EcoSynthetix Reports First Quarter 2019 Results

BURLINGTON, ON, May 8, 2019 /CNW/ - EcoSynthetix Inc. (TSX: ECO) ("EcoSynthetix" or the "Company"), a renewable chemicals company that produces a portfolio of commercially proven bio-based products, today announced its financial and operational results for the three months (Q1 2019) ended March 31, 2019. Financial references are in U.S. dollars unless otherwise indicated.

Highlights

• Recorded net sales of $4.5 million in Q1 2019, compared to $5.4 million in Q1 2018
• Net loss of $0.4 million in Q1 2019, an improvement of 70%, compared to a loss of $1.2 million in Q1 2018
• Adjusted EBITDA loss of $0.1 million in Q1 2019, compared to a loss of $0.9 million in Q1 2018
• Cash used in operating activities was $0.1 million in Q1 2019, an improvement of $1.7 million or 97%, compared to Q1 2018
• Announced funding of up to C$2.0 million over 5 years from the Federal Government's Canadian Agriculture Partnership for the development of the Company's wood composites resin DuraBind™, subsequent to the end of the quarter
• Maintained a strong balance sheet with cash and short-term investments of $44.3 million as at March 31, 2019

"Our primary commercial customer in wood composites continues to support the recent launch of their No-Added Formaldehyde engineered wood product. In paper and paperboard, we experienced significant lumpiness in sales volumes during the quarter as a result of the timing of procurement and a European mill that is no longer using EcoSphere®," said Jeff MacDonald, CEO of EcoSynthetix. "We continue to demonstrate strict cost discipline as demonstrated by our improved adjusted EBITDA position on a year-over-year basis. We are committed to running a profitable business in 2019. Further penetration of the wood composites market is our number one priority. Consumers, retailers and manufacturers are increasingly searching for sustainable and healthy alternatives to traditional resin systems. Our bio-based platform offers them a viable solution."

Financial Summary

Net Sales

Net sales were $4.5 million for Q1 2019, compared to $5.4 million in the corresponding period in 2018. The 18% change was primarily due to lower sales volume of $1.3 million, or 23%, due to unfavourable market conditions. Sales volumes were impacted by inventory de-stocking at a distributor in Asia Pacific, which has since normalized, and the loss of business at a European paperboard mill which reduced sales volume $0.6 million and $0.4 million, respectively. These decreases were partly offset by an increase in average selling prices due to favourable customer mix, which improved sales $0.3 million or 5%.

Gross Profit

Gross profit was $1.0 million for Q1 2019, compared to $1.1 million in the corresponding period in 2018. The 6% decrease was primarily due to lower sales volumes, partly offset by higher average selling prices.

Gross profit as a percentage of sales was 22.2% for Q1 2019, compared to 19.3% in the corresponding period in 2018. Gross profit as a percentage of sales adjusted for manufacturing depreciation was 25.5% for Q1 2019, compared to 23.4% for the corresponding period in 2018. The improvements were primarily due to higher average selling prices due to favourable customer mix. 

Selling, General and Administrative

Selling, general and administrative expenses (SG&A) were $1.2 million for Q1 2019, compared to $1.5 million for the corresponding period in 2018. The decrease was primarily due to $0.1 million of foreign exchange gains and lower people related costs and discretionary spending. The change in foreign exchange was primarily due to the translation of cash balances denominated in Canadian dollars and foreign exchange rate fluctuations between the Canadian dollar and U.S. dollar. The decrease in people related costs and discretionary spending was primarily due to a cost reduction plan which was implemented during the first quarter of 2018.

SG&A includes share-based compensation expense, which was $0.2 million for Q1 2019, unchanged from the same period in 2018.  Changes in share-based compensation expense are primarily due to the achievement of certain time-based and performance-based vesting conditions related to stock options and restricted share units in addition to the issuance of share-based awards. SG&A excluding share-based compensation expense was $1.0 million in Q1 2019 compared to $1.3 million in the same period in 2018.

Research and Development

Research and development (R&D) costs were $0.4 million for Q1 2019, compared to $0.7 million for the corresponding period in 2018. The change was primarily due to lower people related expenses and discretionary spending. R&D expenses were $0.1 million lower in Q1 2019 due to the adoption of IFRS 16, Leases, which was implemented using the modified retrospective method on January 1, 2019.  Under IFRS 16, the Company recognized a new right of use asset under property, plant & equipment of $1.5 million and a corresponding short-term and long-term lease liability of $0.2 million and $1.3 million, respectively, on January 1, 2019. 

