Good day, ladies and gentlemen. Thank you for standing by. Welcome to the EcoSynthetix 2022 second quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided for you at that time for questions. If anyone has any difficulties hearing the conference, you may press star zero for operator assistance at any time. Listeners are reminded that portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.
For more information on EcoSynthetix risks and uncertainties related to these forward-looking statements, please refer to the company's annual information form dated February 24th, 2022, which will be posted on SEDAR. This morning's call is being recorded on Tuesday, August 9th, 2022 at 8:30 A.M. Eastern Time. I would now like to turn the call over to Mr. Jeff MacDonald, Chief Executive Officer of EcoSynthetix. Please go ahead, sir.
Thank you. Good morning, and thank you all for joining us today. Yesterday afternoon, we released our 2022 second quarter results, which you can find on our website at ecosynthetix.com. You can also download a copy of the slides that accompany today's call from our website or alternatively access them on the webcast. Our Q2 results were a continuation of the trend we saw in Q1, with $4.2 million of revenue in Q2, the same as Q1, and down 15% compared to the same period in 2021. Our strategy of diversification beyond traditional graphic paper and expanding with greater contributions from our other applications like wood composites, personal care, and wet end paper is working.
The diversification is helping to make up for lost ground in graphic paper with wood composites and the wet end applications poised to be the primary drivers of our top-line growth. Our Q2 results reflect two major headwinds, which we have mentioned previously. One, a $600,000 headwind from a graphic paper mill closure in Q3 of last year. Two, raw material availability and logistics constraints, which we believe resulted in a $500,000-$1 million headwind on net sales in Q2. On the supply chain constraints, we continue to experience splits and takes in the market. We have received material volumes of supply from regions that we did not expect, but we've also not received supply from vendors that have historically been quite dependable. All in all, at present, we're a little ahead of where we expected to be as we exited Q2.
For the first time since March, we are starting to see positive signs that the availability of corn and starch might be loosening. The price of corn has come off its historic highs recently, and in July, we received our full contracted allocation from an important supplier for the first time in months. We still expect the supply constraints to persist, which could have an upward pressure on starch pricing. We're optimistic that the constraints may be improving, which would open up new growth opportunities, which I'll address in a moment. On the wood composites front, a key account continues to demonstrate strategic and commercial progress with our DuraBind resin. We're seeing positive momentum and engagement from them as they remain committed to reducing their carbon footprint and see our bio-based resins as one of the important steps they can take in that journey.
We expect to see a continued ramp up through the second half of the year, with the potential for them to expand the usage of our binder on the first commercial line we have with them. Our ability to ramp with them on that first line and expand across other lines they operate and into other suppliers they use is a key component of our growth strategy. During the quarter, Swiss Krono, our first commercial wood composites account, continued their work with us to expand to new locations. We did see volumes decline as a result of changes they made to one line. We are working progressively together with them on a resin formulation and a process which enables us to reestablish the full benefit from DuraBind at that line.
On the particle board side, they are engaged and committed to further change, supporting the commercial launch of their BE.YOND particleboard. Their successes are more niche in nature at present, but they continue to believe in the commercial upside of the most environmentally friendly particle board available that delivers the highest indoor air quality. In terms of new opportunities, the sustainable characteristics of our biopolymer platform received more recognition during the quarter. The Corporate Knights organization named EcoSynthetix one of the best 50 corporate citizens in Canada. Their ranking places emphasis on both the ESG performance of a company's operations and the environmental impact of its core products. Of the more than 350 organizations in Canada that it measured, we ranked twentieth overall, which is a great achievement considering some of the larger organizations we were up against.
This recognition follows on the EcoVadis Platinum rating we achieved earlier this year. Our biopolymer platform helps manufacturers address the carbon footprint needs and demands of retailers and consumers. We deliver meaningful carbon footprint reductions across each of our three core markets. As a result, we expect to be a carbon positive company in 2022, which is defined as exceeding a one-to-one carbon cover of the carbon emissions associated with our business, compared to the carbon footprint reductions by customers that we enable through their use of our products. The sustainable all natural benefits of our platform are the key reason behind our momentum in the personal care market. During Q2, our joint development and marketing partner, Dow, a global personal care and home product leader, announced their exclusive agreement with us for MaizeCare in the hairstyling market.
