EcoSynthetix Reports Second Quarter 2016 Results

BURLINGTON, ON, Aug. 10, 2016 /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 and six months ended June 30, 2016. Financial references are in U.S. dollars unless otherwise indicated.

Q2 2016 Highlights

• Expanded its DuraBind™ wood composite trial pipeline and advanced its late-stage trials with multiple prospects
• Recorded $2.9 million in net sales in the paper market in Q2 2016, despite continued depressed petroleum prices through the end of June
• Maintained a strong balance sheet with cash and term deposits of $57.4 million as at June 30, 2016
• Subsequent to the end of the quarter, the U.S. Environmental Protection Agency (EPA) finalized a rule to reduce exposure to formaldehyde vapours from composite wood products, essentially expanding the California Air Resources Board's CARB 2 emission standard to all domestically-produced and imported wood composites; one year after the rule is published, composite wood products that are sold, supplied, manufactured or imported in the U.S. will need to be labeled compliant

"Our DuraBind technology is generating significant interest from a broad range of wood composite manufacturers, as well as retailers, actively searching for alternatives to reduce formaldehyde in their products. The recent announcement from the EPA reinforces the stance many in the industry have already taken to develop products with reduced formaldehyde emissions," said Jeff MacDonald, CEO of EcoSynthetix. "Our DuraBind technology offers manufacturers comparable performance at a lower cost than other No Added Formaldehyde (NAF) alternatives. We expect to reach commercial status with our first account shortly, but even more importantly, we continue to expand our sales pipeline with new prospects and advance existing prospects through the trial process. The resin market for wood composites is a multi-billion dollar market and we believe our technology can address a broad range of applications. The success of our commercialization strategy for DuraBind remains our number one priority in 2016."

Financial Summary

Net Sales

Net sales were $2.9 million and $5.9 million for the three months ended June 30, 2016 (Q2 2016) and the six months ended June 30, 2016 (YTD 2016), respectively, compared to $4.1 million and $8.3 million in the corresponding periods last year. The changes were primarily due to lower sales volumes as a result of unfavourable market conditions in the coated paper industry. Lower sales volume in the quarterly period were a result of decreases of $0.8 million to existing accounts and $0.4 million from the closure of a North America paper mill. In the YTD 2016 period, sales volume decreased by $1.4 million to existing accounts and $0.7 million due to the closed mill, as well as, unfavourable market pricing dynamics which impacted sales volumes by $0.3 million.

Gross Profit

Gross profit was $0.5 million and $0.9 million for Q2 2016 and YTD 2016, respectively, compared to $0.7 million and $1.3 million in the corresponding periods last year. The changes were primarily due to lower sales volume in the quarterly period and lower sales volume and pricing pressure YTD 2016. These changes were partially offset by lower manufacturing production costs.

Gross profit as a percentage of sales were 15.7% and 15.9% in Q2 2016 and YTD 2016, respectively, compared to 16.8% and 15.4% in the corresponding periods last year. Gross profit as a percentage of sales adjusted for manufacturing depreciation were 22.3% and 22.6% for Q2 2016 and YTD 2016, respectively compared to 22.8% and 20.6% for the corresponding periods last year. The YTD 2016 improvement was primarily due to lower manufacturing production costs, partly offset by pricing pressure. 

Selling, General and Administrative
(Excludes share-based compensation, depreciation and amortization and foreign exchange loss or gain)

Selling, general and administrative expenses (SG&A) were $1.6 million and $3.2 million in Q2 2016 and YTD 2016, respectively, compared to $2.0 million and $4.0 million in the corresponding periods last year. The decrease during both periods was primarily due to lower people related costs and the favourable impact of the Canadian dollar versus U.S. dollar which weakened 4% and 8% during Q2 2016 and YTD 2016, respectively, compared to the same periods last year.