Depreciation expense included in R&D was $0.1 million for Q1 2019, which was flat compared to the corresponding period in 2018. R&D excluding depreciation expense was $0.3 million for Q1 2019, compared to $0.6 million in the corresponding period in 2018.

Termination benefits

Termination benefits were nil for Q1 2019, compared to $0.2 million in corresponding period in 2018.  Termination benefits recorded in 2018 related to a cost reduction plan implemented in the first quarter of 2018.

Net Loss

Net loss was $0.4 million, or $0.01 per common share, for Q1 2019, compared to $1.2 million, or $0.02 per common share, for the corresponding period in 2018. The improvement was principally due to lower operating expenses.

Adjusted EBITDA¹

Adjusted EBITDA loss was $0.1 million for Q1 2019, compared to a loss of $0.9 million for the corresponding period in 2018. The 83% improvement was primarily due to lower operating expenses.

Liquidity

Cash on hand and short-term investments were $44.3 million as at March 31, 2019, compared to $44.8 million as at December 31, 2018. Cash on hand at March 31, 2019, excluding the $35.2 million in short-term investments, was $9.1 million. Since the normal course issuers bid was announced in April 2018, The Company purchased and cancelled 2,087,500 common shares for consideration of $3.0 million.

Notice of Conference Call

EcoSynthetix will host a conference call Thursday, May 9, 2019 at 8:30 AM ET to discuss its financial results.  Jeff MacDonald, CEO, and Robert Haire, CFO, will co-chair the call. All interested parties can join the call by dialling [phone] or [phone]. Please dial in 15 minutes prior to the call to secure a line. A live audio webcast of the conference call will also be available at www.ecosynthetix.com. The presentation will be accompanied by slides, which will be available via the webcast link and the Company's website. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast.

¹Non-IFRS Financial Measures
This press release makes reference to certain non-IFRS measures. These non-IFRS measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing a further understanding of results of operations of EcoSynthetix from management's perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of the financial information of EcoSynthetix reported under IFRS. The Company uses non-IFRS measures such as Adjusted EBITDA to provide investors with a supplemental measure of operating performance and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. Management also believes that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. Management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess the Company's ability to meet its capital expenditure and working capital requirements.

Adjusted EBITDA is not a measure recognized under IFRS and does not have a standardized meaning prescribed by IFRS. See "IFRS and Non-IFRS Measures." The Company presents Adjusted EBITDA because the Company believes it facilitates investors' use of operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting relative interest expense), the book amortization of intangibles (affecting relative amortization expense) and the age and book value of property and equipment (affecting relative depreciation expense). The Company also presents Adjusted EBITDA because it believes it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. Adjusted EBITDA as presented herein are not recognized measures under IFRS and should not be considered as an alternative to operating income or net income as measures of operating results or an alternative to cash flows as measures of liquidity. Adjusted EBITDA is defined as consolidated net income (loss) before net interest expense, income taxes, depreciation, amortization, other non-cash expenses and charges deducted in determining consolidated net income (loss).

The following table reconciles net loss to Adjusted EBITDA loss for the three months ended March 31, 2019 and March 31, 2018:

	Three months ended March 31, 2019 (unaudited)	Three months ended March 31, 2018 (unaudited)
Net Loss	(353,236)	(1,165,207)
Depreciation	302,629	327,971
Share-based Compensation	180,597	175,414
Interest Income	(275,045)	(213,622)
Adjusted EBITDA loss	(145,055)	(875,444)

About EcoSynthetix Inc. (www.ecosynthetix.com)
EcoSynthetix offers a range of sustainable engineered biopolymers that allow customers to reduce their use of harmful materials, such as formaldehyde and styrene-based chemicals. The Company's flagship products, DuraBind™ and EcoSphere®, are used to manufacture wood composites, paper and packaging, and enable performance improvements, economic benefits and sustainability. The Company is publicly traded on the Toronto Stock Exchange (T:ECO).