Their commitment to greening their product line, which is very important to them, and their public announcement reflect the optimism from both sides of the relationship that they're beginning to see some application wins and a solid pipeline going forward. We are seeing some small application wins, individual products that have switched over to Dow's all-natural offering from conventional petro-based chemistries, and new products that are getting started in the market for the first time that have chosen to start with formulations that use our biopolymer. We expect to see some top-line contributions from these applications, and in a small way already, they're part of the reason for the improved product mix. The legacy graphic paper market continues to experience a deterioration in demand. This pressure, along with raw material and logistics constraints, were the primary headwinds to the top line in the quarter.
Our existing accounts continue to use EcoSphere and appear to be holding their own in a challenging market. The price of oil and the conventional petro-based paper binder we replace, SB Latex, continued to be elevated during the quarter, which helps improve our value proposition. As a result, this dynamic contributed a positive impact to our higher average selling prices, which helped to partially offset the decline in volumes. The more exciting area of the paper market for us today is in the wet end application, where our binders are used as strength aids in the early formation of the fiber mix in paper making. This application has potential across a range of opportunities, which include paper board, corrugated, and tissue. We are commercial in this application today and are seeing great results with additional prospects that are trialing our binder. In some cases, remarkable results.
As an example, in a trial with one prospect, they were unable to run the line for a specific product category with the necessary quality and economics. After they added our binder, they were able to produce the product line and achieve their targets. That's a promising result. We are yielding positive results like this across multiple prospects. This is one of the areas where the availability of raw material encumbered growth. These prospects run high volume manufacturing processes. Once we go commercial with an account, they depend on us to maintain a consistent and stable supply. Until we have better visibility on the availability of raw material, we are working patiently with these prospects.
While it is still early, we are optimistic based on the signals we're seeing in corn and starch supply, that we could engage a key prospect commercially before the end of the year, which would represent a significant boost to volumes. Our diversification strategy is working. The contributions from our wood composites and wet end applications are poised for additional growth. The personal care applications with our partner, Dow, are beginning to shape up nicely. The current macro conditions with graphic paper demand and raw material and logistics constraints continue to be challenging. However, the progress and momentum we are building with our bio-based platform that delivers material green benefits and value for our customers set the stage for sustainable growth. With that, I'll turn it over to Rob to review the financials. Rob?
Thanks, Jeff, and good morning. Net sales were $4.2 million in Q2 2022, down 15% or $730,000 compared to the same period in 2021. Net sales were in line with our Q1 results. The change in net sales was due to lower volumes, which reduced sales $2.1 million or 43%, which was partially offset by higher average selling price and an improved product mix, which increased sales $1.4 million or 28%. As Jeff mentioned, supply chain constraints and raw materials and logistics impacted sales. We believe this issue resulted in lost revenue opportunity in the range of $500,000-$1 million in the quarter. The decrease in volumes was also impacted by a $600,000 headwind from a graphic paper mill closure announced in Q3 2021.
The pricing dynamics of petroleum-based chemicals we compete with created pricing tailwinds for us, which allowed us to implement pricing actions to offset cost escalations and improve our margin profile. Gross profit was CAD 1.1 million in the quarter, unchanged from the prior year period. Higher average selling price and improved product mix were offset by decreases in sales volumes and higher manufacturing costs. Net of manufacturing depreciation, gross profit as a percentage of sales was 30.8% in the quarter, compared to 26.3% for the same period in 2021. SG&A expenses were CAD 1.4 million in the quarter, an increase of CAD 480 ,000 compared to the same period in 2021.
