EcoSynthetix Inc. — Management Reports 2020

Mar 3, 2020

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis (“ MD&A ”) dated March 2, 2020 is intended to assist the readers in the understanding of EcoSynthetix Inc. and its wholly owned subsidiaries (“ EcoSynthetix ” or the “ Company ”), its business environment, strategies and performance and risk factors. It should be read in conjunction with the audited annual consolidated financial statements for the year ended December 31, 2019. Financial data has been prepared in conformity with International Financial Reporting Standards (“ IFRS ”) and using the same accounting policies and methods as those used in the Company’s audited consolidated financial statements for the year ended December 31, 2019.

The Company, together with its consolidated subsidiaries, is referred to as the “Company”, “we”, “us”, or “our”. Our functional currency and reporting currency is the U.S. dollar. Unless otherwise indicated, all references to “$” and “dollars” in this discussion and analysis mean U.S. dollars.

Certain measures used in this MD&A do not have any standardized meaning under IFRS. When used, these measures are defined in such terms as to allow the reconciliation to the closest IFRS measure. It is unlikely that these measures could be compared to similar measures presented by other companies. See “IFRS and non-IFRS Measures”.

Forward-looking statements are included in this MD&A. See "Forward-Looking Statements" below for a discussion of risks, uncertainties and assumptions relating to these statements. For a description of the risks relating to the Company, refer to the “Risk Factors” section of this MD&A and the "Risk Factors" section of the Company’s Annual Information Form dated March 2, 2020.

Forward-looking Statements and Risk Factors

Certain statements contained in this MD&A constitute forward-looking statements. All statements other than statements of historical fact may be forward-looking statements. These statements relate to, but are not limited to, future events or future performance, our expectations regarding the Company’s growth, results of operations, estimated future revenues, requirements for additional capital, production costs, future demand for latex-based products, business prospects and opportunities. Forward-looking statements are often, but not always, identified by use of words such as ‘‘may’’, ‘‘will’’, ‘‘should’’, ‘‘could’’, ‘‘seek’’, ‘‘anticipate’’, ‘‘contemplate’’, ‘‘continue’’, ‘‘expect’’, ‘‘intend’’, ‘‘plan’’, ‘‘potential’’, ‘‘budget’’, ‘‘target’’, ‘‘believe’’, ‘‘estimate’’ and similar expressions. The forward-looking statements in this document 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 2020. Such statements reflect our current views and beliefs with respect to future events, are subject to risks and uncertainties, and are based upon a number of estimates and assumptions that, while considered reasonable by us, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. 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 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.

We have made material assumptions regarding, among other things: that our intellectual property rights are adequately protected; our ability to obtain the materials necessary for the production of our products; our ability to convert prospects from the industrial trial phase into full commercial customers; our ability to market products successfully to our customers; that we will continue to possess unique intellectual property rights; changes in demand for and prices of our products or the materials required to produce those products; labour and material costs remaining consistent with our current expectations; the price and availability of substitute or competitive products; and that we do not and will not infringe third party intellectual property rights. Some of our assumptions are based upon internal estimates and analysis of current market conditions and trends, management plans and strategies, economic conditions and other factors and are necessarily subject to risks and uncertainties inherent in projecting future conditions and results.

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Some of the risks that could affect our future results and could cause those results to differ materially from those expressed in the forward-looking information include, among other things: an inability to protect, defend, enforce or use our intellectual property and/or infringement of third-party intellectual property; dependence on certain customers and changes in customer demand; the availability and price of natural feedstock’s used in the production of our products; the inability to effectively expand our production facilities; variations in our financial results; increase in industry competition; the risk of volatility in global financial conditions, as well as significant decline in general economic conditions; our ability to effectively commercially market and sell our products; our ability to protect our know-how and trade secrets; Company growth and the impact of significant operating and capital cost increases; changes in the current political and regulatory environment in which we operate; the inability to retain key personnel; changes to regulatory requirements, both regionally and internationally, governing development, production, exports, taxes, labour standards, waste disposal, and use, environmental protection, project safety and other matters; enforcement of intellectual property rights; a significant decrease in the market price of petroleum related feedstocks; a shortage of supplies, equipment and parts; the inability to secure additional government grants; a deterioration in our cash balances or liquidity; the inability to obtain equity or debt financing; the ability to acquire intellectual property; the risk of litigation; changes in government regulations and policies relating to our business; losses from hedging activities and changes in hedging strategy; insufficient insurance coverage; the impact of issuance of additional equity securities on the trading price of the Common Shares; the impact of ethical, legal and social concerns relating to genetically modified organisms and the food versus fuel debate; the risk of business interruptions; the impact of changes in interest rates; the impact of changes in foreign currency exchange; and credit risk, as well as the factors identified in the “Risk Factors” section of the Company’s Annual Information Form dated March 2, 2020. Such factors are not intended to represent a complete list of the factors that could affect us. These factors should be considered carefully and prospective investors should not place undue reliance on forwardlooking information.