Forward-Looking Statements

Certain statements in this Press Release constitute "forward-looking" statements that involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, objectives or achievements of the Company, or industry results, to be materially different from any future results, performance, objectives or achievements expressed or implied by such forward looking statements. The forward-looking statements in this Press Release include, but are not limited to, statements regarding the Company's plans to execute its commercial strategy, convert late-stage industrial trial prospects into customers and expand the number of lines and the volumes at existing customers, and other statements regarding the Company's plans and expectations in 2019. These statements reflect our current views regarding future events and operating performance and are based on information currently available to us, and speak only as of the date of this Press Release. These forward-looking statements involve a number of risks, uncertainties and assumptions and should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such performance or results will be achieved. Those assumptions and risks include, but are not limited to, the Company's ability to successfully allocate capital as needed and to develop new products, as well as the fact that our results of operations and business outlook are subject to significant risk, volatility and uncertainty. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including the factors identified in the "Risk Factors" section of the Company's Annual Information Form dated March 4, 2019. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described in this Press Release as intended, planned, anticipated, believed, estimated or expected. Unless required by applicable securities law, we do not intend and do not assume any obligation to update these forward-looking statements.

EcoSynthetix Inc.
Consolidated Balance Sheets
(expressed in US dollars)
	(Unaudited)
	March 31, 2019	December 31, 2018
Assets
Current assets
Cash	9,050,178	14,207,342
Short-term investments	35,204,658	30,635,400
Accounts receivable	1,629,316	2,347,622
Inventory	3,573,458	2,722,742
Government grants receivable	136,362	140,000
Prepaid expenses	89,523	129,240
	49,683,495	50,182,346
Non-current assets
Property, plant and equipment	7,412,700	6,174,898
Total assets	57,096,195	56,357,244
Liabilities
Current liabilities
Trade accounts payables and accrued liabilities	1,869,463	2,255,430
Non-current liabilities
Lease liability	1,308,319	-
Total liabilities	3,177,782	2,255,430
Shareholders' Equity
Common shares	491,747,498	491,618,125
Contributed surplus	9,839,265	9,798,803
Accumulated deficit	(447,668,350)	(447,315,114)
Total shareholders' equity	53,918,413	54,101,814
Total liabilities and shareholders' equity	57,096,195	56,357,244
EcoSynthetix Inc.
Consolidated Statements of Operations and Comprehensive Loss
For the three months ended March 31, 2019 and 2018
(Unaudited)
(expressed in US dollars, unless otherwise noted)	Three months ended March 31,
	2019	2018
Net sales	4,468,721	5,447,074
Cost of sales	3,477,649	4,395,546
Gross profit on sales	991,072	1,051,528
Expenses
Selling, general and administrative	1,173,329	1,457,749
Research and development	446,024	749,830
Termination benefits	-	222,779
	1,619,353	2,430,357
Loss from operations	(628,281)	(1,378,829)
Net interest income	275,045	213,622
Net loss and comprehensive loss	(353,236)	(1,165,207)
Basic and diluted loss per common share	(0.01)	(0.02)
Weighted average number of common shares outstanding	58,290,368	59,679,767
EcoSynthetix Inc.
Consolidated Statements of Cash Flows
For the three months ended March 31, 2019 and 2018
(Unaudited)
(expressed in US dollars)
	Three months ended March 31,
	2019	2018
Cash provided by (used in)
Operating activities
Net loss and comprehensive loss	(353,236)	(1,165,207)
Items not affecting cash
Depreciation	302,629	327,971
Share-based compensation	180,597	175,414
Unrealized foreign exchange (gain) loss	(51,832)	140,702
Other	(207,156)	(225,859)
Changes in non-cash working capital
Accounts receivable	718,306	748,341
Inventory	(794,318)	(122,588)
Government grants receivable	3,638	-
Prepaid expenses	39,717	69,419
Trade accounts payables and accrued liabilities	(543,790)	(431,597)
Accrued termination benefits	-	(39,830)
Interest received on short-term investments	655,200	187,319
	(50,245)	(1,832,597)
Investing activities
Purchase of property, plant and equipment	(78,687)	-
Receipts on mature short-term investments	30,000,000	30,000,000
Purchase of short-term investments	(35,000,000)	(30,000,000)
	(5,078,687)	-
Financing activities
Payments made on lease liability	(52,000)	-
Common shares repurchased	(59,314)	-
Exercise of common share options	48,552	60,460
	(62,762)	60,460
Effect of exchange rate changes on cash	34,530	(66,941)
Decrease in cash during the period	(5,157,164)	(1,839,078)
Cash - Beginning of period	14,207,342	19,116,828
Cash - End of period	9,050,178	17,277,750

SOURCE EcoSynthetix Inc.