The change is primarily due to higher operating costs of CAD 300 ,000, including lower payments received under the government funding CEWS program, foreign exchange loss, and increased discretionary spend. These headwinds were partially offset by a reduction in the provision for variable compensation of CAD 200 ,000. R&D expenses were CAD 500 ,000 in the quarter, in line with the CAD 550 ,000 from the same period in 2021. R&D expense as a percentage of sales was 12% in the quarter, compared to 11% in the same period in 2021. We continue to invest in innovation to improve our value proposition and expand our addressable market opportunities. Adjusted EBITDA loss was CAD 230,000 in the quarter, compared to a loss of CAD 180 ,000 in the same period in 2021.
The change was primarily due to higher operating costs, which were offset by higher gross profit and improved product mix. Cash provided by operating activities increased to CAD 80,000 in the quarter, an improvement of CAD 310,000 compared to the cash used in operating activities of CAD 200,000 in the same period in 2021. The change was primarily due to changes in working capital. As of June 30th, we had CAD 39.4 million in cash and term deposits, compared to CAD 42.2 million as of December 31st, 2021. We invested CAD 400,000 in NCIB share buybacks during the quarter, bringing the year-to-date investment in 2022 to CAD 1 million. We have demonstrated our ability to responsibly manage our cash reserves through multiple cycles while continuing to invest in our long-term growth strategy.
With that, I'll turn it back to Jeff for closing comments.
Thanks, Rob. In the face of the serious geopolitical and economic challenges in the current market, sustainability remains a major theme. Manufacturers, retailers, and consumers are searching for alternatives that can make a difference. Our biopolymer platform has proven its capabilities across multiple applications in large-scale manufacturing processes. Change can be difficult. It can take longer than expected. We have built a platform that gives us multiple shots on goal in markets that are billion-dollar opportunities. A platform that delivers material green benefits and performance benefits to our customers. We are managing the current supply chain constraints and setting the stage for future growth in wood composites and wet end paper applications, and in personal care. We are working with major manufacturers and partners that recognize the benefits of driving further implementation and adoption across new lines. We're in a great position to deliver long-term sustainable growth.
We appreciate the trust and patience that our shareholders have shown, and I look forward to updating you further on our progress. With that, I'll turn it back to the operator to open up the call for questions. Thank you.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Thank you. That is star one to ask a question. We will take our first question from Meaghen Annett with TD Securities. Please go ahead. Your line is open.
Thank you. Good morning.
Morning, Meaghen.
First off, can we talk a bit more about the availability of cornstarch and the improvement you're seeing there? You saw some receipts in July. You sound quite optimistic for a new wet end prospect. Just wanna understand how you're positioned to drive the top line in the back half of this year, and what kind of revenue run rate we could be looking at if you do get the starch that you need.
Yeah. Thanks, Meaghen. I think by far the most practical and important indicator we saw was that a major supplier came back online fully for us in July after several months of not supplying. I mean, we're otherwise looking at the same things probably the whole world that's looking at corn is looking at. We're looking at the shipments that are beginning to happen out of the Ukraine now. We're looking at the corn futures market softening over the past couple of months. We're looking at, you know, signals in the starch market, like the practical thing I just mentioned. Those are the signals that we are looking for.
In order to have the growth that we can realize in the back half of the year, it does require those major suppliers to continue to be able to supply for us in the way that they did in July and for some of the additional supply we've had out of some of the newer regions we've developed that are affected by the conflict. With that, I mean, we have orders in hand that would allow us to generate some pretty substantial growth in the second half. Probably not getting us all the way to the targets we would have set at the beginning of the year, but has the potential to get us pretty close to that.
Okay. Maybe if you could just give us your thoughts on how volumes are trending, Q3 to date, perhaps. Should we expect to see some supply chain challenges reflected in those numbers and then potentially an acceleration in Q4?
Yeah, certainly there's still some continued impact of supply chain challenges, but what we did receive from that major supplier definitely helped. Yeah, I would say as important as starch supply right now are just some of the logistics constraints. It's actually still very tough getting product moved into the U.S. and getting it moved out on a timely and predictable basis. So we're hopeful that that begins to ease as well. We've seen some of the transportation logistics numbers begin to fall off pretty rapidly just in the last few weeks, and we're hoping that that bodes well for the availability of logistics and the cost of logistics. So that's been a bit of a double whammy for us. We actually see signs that both are easing.