Should one or more of these risks or uncertainties materialize, or should assumptions underlying those forwardlooking statements prove incorrect, actual results may vary materially from those anticipated in such forward-looking statements. Although the forward-looking statements contained in this MD&A are based upon what we believe to be reasonable assumptions, there can be no assurance that such forward-looking information will prove to be accurate and we cannot assure that actual results will be consistent with these forward-looking statements. Accordingly, readers should not place undue reliance on forward-looking statements. The information contained in this document, including the information provided under the heading ‘‘Risk Factors’’, identifies additional factors that could affect the Company’s operating results and performance. Forward-looking information contained in this MD&A is made as of March 2, 2020 and we disclaim any obligation to update any forward-looking information, whether as a result of new information, future events or results, except as may be required by applicable securities laws. Accordingly, potential investors should not place undue reliance on forward-looking information.

IFRS and Non-IFRS Measures

This MD&A 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 the Company from management’s perspective. Accordingly, they should not be considered in isolation or as a substitute for analysis of the financial information of the Company reported under IFRS. We use non-IFRS measures such as Adjusted EBITDA to provide investors with a supplemental measure of operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. We also believe that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. Our management also use non-IFRS measures in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess its ability to meet its capital expenditure and working capital requirements.

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 interest, income taxes, depreciation, amortization, impairment loss on property, plant and equipment (PP&E), accretion, and other non-cash expenses deducted in determining consolidated net income (loss).

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Overview

We are a renewable chemicals company specializing in bio-based materials that are used as inputs in a wide range of products that allow customers to reduce their use of harmful materials, such as formaldehyde and styrene-based chemicals. Our flagship products, DuraBind[®] and EcoSphere[®] , are used to manufacture wood composites, paper and paperboard, and enable performance improvements, economic benefits and sustainability. Our strategy is to commercialize a broad range of bio-based polymer and monomer products. We have developed processes that leverage “green” technology to produce bio-based materials from natural feedstocks, such as potato, tapioca and cornstarch, as an alternative to petroleum-derived feedstocks.

To date, we have developed the following two bio-based technology platforms that support broad application across a wide range of industries: (i) a biopolymer nanosphere technology that has been fully scaled and validated; and (ii) a bio-based sugar macromer technology. Our biopolymer nanosphere technology has generated two products, EcoSphere biopolymers and DuraBind biopolymers. Our bio-based sugar macromer technology has generated two products, EcoMer[®] biomonomers, EcoStix[®] bio-based pressure sensitive adhesives. Substantially all of our revenue has been generated from the sale of EcoSphere biopolymers into the paper & paperboard market.

Factors Affecting the Results of Operation

Commercialization

Our customers typically go through the following evaluation stages prior to commercial adoption of our products:

(i) laboratory evaluation; (ii) pilot scale production testing; and (iii) industrial trials representing full scale production.

Our performance is influenced by our ability to convert prospects from the industrial trial phase into full commercial customers. The industrial trial stage is an important part of the sales cycle; it requires potential customers to invest significant resources, including labour and operating expenditures, and the product must meet or surpass rigorous qualification procedures. Successfully reaching the mill trial stage with a potential customer reflects substantial interest and commitment from them.

Our financial condition and results of operations are influenced by a variety of other factors, including:

• Optimizing the formulation of existing products to allow higher substitution rates by current and new customers and the ability to effectively develop products for new markets which could be a significant source of revenue growth in the future

• Pricing of incumbent technologies and other substitutes for our products

• Feedstock, other input and production costs

Net Sales

Revenue is recognized when the Company has satisfied its performance obligations as set out in the contract with the customer, the contract has commercial substance and it is probable that the Company will collect the consideration it is entitled to on performance of its obligations in the contract. These criteria are generally met when the transfer of control of goods has occurred which typically occurs at the time of shipment or delivery, depending on the terms of the agreement. Net sales are measured based on the price specified in the sales contract net of any discounts and estimated returns at the time of sale.