Provision for termination benefits

Provision for termination benefits were $0.3 million and $0.5 million in Q2 2016 and YTD 2016, respectively, compared to nil and $1.2 million in the corresponding periods last year.  During the current period, the Company reached a settlement agreement with respect to the termination of employment of the former CEO.  Accordingly, the Company recorded a provision for termination benefits of $0.5 million in the YTD 2016 period. During the six months ended June 30, 2015, the Company recognized $1.2 million in termination benefits as a result of a workforce reduction.

Research and Development
(Excludes share-based compensation, depreciation and amortization and foreign exchange loss or gain)

Research and development (R&D) costs were $1.1 million and $2.2 million in Q2 2016 and YTD 2016, respectively, compared to $1.0 million and $1.8 million in the corresponding periods last year. The increase was primarily due to higher spending related to commercialization activities for DuraBind, partly offset by the favourable impact of a weaker Canadian dollar versus U.S. dollar.

Foreign Currency Exchange Gain (Loss)

Foreign exchange gains (loss) were nil and $0.2 in Q2 2016 and YTD 2016, respectively, compared to $0.1 million and $(0.5) million in the corresponding periods last year. The changes were primarily due to the translation of cash balances denominated in Canadian dollars and the strengthening of the Canadian dollar versus U.S. dollar.  The Canadian dollar versus U.S. dollar month-end spot rate strengthened 6% at June 30, 2016 compared to December 31, 2015. During the same period in fiscal 2015, the Canadian dollar versus U.S. dollar month-end spot rate weakened 7%.

Adjusted EBITDA

Adjusted EBITDA loss was $2.3 million and $4.4 million in Q2 2016 and YTD 2016, respectively, compared to $2.0 million and $5.8 million in the corresponding periods last year. The change in the quarter was primarily due to lower gross profit. The improvement in the YTD 2016 period was principally due to lower operating expenses partly offset by lower gross profit.

Net Loss

Net loss was $2.6 million, or $0.04 per common share, and $5.0 million, or $0.08 per common share, in Q2 2016 and YTD 2016, respectively, compared to $2.4 million, or $0.04 per commons share, and $6.6 million, or $0.12 per common share, for the corresponding periods last year. The $1.6 million improvement in the YTD 2016 period was principally due to lower loss from operations.

Liquidity

Cash on hand and term deposits were $57.4 million as at June 30, 2016, compared to $60.7 million as at December 31, 2015. During the first quarter, the Company purchased a $15.0 million fixed term deposit maturing on January 8, 2018. Cash on hand at June 30, 2016, excluding the term deposit, was $42.3 million.

Notice of Conference Call

EcoSynthetix will host a conference call on Thursday, August 11, 2016 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 and six months ended June 30, 2016 and June 30, 2015:

	Three months ended June 30, 2016	Three months ended June 30, 2015	Six months ended June 30, 2016	Six months ended June 30, 2015
Net Loss	$(2,644,086)	$(2,440,321)	$(5,013,308)	$(6,564,940)
Depreciation and Amortization	303,966	376,096	596,224	712,838
Share-based Compensation	155,237	127,427	297,237	162,427
Interest Income	(122,923)	(74,018)	(262,159)	(153,909)
Adjusted EBITDA loss	(2,307,806)	(2,010,816)	(4,382,006)	(5,843,584)

About EcoSynthetix Inc. (www.ecosynthetix.com)

EcoSynthetix offers a range of engineered biopolymers that replace non-renewable chemicals used to manufacture many products, such as paper and packaging, and wood composites. The Company's flagship products, EcoSphere® biolatex® and DuraBind^TM biopolymers, provide customers with a sustainable alternative that reduces the use of hazardous chemicals, improves performance and delivers economic benefits. 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 expected product pipeline, plans to expand the Company's business into new markets, the Company's ability to achieve organizational efficiencies, and other statements regarding the Company's plans and expectations in 2016. 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 30, 2016. 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.  Interim Consolidated Balance Sheets (Unaudited)
(expressed in US dollars)
	June 30, 2016		December 31, 2015
Assets
Current assets
Cash	42,335,305		60,717,658
Accounts receivable	1,659,108		1,177,719
Inventory	2,948,792		3,290,238
Government grants receivable	283,867		528,436
Prepaid expenses	230,038		242,983
	47,457,110		65,957,034
Non-current assets
Long-term term deposit	15,043,560		-
Property, plant and equipment	8,522,572		8,746,072
Total assets	71,023,242		74,703,106
Liabilities
Current liabilities
Trade accounts payable and accrued liabilities	2,131,943		1,262,709
Accrued termination benefits	1,444,728		1,277,755
Total liabilities	3,576,671		2,540,464
Shareholders' Equity
Common shares	493,232,265		493,182,209
Contributed surplus	8,265,088		8,017,907
Accumulated deficit	(434,050,782)		(429,037,474)
Total shareholders' equity	67,446,571		72,162,642
Total liabilities and shareholders' equity	71,023,242		74,703,106

EcoSynthetix Inc.  Interim Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(expressed in US dollars)
	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
Net sales	2,917,010		4,094,987		5,881,480		8,264,935
Cost of sales	2,459,903		3,405,067		4,946,050		6,993,747
Gross profit on sales	457,107		689,920		935,430		1,271,188
Expenses
Selling, general and administrative	1,768,171		2,101,295		3,330,412		4,827,973
Provision for termination benefits	292,849		-		492,538		1,220,080
Research and development	1,163,096		1,102,964		2,387,947		1,941,984
	3,224,116		3,204,259		6,210,897		7,990,037
Loss from operations	(2,767,009)		(2,514,339)		(5,275,467)		(6,718,849)
Interest income	122,923		74,018		262,159		153,909
Net loss and comprehensive loss	(2,644,086)		(2,440,321)		(5,013,308)		(6,564,940)
Basic and diluted loss per common share	(0.04)		(0.04)		(0.08)		(0.12)
Weighted average number of common shares outstanding	59,277,680		56,477,460		59,276,033		56,477,460

EcoSynthetix Inc.  Interim Consolidated Statements of Cash Flows (Unaudited)
(expressed in US dollars)		Three months ended June 30,				Six months ended June 30,
		2016		2015		2016		2015
Cash provided by (used in)
Operating activities
Net loss and comprehensive loss		(2,644,086)		(2,440,321)		(5,013,308)		(6,564,940)
Items not affecting cash
	Depreciation, amortization and impairment loss	303,966		376,096		596,224		712,838
	Share-based compensation	155,237		127,427		297,237		162,427
	Unrealized foreign exchange loss (gain)	114,007		(101,944)		(47,679)		427,322
	Other	(130,632)		-		(241,783)		-
Changes in non-cash working capital
	Accounts receivable	(158,556)		(639,040)		(481,389)		(97,852)
	Inventory	(64,575)		1,340,034		303,680		1,210,858
	Government grants receivable	(118,743)		(155,022)		(252,248)		(663,415)
	Prepaid expenses	70,521		(188,493)		12,945		(91,013)
	Trade accounts payable and accrued liabilities	484,852		(980,075)		969,234		(296,663)
	Accrued termination benefits	58,758		(126,440)		166,973		820,910
		(1,929,251)		(2,787,778)		(3,690,114)		(4,379,528)
Investing activities
Cash used for purchase of intangible assets and property, plant and equipment		(157,802)		(174,656)		(434,958)		(637,147)
Purchase of long-term term deposit		-		-		(15,000,000)		-
		(157,802)		(174,656)		(15,434,958)		(637,147)
Financing activity
Proceeds from government grant		200,986		455,749		496,817		455,749
Effect of exchange rate changes on cash		32,169		86,970		245,902		(516,501)
Change in cash during the period		(1,853,898)		(2,419,715)		(18,382,353)		(5,077,427)
Cash - Beginning of period		44,189,203		64,588,258		60,717,658		67,245,970
Cash - End of period		42,335,305		62,168,543		42,335,305		62,168,543

SOURCE EcoSynthetix Inc.