Yeah, Q3 is off to a better start for us, I'll just say that. We're optimistic that we can continue to build some input starch and get some of these new opportunities in the wet end served the way that we need to.
Just last question on the gross margins. You're seeing some nice improvement there. What do you see as a run rate for that, for the business, throughout this year? Do you see any major mix shifts in revenue, you know, that could bring that back down or anything on the cost side, that we should be thinking about?
We're thinking that the mix should probably remain similar and healthy to what we've been seeing. I mean, that is the great news here, is that there's a lot of our diversification efforts showing up underneath what is a pretty flat number, otherwise. If we see pressures on the margin side, it's going to be due to cost. I think one thing we've said is we're not going to compromise the growth. We are out there every day looking for starch that's available, and if we have to pay a premium for it to secure some of these growth opportunities in the short term, we'll do that.
That could result in some margin pressure, but there's nothing there yet that's certain enough to say, you know, it's gonna have a material impact on margin, but that is, that's the one thing we are watching.
Great. Thank you.
Thanks, Megan.
Thank you. As a reminder, ladies and gentlemen, please press star one to ask a question. We will take our next question from Daniel Marks with Stonehouse Capital. Please go ahead. Your line is open.
Thank you. Good morning, gentlemen.
Good morning, Dan.
Good morning.
Good morning. You mentioned a couple of the difficulties in the quarter being $600,000 of year-over-year business lost, as well as the half million to $1 million due to supply constraints. Are those numbers additive? If you did not have supply constraints, you still would have not earned the or been able to achieve the $600,000 from the paper customer. Should we add those together? Are those different types of starches that impacted things? Give us a little more flavor on that.
Well, they're definitely different types of starches that would serve some of our new growth opportunities, and they're also different geographies, which is pretty important to us right now as well. That account was lost in the North American geography with probably the most vanilla, I would say, of our products. Whereas what we're looking at in Europe as the missed growth opportunities is in some of our newer products, which require, in some cases, a different starch and different manufacturing processes. They are additive, though, when we talk about the volume shortfall that we had. They're additive in that sense, but they're not where I think your question was going. They're not sort of a one-to-one replacement for each other.
Okay. Got it. With that in mind, I find it unusual that your raw material inventory went from basically CAD 1 million to CAD 1.5 million quarter-over-quarter. Why would that be if you're having such a hard time getting corn starch?
Part of it is the pricing of those raw materials, and part of it is because of where we're sourcing some raw materials and then where they end up having to be processed. There's more material tourism today than we've ever seen before, just trying to get starch from wherever we can get it and then process it at the right place. Those are some of the impacts. Rob, anything to add to that?
Yeah, no. Dan, it is primarily, you know, the geographic issue and the product mix issue, that's playing into that. Like Jeff said, the increased cost of that inventory.
Got it. Last question. Obviously, I heard what you said in terms of you aren't starting customers in the wet end until you can ensure their supply. You don't wanna get them going and then stall them out, which makes perfect business sense. Given that, are you able to get enough starch to get more guys trialing? Can you give us an idea of how many companies are in at a commercial level? How many are at a trial level now? If as and when corn starch supply is freed up, what sort of timeline could we be looking at where those trials could turn into commercial accounts and sort of just give us a better idea of what that wet end opportunity could lead to?
Obviously, you mentioned one that could be coming online by end of year, but give us a little more flavor on that. In particular, could you give us numbers of companies that are trialing?
Yeah. Let's start with what's commercial already. We can point to, you know, clear and sustained success that the product is working in application. We have two tissue mills, which are lower volume users of our strength aid products. They've been going concerns now for a few quarters. We have a large packaging customer that's gone all the way to the end of their trialing and commercial evaluation process, to the point where they represent a significant part of that shortfall that we talked about within Q2. They're ready to go as soon as we're ready to go. As soon as that happens, they become a significant uptick to our volumes, and we do believe that we're gonna be able to get that going during the second half of the year.