Cost of sales and gross profit

Our gross profit is derived from our net sales less our cost of sales. Cost of sales includes raw material costs, contract manufacturing costs, freight costs and depreciation related to manufacturing equipment. Direct materials consist of the costs of natural feedstock and process chemicals. Cost of sales is mainly affected by the cost of natural feedstock costs and contract manufacturing costs.

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Selling, general and administrative

Selling, general and administrative expense (SG&A) primarily relates to salaries & benefits and other employee related costs which collectively represent approximately 50% of total SG&A. In addition to this, SG&A includes: travel expenses, professional fees, facility costs, foreign exchange gains and losses, insurance and marketing costs.

Research and development

Expenditures during the research phase are expensed as incurred. Expenditures during the development phase are expensed as incurred, unless they meet certain capitalization criteria . No development costs have been capitalized to date.

Our research and development expenses (R&D) consist of costs incurred to develop and test our products. Salaries & benefits related to employees directly involved in research and development activities represent approximately 35% of total R&D. In addition, R&D includes costs related to consultants, facility costs, supplies and other costs directly associated with product development. These costs are partially offset by government grants related to such expenditures.

Share-based compensation

The Company operates an equity settled, share-based compensation plan under which we receive services from employees, directors, advisors, officers, contractors and consultants as consideration for equity instruments which include share options, restricted share units (RSUs) and deferred share units (DSUs) of the Company. Share options and RSUs are subject to time-based vesting conditions and may also include vesting conditions based on the achievement of performance targets.

Depreciation

Depreciation included in operating expenses includes depreciation on property, plant and equipment not utilized in our production process.

Depreciation expense included in cost of sales relates to depreciation on property, plant and equipment associated with our production processes.

Foreign exchange (gain)/loss

Foreign exchange represents the revaluation of monetary assets and liabilities denominated in foreign currencies. The change in foreign exchange gains and losses are primarily due to foreign exchange rate fluctuations between the U.S. dollar (our functional currency) and foreign currencies on our net monetary position in those respective currencies.

Results of operations

The following is a summary of our results of operations for the three months and twelve months ended December 31, 2019 and 2018:

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Three months ended (unaudited) Change
December 31, 2019 December 31, 2018 $ %
Net sales 4,398,305 5,989,317 (1,591,012) -27%
Gross profit 1,012,936 1,194,819 (181,883) -15%
Loss from operations (864,227) (607,855) (256,372) 42%
Net loss (587,793) (348,951) (238,842) 68%
Weighted average number of shares outstanding 58,101,864 59,032,951 (931,087) -2%
Basic and diluted loss per share (0.01) (0.01) (0.00) 71%
Adjusted EBITDA [1] loss (237,330) (69,590) (167,740) 241%
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Twelve months ended (unaudited) Change
December 31, 2019 December 31, 2018 $ %
Net sales 18,446,922 22,799,329 (4,352,407) -19%
Gross profit 4,029,725 4,496,347 (466,622) -10%
Loss from operations (2,562,704) (3,457,642) 894,938 -26%
Net loss (1,454,058) (2,530,758) 1,076,700 -43%
Weighted average number of shares outstanding 58,297,045 59,498,498 (1,201,453) -2%
Basic and diluted loss per share (0.02) (0.04) 0.02 -41%
Adjusted EBITDA [1] loss (397,020) (1,428,301) 1,031,281 -72%
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[1] Refer to “IFRS and Non-IFRS Measures” section in this MD&A

Net Sales – Net sales for the three months ended December 31, 2019 were $4.4 million compared to $6.0 million in the same period last year, a decrease of $1.6 million or 27%. The decrease was primarily due to lower sales volumes. Net sales for the twelve months ended December 31, 2019 were $18.4 million compared to $22.8 million in the same period last year, a decrease of $4.4 million or 19%. The decrease in sales during the quarter and fiscal year was primarily due to lower sales volumes caused by continued challenging market dynamics within the paper market. U.S. shipments of coated free sheet papers declined 10% compared to December 2018 as reported by the American Forest & Paper Association. Lower market demand for coated paper impacts demand for the Company’s biopolymers. Also impacting sales in 2019 was the loss of business at a European Paperboard mill announced in the first quarter of fiscal 2019 which reduced sales by $1.3 million for the twelve months ended December 31, 2019.

