with about $3.7 million in cash and no debt, and here I refer to Canadian dollars because we are a Canadian company. We anticipated, several years ago, that we were well positioned to win important contracts that would provide a stable opportunity for growth, but recognized that the timing of these awards was beyond our control.  So, we took the opportunity for equity financing to assure that the company had sufficient cash to be there when the customers were ready.  We control our cash burn very carefully and are quite selective on where we spend our engineering and development dollars.  We are also very careful on where we place our long-term business development dollars. We do expect to initiate new work this year, all of which will have multi-year consequences and reinforce the strength of our company.  It is important to know that the markets in which we have invested substantial time and money are continuing to deliver the signals that we made the right decision, and that the company has the financial resources to succeed.

CEOCFOinterviews: Do you own and maintain much equipment or do you actually purchase it and use it at the site when you are doing a job?

Mr. Arnold: Principally, the latter.  We have a well-defined process that we implement at appropriate scale for each customer.  In each case we design and construct a system that is calibrated to the unique waste destruction requirements and site infrastructure of the customer.  Our capital systems are largely created with off the shelf, industry standard components, and castings and metal fabrication services from suppliers that we have worked with in the past.   For the most part, we do not maintain an inventory of spare parts and accessories.

CEOCFOinterviews: You sound very well positioned for moving forward.


Mr. Arnold: We are comfortable in our current position and optimistic for the future. I am frequently asked the inevitable question: should I invest in your company?  My answer is that we are a development company with all the risk of uncertainty and upside potential that this entails. We are a company that generates an aggressive market response when we succeed because, when we get it right, we control a lot of the turf.  We are, however, in a tough market; its difficult to change the way societies solve problems.  On the bright side, the company is standing in a space that was one occupied by well funded corporations that offered the same potential, but who failed because of less efficient technology and poor cash management.   Our markets are valued in the billions of dollars worldwide, we understand their dynamics with sufficient clarity to succeed, and we may have weathered the worst of the storm associated with barriers to entry.

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