EcoSynthetix Reports Second Quarter 2015 Results

BURLINGTON, ON, Aug. 6, 2015 /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 and six months ended June 30, 2015. Financial references are in U.S. dollars unless otherwise indicated.

Q2 2015 Highlights

• Accelerated select wood composite accounts to advanced-stage, industrial-scale trials – a strong indication of a healthy pipeline and ability to commercialize DuraBind in 2015;
• Recorded net sales of $4.1 million for the second quarter of 2015 compared to $4.5 million for the same period last year;
• Decreased adjusted EBITDA loss from $3.3 million in the second quarter of 2014 to $2.0 million in the same period in 2015, an improvement of $1.3M or 39%; and,
• Reported cash on hand of $62.2 million at the end of June 30, 2015.

Subsequent to Quarter-End

• Secured a marketing agreement with leading speciality chemicals supplier, Amazon Papyrus, to market, sell and distribute the EcoSphere biolatex solution in China.

"In the second quarter, we began to see clear progress from the strategic growth plan we announced in early 2015," stated Jeff MacDonald, CEO of EcoSynthetix. "Despite continued pricing pressure in the paper market in the first part of the year, we have been able to achieve resource efficiencies, increased volumes and reduced production costs while providing our customers with continued positive returns. In addition to our progress in paper, we have further advanced the trial activity of several industrial-stage wood composite accounts and have expanded our overall pipeline. As we look towards the remainder of 2015, we remain confident that we can commercialize our DuraBind solution in the near-term and expand our presence in paper."

Outlook

EcoSynthetix's continued focus on product innovation, market diversification and disciplined organizational growth has created a strong foundation for the Company to return to its growth trajectory in 2015.

1. Defined product pipeline

EcoSynthetix has allocated development resources to select projects, in a targeted and disciplined manner, in order to expand its bio-based product portfolio. The Company is focused on opportunities that demonstrate both technical feasibility and strong commercial value in the short and long-term.

In addition to its existing bio-solutions for the paper coating and wood composites space, EcoSphere and DuraBind, respectively, EcoSynthetix is developing a defined number of additional products using its proprietary chemistries and manufacturing processes.

The Company continues to invest in a small number of longer-term development opportunities, including those in conjunction with its university partners.

2. Diversified business verticals

EcoSynthetix is focused on expanding its presence in paper while also commercializing its offerings in new markets, including building products.

EcoSynthetix has identified applications for its bio-based solutions across targeted segments of the paper value chain where it can offer a strong value proposition. The Company believes that it can meaningfully expand its foothold in this industry. As such, it has signed a marketing agreement with a leading Asian specialty chemicals supplier, Amazon Papyrus, to market, sell and distribute EcoSphere biolatex in China. The relationship will allow the Company to tap into an important and growing market in the pulp and paper industry by getting the EcoSphere product in front of key decision makers in the near-term. The Company anticipates that building a strong presence in China will be beneficial as it looks to introduce other bio-based solutions across the paper value chain over the longer-term.

The Company continues to run advanced-stage, industrial-scale trials of its DuraBind solution with multiple wood composite accounts. EcoSynthetix expects that its customers in advanced trials, which have already pressed, cut and laminated boards using the DuraBind solution, will move to multiple shift testing in the second half of 2015. This continued commitment by wood composite mills is a strong indication that the Company remains on track for commercial success in the near-term.

3. Disciplined organizational growth

EcoSynthetix right-sized its organization in early 2015 by redeploying resources to high-priority projects with meaningful revenue potential. Today, 75% of the Company's human and financial resources are allocated towards commercializing the DuraBind solution in the wood composites space.

Going forward, prudent resource allocation will be closely tied to the Company's innovation engine and sales cycle; this approach will ensure that EcoSynthetix remains product and bottom-line driven. 

Financial Summary

Net Sales

Net sales for the three months ended June 30, 2015 were $4.1 million compared to $4.5 million in the same period last year, a decrease of $0.4 million or 10%. Net sales for the six months ended June 30, 2015 were $8.3 million compared to $9.5 million in same period last year, a decrease of $1.3 million or 13%. 

The decrease in the three and six month period ended June 30, 2015 was primarily due to the impact of the announced FutureMark paper mill closure, which accounted for $0.7 million of sales in the second quarter of 2014 and $1.3 million of sales during the six months ended June 30, 2014. Net sales were further impacted by pricing pressure as a result of unfavourable market pricing dynamics which reduced sales by $0.6M, or 13%, and $0.9 million, or 9%, in the three and six months ended June 30, 2015, respectively. The decreases in the three and six months ended June 30, 2015 were partly offset by a net increase in sales volumes of $0.9 million, or 19%, and $0.9 million, or 9%, respectively, at existing commercial accounts.

Gross Profit

Gross profit for the three months ended June 30, 2015 was $0.7 million compared to $1.0 million in the same period last year, a decrease of $0.3 million or 28%. Gross profit for the six months ended June 30, 2015 was $1.3 million compared to $1.9 million in the same period last year, a decrease of $0.7 million or 34%. The decrease during the three and six months ended June 30, 2015 was primarily due to pricing pressure partially offset by lower production costs. Gross profit adjusted for manufacturing depreciation as a percentage of sales was 22.8% and 20.6% for the three and six months ended June 30, 2015 compared to 27.7% and 26.6% during the same periods last year. 

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

Selling, general and administrative expenses (SG&A) were $2.0 million for the three months ended June 30, 2015 compared to $3.1 million in the same period last year, a decrease of $1.1 million or 35%. For the six months ended June 30, 2015, SG&A expenses were $4.0 million compared to $5.8 million in the same period last year, a decrease of $1.8 million or 31%. The decrease in both periods was primarily due to lower salaries and benefits and discretionary spending which was attributable to the workforce reduction in the first quarter of fiscal 2015 and the favourable impact of a weaker Canadian dollar versus the U.S. dollar.

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

Research and development (R&D) costs for the three months ended June 30, 2015 were $1.0 million compared to $1.2 million in the same period last year, a decrease of $0.2 million or 19%. For the six months ended June 30, 2015, R&D costs were $1.8 million compared to $2.7 million during the same period last year, a decrease of $0.9 million or 35%. The decrease during both periods was primarily due to lower salaries and benefits and lower discretionary costs due to the favourable impact of a weaker Canadian dollar versus U.S. dollar and the recognition of grants associated with funding from Bioindustrial Innovation Canada (BIC), which was announced in September 2014.

Provision for termination benefits

During the first quarter of fiscal 2015, the Company recognized $1.2 million in termination benefits as a result of a workforce reduction of approximately 20% and the employment termination of the former CEO effective May 1, 2015. As a result of this termination of employment, the former CEO is entitled to an aggregate of $0.9 million, representing a 24 month severance period, inclusive of all salary, perquisites, allowances, statutory entitlements and bonus accounts. Accordingly, the Company recorded a $0.9 million provision for termination benefits during the first quarter of the current year. The former CEO is also entitled to a maximum of 24 months of severance related to the value of long-term incentives during this period. The Company has determined that no additional amounts are owed with respect to these long-term incentives as the associated performance conditions have not been met. Accordingly, the Company ascribes no value to the long-term incentives for the 24 month severance period. If the value of the long-term incentives is disputed, the Company's potential exposure is estimated to range from nil to $0.7 million.

Foreign Currency Exchange Loss

For the three months ended June 30, 2015, foreign exchange gains were $0.1 million compared to a gain of $0.05 million during the same period last year.  The increase in foreign exchange gains was primarily due to translation gains resulting from the revaluation of cash balances denominated in Canadian dollars at June 30, 2015 and a strengthening of the Canadian dollar versus the U.S. dollar during the current quarter compared to the same period last year. 

For the six months ended June 30, 2015, foreign exchange losses were $0.5 million compared to a gain of $0.03 million during the same period last year. The increase in foreign exchange losses was primarily due to translation losses resulting from the revaluation of cash balances denominated in Canadian dollars at June 30, 2015 and a weakening of the Canadian dollar versus the U.S. dollar in the current fiscal year.

Adjusted EBITDA¹

Adjusted EBITDA loss for the three months ended June 30, 2015 was $2.0 million compared to $3.3 million in the same period last year, a decrease of $1.3 million or 39%. Adjusted EBITDA loss for the six months ended June 30, 2015 was a loss of $5.8 million compared to a loss of $6.1 million in the same period last year, a decrease of $0.3 million or 4%. 

Net Loss

Net loss for the three months ended June 30, 2015 was $2.4 million or $0.04 per common share compared to $3.7 million or $0.07 per common share in the same period last year, a decrease of $1.3 million or 35%. Net loss for the six months ended June 30, 2015 was $6.6 million or $0.12 per common share compared to $7.1 million or $0.12 per common share in the same period last year, a decrease of $0.5 million or 7%. The decrease in both periods was primarily due to a decrease in loss from operations. 

Liquidity

Cash on hand was $62.2 million at June 30, 2015, compared to $67.2 million at December 31, 2014. The decrease was principally due to cash used in operating and investing activities.   

Notice of Conference Call

EcoSynthetix will host a conference call on Friday, August 7, 2015, 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 (647) 427-7450 or (888) 231-8191. 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 for the three months ended June 30, 2015 and June 30, 2014:

About EcoSynthetix Inc. (www.ecosynthetix.com)

EcoSynthetix offers a range of engineered biopolymers that replace the non-renewable chemicals used to manufacture many products, such as paper and packaging, personal care products, insulation and wood composites. Our flagship products, EcoSphere® biolatex® and DuraBind^TM biopolymers, provide a sustainable alternative that reduces a customer's carbon footprint, decreases overall material costs and improves performance. 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 2015. 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 31, 2015. 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.

SOURCE EcoSynthetix Inc.