Gross profit – Gross profit for the three months ended December 31, 2019 was $1.0 million compared to $1.2 million in the same period last year, a decrease of $0.2 million or 15%. Gross profit for the twelve months ended December 31, 2019 was $4.0 million compared to $4.5 million in the same period last year, a decrease of $0.5 million or 10%. The decrease during the period and year was primarily due to lower sales volume partially offset by lower manufacturing costs.

Gross profit as a percentage of sales was 23.0% and 21.8% for the three months and twelve months ended December 31, 2019, respectively, compared to 19.9% and 19.7% in the same periods last year. Gross profit as a percentage of sales adjusted for manufacturing depreciation was 27.8% and 26.0% for the three months and twelve months ended December 31, 2019, respectively, compared to 23.5% and 23.4% in the same periods last year. The increases in gross profit as a percentage of sales and gross profit as a percentage of sales adjusted for manufacturing depreciation in both periods were primarily due to lower manufacturing costs.

Operating Expenses

The following table sets forth the breakdown of our operating expenses by category during the three months and twelve months ended December 31, 2019 and 2018:

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Three months ended ended (unaudited) Change
December 31, 2019 December 31, 2018 $ %
Selling, general and administrative 1,408,141 1,391,958 16,183 1%
Research and development 469,022 410,716 58,306 14%
Total operating expenses 1,877,163 1,802,674 74,489 4%
Twelve months ended ended Change
December 31, 2019 December 31, 2018 $ %
Selling, general and administrative 4,849,977 5,511,936 (661,959) -12%
Research and development 1,742,452 2,219,275 (476,823) -21%
Termination benefits - 222,778 (222,778) -100%
Total operating expenses 6,592,429 7,953,989 (1,361,560) -17%
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Selling, general and administrative (SG&A) – SG&A expenses for the three months ended December 31, 2019 were $1.4 million which is comparable to the same period last year. SG&A expenses for the twelve months ended December 31, 2019 were $4.8 million compared to $5.5 million in the same period last year, a decrease of $0.7 million or 12%. The decrease was primarily due to lower people related costs, a change in foreign exchange revaluation gains and losses and lower discretionary expenses. Changes in foreign exchange revaluation gains and losses are 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 lower headcount.

Research and development (R&D) – R&D expenses for the three months ended December 31, 2019 were $0.5 million compared to $0.4 million in the same period last year, an increase of $0.1 million or 14%. The increase was primarily due to lower government grants recognized during the period. R&D expenses for the twelve months ended December 31, 2019 were $1.7 million compared to $2.2 million, a decrease of $0.5 million or 21%. The decrease was primarily due to lower people related costs and discretionary spend. Rent expense included in R&D was $0.2 million lower and depreciation expense was $0.2 million higher during the twelve months ended December 31, 2019 due to the adoption of IFRS 16, Leases, effective January 1, 2019

R&D expense as a percentage of sales was 11% and 9% for the three months and twelve months ended December 31, 2019, respectively, compared to 7% and 10% in the same periods last year. The Company’s R&D efforts continue to focus on further enhancing value for our existing products and expanding addressable opportunities.

Termination benefits – Termination benefits for the twelve months ended December 31, 2019 were nil compared to $0.2 million in the same period last year. The termination benefits recorded in the prior year relate to a cost reduction plan that was implemented during the first quarter of fiscal 2018.

Loss from operations – Loss from operations for the three months ended December 31, 2019 was $0.9 million compared to $0.6 million in the same period last year, an increase of $0.3 million or 42%. The increase was primarily due to lower gross profit and higher operating expenses. Loss from operations for the twelve months ended December 31, 2019 was $2.6 million compared to $3.5 million in the same period last year, a decrease of $0.9 million or 26%. The decrease was primarily due to lower operating expenses partly offset by lower gross profit.

Net Loss – Net loss for the three months ended December 31, 2019 was $0.6 million, or $0.01 net loss per common share, compared $0.3 million, or $0.01 net loss per common share, in the same period last year, an increase of $0.2 million or 68%. The increase was primarily due to lower gross profit and higher operating expenses. Net loss for the twelve months ended December 31, 2019 was $1.5 million, or $0.02 net loss per common share, compared to $2.5 million, or $0.04 net loss per common share, in the same period last year. The decrease in net loss and net loss per common share was primarily due to lower operating expenses partly offset by lower gross profit. Financial Condition

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December 31 December 31, Change
2019 2018 $ %
Total current assets 47,980,732 50,182,346 (2,201,614) -4%
Total assets 54,710,103 56,357,244 (1,647,141) -3%
Total current liabilities 1,360,568 2,255,430 (894,862) -40%
Total liabilities 2,537,211 2,255,430 281,781 12%
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Total current assets – Total current assets at December 31, 2019 were $48.0 million compared to $50.2 million at December 31, 2018, a decrease of $2.2 million or 4%. The decrease was primarily due to lower cash, accounts receivable and inventory partly offset by an increase in short-term investments.

Total assets – Total assets at December 31, 2019 were $54.7 million compared to $56.4 million at December 31, 2018, a decrease of $1.6 million or 3%. The change was due to an increase in PP&E of $0.6 million offset by a decrease in total current assets of $2.2 million. The increase in PP&E was primarily due to the recognition of a right of use asset of $1.6 million on adoption of IFRS 16 Leases, as well as purchases of PP&E of $0.4 million. This was partly offset by $1.4 million in depreciation of PP&E during the period.

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Total current liabilities – Total current liabilities at December 31, 2019 were $1.4 million compared to $2.3 million at December 31, 2018, a decrease of $0.9 million or 40%. The decrease was primarily due to the timing of settlement of trade payables and accrued liabilities.

Total liabilities – Total liabilities at December 31, 2019 were $2.5 million compared to $2.3 million at December 31, 2018, an increase of $0.3 million or 12%. The increase was due to the recognition of $1.2 million non-current lease liability offset by a decrease in current liabilities of $0.9 million. The increase in lease liability was due to the implementation of IFRS 16, Leases.

Liquidity and Capital Resources

We currently fund our business operations through cash flow generated from our operations and from existing cash. We believe that ongoing operations, working capital and associated cash flow in addition to our cash resources provide sufficient liquidity to support our ongoing business operations for the foreseeable future.

Below is a summary of our cash flows provided by / (used in) operating activities, financing activities and investing activities for the three and twelve months ended December 31, 2019 and 2018:

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Three months ended (unaudited) Change
December 31, 2019 December 31, 2018 $ %
Cash provided by operating activities 115,099 58,718 56,381 96%
Cash used in investing activities (251,898) (201,302) (50,596) 25%
Cash used in financing activities (721,749) (1,951,194) 1,229,445 -63%
Effect of exchange rate changes on cash 47,483 (124,190) 171,673 -138%
Decrease in cash (811,065) (2,217,968) 1,406,903 -63%
Beginning cash 8,786,778 16,425,310 (7,638,532) -47%
Ending cash 7,975,713 14,207,342 (6,231,629) -44%
Twelve months ended Change
December 31, 2019 December 31, 2018 $ %
Cash provided by (used in) operating activities 705,612 (1,931,254) 2,636,866 -137%
Cash used in investing activities (5,458,172) (218,865) (5,239,307) 2394%
Cash used in financing activities (1,446,914) (2,545,407) 1,098,493 -43%
Effect of exchange rate changes on cash (32,155) (213,960) 181,805 -85%
Decrease in cash (6,231,629) (4,909,486) (1,322,143) 27%
Beginning cash 14,207,342 19,116,828 (4,909,486) -26%
Ending cash 7,975,713 14,207,342 (6,231,629) -44%
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Cash provided by (used in) operating activities – Cash provided by operating activities for the three months ended December 31, 2019 were $0.1 million which is comparable to the same period last year.

Cash provided by operating activities for the twelve months ended December 31, 2019 were $0.7 million compared to cash used in operating activities of $1.9 million in the same period last year, a change of $2.6 million or 137%. The change was primarily due to a decrease in net loss adjusted for non-cash items, a decrease in cash used towards non-cash working capital and an increase in interest received on short-term investments. The decrease in net loss adjusted for non-cash items was primarily due to lower operating expenses partly offset by lower gross profit.

Cash used in investing activities – Cash used in investing activities for the three months ended December 31, 2019 were $0.3 million compared to $0.2 million in the same period last year. Both years relate to purchases of PP&E related to the Company’s production facilities. Cash used in investing activities during the twelve months ended December 31, 2019 were $5.4 million compared to $0.2 million in the same period last year, an increase of $5.2 million. The increase was due to the purchase of a $5.0 million short-term investment which matures in January 2020 and a $0.2 million increase in purchases of PP&E related to the Company’s production facilities.

Cash used in financing activities – Cash used in financing activities during the three months ended December 31, 2019 were $0.7 million compared to cash used in financing activities of $1.9 million in the same period last year, a

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decrease of $1.2 million or 63%. The change is due to a decrease in common shares repurchased through a normal course issuers bid (NCIB).

Cash used in financing activities during the twelve months ended December 31, 2019 were $1.4 million compared to $2.5 million in the same period last year, a decrease of $1.1 million or 43%. During the twelve months ended December 31, 2019, $1.5 million worth of common shares were repurchased through the NCIB and payments of $0.2 million were made towards the lease liability which was offset by $0.2 million in proceeds received on the exercise of common share options. During the twelve months ended December 31, 2018, $2.9 million worth of common shares were repurchased through the NCIB which was offset by $0.4 million in proceeds received from the exercise of common share options.

Effect of exchange rate changes on cash – The effect of exchange rate changes on cash is primarily due to the revaluation of cash denominated in Canadian dollars and the impact of currency fluctuations between the Canadian dollar and U.S. dollar.

Capital Management

The Company’s objective in managing capital is to ensure sufficient liquidity to pursue its growth strategy and fund research and product development, while at the same time taking a conservative approach towards managing financial risk. The Company’s capital is composed of the net cash received related to common shares and shareholder option exercises. Our primary uses of capital are financing operations, increasing non-cash working capital and capital expenditures. We currently fund these requirements from existing cash resources and cash raised through share issuances. Our objectives when managing capital are to ensure that we will continue to have enough liquidity to provide our products and services to our customers and a return to our shareholders. We monitor our capital on the basis of the adequacy of our cash resources to fund our business plan. In order to maximize the capacity to finance our ongoing growth, we do not currently pay a dividend to holders of our common shares.

Commitments

The Company entered the following contractual obligations in the normal course of operations that were not recognized as liabilities as at December 31, 2019:

• I. The Company was committed to purchases of feedstock of approximately $2.3 million over the next twelve months. The Company may enter into feedstock contracts to secure raw material availability over a twelve to twenty-four month period based on market pricing at the time of purchase.

• II. The Company is committed to purchasing $0.5 million of other production raw materials and equipment related to its production facilities over the next twelve months.

Summary of Quarterly Results

The following table sets out selected financial information for each of the eight most recent quarters, the latest of which ended December 31, 2019. This information has been prepared on the same basis as the annual financial statements and all necessary adjustments have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the quarterly financial statements of the Company and the related notes to those statements.

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Three months ended (unaudited)
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2019 2019 2019 2019 2018 2018 2018 2018
Net sales 4,398,305 4,505,533 5,074,363 4,468,721 5,989,317 5,566,269 5,796,669 5,447,074
Gross profit 1,012,936 1,004,569 1,021,148 991,072 1,194,819 1,060,359 1,189,641 1,051,528
Loss from operations (864,227) (594,751) (475,445) (628,281) (607,855) (536,080) (934,878) (1,378,829)
Net loss (587,793) (312,441) (200,588) (353,236) (348,951) (307,582) (709,018) (1,165,207)
Weighted average number of shares outstanding 58,101,864 58,378,346 58,418,779 58,290,368 59,032,951 59,585,638 59,701,785 59,679,767
Basic and diluted loss per share (0.01) (0.01) (0.00) (0.01) (0.01) (0.01) (0.01) (0.02)
Adjusted EBITDA [(1)] loss (237,330) (40,330) 25,695 (145,055) (69,590) (4,047) (479,220) (875,444)
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The following table reconciles net loss to Adjusted EBITDA for the three months ended:

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Three months ended (unaudited)
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2019 2019 2019 2019 2018 2018 2018 2018
Net loss (587,793) (312,441) (200,588) (353,236) (348,951) (307,582) (709,018) (1,165,207)
Depreciation 363,391 327,711 387,330 302,629 312,908 300,497 307,570 327,971
Share-based compensation 263,506 226,710 113,810 180,597 225,357 231,536 148,088 175,414
Interest income (276,434) (282,310) (274,857) (275,045) (258,904) (228,498) (225,860) (213,622)
Adjusted EBITDA [(1)] loss (237,330) (40,330) 25,695 (145,055) (69,590) (4,047) (479,220) (875,444)
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Adjusted EBITDA

The following table reconciles net loss to Adjusted EBITDA for the twelve months ended December 31, 2019 and 2018

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Twelve months ended (unaudited) Change
December 31, 2019 December 31, 2018 $ %
Net loss (1,454,058) (2,530,758) 1,076,700 -43%
Depreciation 1,381,061 1,248,946 132,115 11%
Share-based compensation 784,623 780,395 4,228 1%
Interest income (1,108,646) (926,884) (181,762) 20%
Adjusted EBITDA [ (1)] loss (397,020) (1,428,301) 1,031,281 -72%
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Notes: (1) Refer to “IFRS and Non-IFRS Measures” section in this MD&A

Adjusted EBITDA for the three months ended December 31, 2019 was $0.2 million loss compared to a loss of $0.1 million in the same period last year. The increase in loss was due to lower gross profit and higher operating expenses. Adjusted EBITDA loss for the twelve months ended December 31, 2019 was a loss of $0.4 million compared to a loss of $1.4 million in the same period last year, a decrease of $1.0 million or 72%. The decrease was primarily due to lower operating expenses partly offset by lower gross profit.

Internal control over financial reporting

There were no changes in the Company’s internal control over financial reporting during the three and twelve months ended December 31, 2019 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

Risk Factors

For a detailed description of the risk factors associated with the Company, refer to the “Risk Factors” section of the Company’s Annual Information Form dated March 2, 2020. The Company is not aware of any significant changes to the Company’s risk factors from those disclosed at that time.

Additional Information

Additional information relating to EcoSynthetix Inc., including continuous disclosure documents, are available on SEDAR at www.sedar.com.

Common Share Trading Information

The Company’s common shares trade on the Toronto Stock Exchange under the symbol “ECO”. As at March 2, 2020, the Company had the equivalent of 57,996,913 common shares issued and outstanding. If all outstanding share options were exercised and assuming the settlement of outstanding RSU’s and DSU’s through common shares, there would be the equivalent of 63,880,936 common shares issued and outstanding on a fully diluted basis.

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Outlook

Significant progress has been made towards achieving sustainable growth and profitability. EcoSynthetix has lowered its cost footprint, invested in leadership and talent, focused its R&D efforts and pursued a growth strategy which leverages its foundation in paper and paperboard packaging and the commercialization of DuraBind within the building materials space.

EcoSynthetix will continue to execute on the following priorities to drive profitable growth:

1. Drive Growth in Paper & Paperboard and Wood Composites Markets

The Company’s relationships with key customers in the paper & paperboard market continue to provide a strong foundation for its business and EcoSynthetix will continue to pursue growth opportunities in this market.

The Company continues its efforts in expanding its presence in the building materials space. Consumer and regulatory factors are creating demand for no-added formaldehyde (NAF) products, and the Company believes it is well-positioned to capitalize on these trends to grow its share of the $15 billion annual wood composite binder market. Manufacturers are actively pursuing new technologies as alternatives to conventional formaldehyde binders. EcoSynthetix has expanded its relationship with its first key customer, won new lines and expanded the number of SKUs that use DuraBind. The key targets within the wood composites market are highly engaged and the Company continues to make progress with its commercialization activities. The conversion of its robust pipeline of industrial trial opportunities into commercial accounts remains its highest priority.

2. Product Development

The Company’s product development efforts focus on applications for its existing EcoSphere and DuraBind products in market segments where their value proposition is strong, and on further improvements to both product lines to further enhance value and expand addressable opportunities. The Company is also pursuing new product categories in specific markets where strong commercial interest from recognized leaders exist.

3. Top line growth with a sustainable bottom line

The Company expects to continue making investments in areas of the business that allow it to accelerate growth while retaining a disciplined approach toward its cost structure. The Company remains confident in its ability to execute on the opportunities it has identified in the wood composites and the paper and paperboard markets.

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