Again, it's depending on the starch outlook that we're seeing right now coming through, which is still a question mark, but it looks like we're gonna be able to get them going. Beyond that, we've gone through trials with, I'm gonna say eight different accounts in earnest at various stages from lab to, I'll say, the first of their, you know, large production line trials. They represent a mix of everything from a few more small tissue opportunities, a graphic paper opportunity, more packaging. They represent a more diversified geography than where we got our start with the existing customers.
I guess to the first part of your question, our ability to trial more was constrained by material, so we were careful in our allocation to people who we don't believe are just kicking tires, because it really was in short supply. We were able to get enough trial material to get serious candidates moving and to be ready for what we hope will be late this year or early next year in terms of getting them started commercially.
Got it. Did I hear you correct that the one account that you have that's gone all the way through their trials and is ready to go was a substantial part of the CAD 500,000-CAD 1 million of lost revenue?
Yes. Yeah. I guess just to put that in the right perspective for you, for everybody, that's not us saying, "Oh, we could have had, you know, $500,000 - $1 million more." Those are real customer commitments. From that customer specifically, in order to show their seriousness and to keep their place, first place in line, they've placed, you know, significant purchase orders for us or with us. I wanted to provide some clarity on where that number came from. It's not just us saying, we think we lost that much. There's real demand there that we were unable to satisfy due to material and logistics.
Okay. That would be, you know, I guess not deferred revenue that you expect to double that number the next quarter when you're actually able to fill it. That's sort of like a run rate, if you would, of.
Yeah.
CAD 1 million-CAD 2 million a year kind of, or CAD 2 million-CAD 4 million. I guess that would be CAD 2 million-CAD 4 million a year.
Yep.
of demand. Okay.
Yeah, that's right.
Excellent.
It's not a deferral where it becomes double. It's just a delay in getting started.
Okay. Got it. Thanks very much, gentlemen.
Thank you, Dan.
Thanks, Dan.
Thank you. We take our next question from Gerry Wimmer with Investorfile. Please go ahead. Your line is open. It appears Mr. Wimmer has drawn his question back. As a reminder, ladies and gentlemen, please press star one to ask a question. That is star one on your telephone keypad. All right. We have a question from Brian McIntyre with TD Wealth. Please go ahead. Your line is open, sir.
Good morning, Jeff. I was talking to Glen this morning, and he had asked about the trajectory on the $100 million top line. Really it related to the prior discussion of, you know, a 3-5 year window to get to that level was pre the discussion on the wet end opportunity. I don't know if you can give any sort of color to how that balances with supply issues, whether that trajectory is intact or shorter.
Yeah. Good morning, Brian. Thanks for the question. You guys are right. That target we set prior to understanding really what we had with the wet end opportunity. If you recall, when we broke down our components of the $100 million goal, we expected paper in different forms to sort of hold its own at kind of the $20 million range within the $100 million. But we certainly see now and believe, and we feel like we're on the trajectory to realize quite a bit more than that through the wet end opportunity. I still believe that this could be more faster than wood. I believe wood is more proven in its industrial application, and therefore I continue to sort of put it at the head of the line.
With what we're seeing in wet end applications and how fast the adoption can happen there relative to wood lines, we think this can have a significant impact. What I would say about the $100 million goal is certainly the first two quarters of this year were disappointing for us for all the reasons that we've discussed. I mean, that's a bit of a setback in whatever timeline we think about the $100 million in. We're still thinking about it though within that three to five year timeframe, and we're, you know, more than a year into having set that goal.
We believe that the wet end opportunity can help us make up for some of that lost time and provide quite a bit of upside to it if what we're seeing pans out into the multiple line opportunities that we see in front of us. Does that put it in the right context for.
Yes, it does. Thank you very much.
Thanks, Brian.
Thank you. As we have no further questions, I would like to turn the call back over to Jeff MacDonald for any additional or closing remarks.
Yeah, I'd just like to thank everyone for joining us again today, and we'll be in touch again quite soon.
Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect.