OREANDA-NEWS. Enzymotec Ltd. (Nasdaq:ENZY), a developer, manufacturer and marketer of innovative bio-active lipid ingredients and nutritional products, today reported financial results for the third quarter ended September 30, 2017.

Third Quarter 2017 Results

For the third quarter of 2017, net revenues increased 19.8% to $13.7 million from $11.4 million for the third quarter of 2016. For the third quarter of 2017, based on the proportionate consolidation method that is used for segment reporting, net revenues increased 28.0% to $19.5 million from $15.2 million for the third quarter of 2016.

GAAP net income for the third quarter of 2017 amounted to $0.4 million, or $0.02 per diluted share, compared to net loss of $(0.3) million, or $(0.01) per diluted share, for the third quarter of last year.

Non-GAAP net income for the third quarter of 2017 increased to $1.6 million, or $0.07 per diluted share, from $0.6 million, or $0.03 per diluted share, for the third quarter of 2016. A reconciliation of non-GAAP net income to GAAP net income or loss is set forth below.

Adjusted EBITDA for the third quarter of 2017 increased 81.8% to $2.3 million from $1.3 million for the third quarter of 2016. A reconciliation of adjusted EBITDA, a non-GAAP financial measure, to GAAP net income or loss is set forth below.

Set forth below is segment information for the three months ended September 30, 2017 and 2016 (unaudited):

    Three Months Ended September 30, 2017
    Nutrition
Segment		   VAYA
Segment		   Total Segment
Results of
Operations		   Elimination(1)   Consolidated
Results of
Operations
    U.S. dollars in thousands
     
     
Net revenues   $ 15,914     $ 3,554       $ 19,468     $ (5,796 )     $  13,672  
Cost of revenues(2)     9,097       686         9,783       (5,658 )       4,125  
Gross profit(2)     6,817       2,868         9,685       (138 )       9,547  
Operating expenses(3)     3,493       4,709         8,202       —         8,202  
Depreciation and amortization     647       150         797                  
Adjusted EBITDA(4)   $ 3,971     $ (1,691 )     $ 2,280                  
     
    Three Months Ended September 30, 2016
    Nutrition
Segment		   VAYA
Segment		   Total Segment
Results of
Operations		   Elimination(1)   Consolidated
Results of
Operations
    U.S. dollars in thousands
     
Net revenues   $ 13,371     $ 1,839       $ 15,210     $ (3,798 )     $  11,412  
Cost of revenues(2)     7,114       365         7,479       (3,642 )       3,837  
Gross profit(2)     6,257       1,474         7,731       (156 )       7,575  
Operating expenses(3)     2,753       4,410         7,163       —         7,163  
Depreciation and amortization     511       175         686                  
Adjusted EBITDA(4)   $ 4,015     $ (2,761 )     $ 1,254                  

____________________
(1) Represents the change from proportionate consolidation to the equity method of accounting.
(2) Includes depreciation and amortization, but excludes share-based compensation expense.
(3) Includes depreciation and amortization, but excludes share-based compensation expense and business development related expenses in 2016 and merger and acquisition related expenses in 2017.
(4) Adjusted EBITDA is a non-GAAP financial measure. For a definition and a reconciliation of Adjusted EBITDA to our net income, see “Non-GAAP Financial Measures” below.

Nine Months Ended September 30, 2017 Results

For the nine months ended September 30, 2017, net revenues increased 4.2% to $38.7 million from $37.1 million for the nine months ended September 30, 2016. Based on the proportionate consolidation method that is used for segment reporting, net revenues for the nine months ended September 30, 2017 increased 18.7% to $56.2 million, from $47.3 million for the same period last year.

Net loss for the nine months ended September 30, 2017 amounted to $(1.9) million or $(0.08) per diluted share, compared to net income of $1.3 million, or $0.06 per diluted share, for the same period last year.

Non-GAAP net income for the nine months ended September 30, 2017 decreased 74.9% to $0.9 million, or $0.04 per diluted share, from $3.5 million, or $0.15 per diluted share, for the same period last year. A reconciliation of non-GAAP net income to GAAP net income is set forth below.

Adjusted EBITDA for the nine months ended September 30, 2017 decreased 46.1% to $3.0 million, from $5.6 million for the same period last year. A reconciliation of adjusted EBITDA, a non-GAAP financial measure, to GAAP net income is set forth below.

Set forth below is segment information for the nine months ended September 30, 2017 and 2016 (unaudited):

    Nine Months Ended September 30, 2017
    Nutrition
Segment		   VAYA
Segment		   Total Segment
Results of
Operations		   Elimination(1)   Consolidated
Results of
Operations
    U.S. dollars in thousands
     
Net revenues   $ 46,787     $ 9,370       $ 56,157     $ (17,470 )     $  38,687  
Cost of revenues(2)     28,778       2,123         30,901       (16,803 )       14,098  
Gross profit(2)     18,009       7,247         25,256       (667 )       24,589  
Operating expenses(3)     9,558       14,962         24,520               24,520  
Depreciation and amortization     1,838       438         2,276                  
Adjusted EBITDA(4)   $   10,289     $ (7,277 )     $ 3,012                  
    Nine Months Ended September 30, 2016  
    Nutrition
Segment		   VAYA
Segment		   Total Segment
Results of
Operations		   Elimination(1)   Consolidated
Results of
Operations		  
    U.S. dollars in thousands  
       
       
Net revenues   $ 38,984     $ 8,342       $ 47,326     $ (10,214 )     $  37,112  
Cost of revenues(2)     20,211       1,535         21,746       (9,832 )       11,914  
Gross profit(2)     18,773       6,807         25,580       (382 )       25,198  
Operating expenses(3)     8,798       13,186         21,984               21,984  
Depreciation and amortization     1,633       363         1,996                    
Adjusted EBITDA(4)   $ 11,608     $ (6,016 )     $ 5,592                    

____________________
(1) Represents the change from proportionate consolidation to the equity method of accounting.
(2) Includes depreciation and amortization, but excludes share-based compensation expense.
(3) Includes depreciation and amortization, but excludes share-based compensation expense and business development related expenses in 2016 and merger and acquisition related expenses in 2017.
(4) Adjusted EBITDA is a non-GAAP financial measure. For a definition and a reconciliation of adjusted EBITDA to our net income, see “Non-GAAP Financial Measures” below.

Joint Venture Accounting

The Company accounts for the results of operation of Advanced Lipids AB (Advanced Lipids), the Company's 50%-owned joint venture, utilizing the equity method of accounting as required by U.S. GAAP. We recognize two sources of income from the JV arrangement. First, we recognize revenue for the enzymes sold by us to AarhusKarlshamn AB (AAK) upon the sale of the final INFAT® product by Advanced Lipids to its customers. Accordingly, the revenues recognized from the arrangement are the amounts the Company charges to its joint venture partner, or the Company's direct costs of production plus an agreed-upon margin defined in the joint venture agreement. For the three months periods ended September 30, 2017 and 2016, sales of enzymes to the joint venture partner amounted to $6.2 million and $4.4 million, respectively. For the nine months ended September 30, 2017 and 2016, sales of enzymes to the joint venture partner amounted to $17.8 million and $11.9 million, respectively. In addition, we also record our share of Advanced Lipids profits under the equity method of accounting. The Advanced Lipids profits that are shared between us and AAK are the profits that Advanced Lipids earns for its distribution activity.

For purposes of segment reporting, we account for the arrangement with AAK and the results of operations of Advanced Lipids using the proportionate consolidation method. Under the proportionate consolidation method, we recognize our proportionate share (50%) of the revenues of Advanced Lipids and record our proportionate share (50%) of the overall joint venture’s costs of production and other operating expenses in our income statement. The financial information included in the tables above under the heading "Nutrition segment" includes, inter alia, the results of operations of Advanced Lipids, using the proportionate consolidation method.

Balance Sheet and Liquidity Data

As of September 30, 2017, we had $78.8 million in cash and cash equivalents, short-term bank deposits and short-term and long-term marketable securities (compared to $75.7 million as of December 31, 2016), $22.3 million in other working capital items (compared to $29.5 million as of December 31, 2016) and no debt.
                                    
Suspension of Financial Results Conference Calls

As previously announced, on October 28, 2017, Enzymotec entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Frutarom Ltd., an Israeli company (“Parent”), and Frutarom Tech Ltd., an Israeli company and a wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will merge with and into Enzymotec (the “Merger”), with Enzymotec continuing after the Merger as the surviving company and a wholly-owned subsidiary of Parent. The Merger is structured as a statutory merger pursuant to Sections 314-327 of the Israeli Companies Law, 5759-1999. In light of the pending transaction, the Company will not host a financial results conference call for this period or for future periods.

 

About Enzymotec Ltd.

Enzymotec (NASDAQ:ENZY) is a leading global supplier of specialty lipid-based products and solutions. The Company develops, manufactures and markets innovative bio-active lipid ingredients, as well as final products, based on sophisticated processes and technologies. For further information, please visit Enzymotec’s website at: www.enzymotec.com.

Non-GAAP Financial Measures

Adjusted EBITDA and non-GAAP net income are metrics used by management to measure operating performance. Adjusted EBITDA represents net income excluding: (i) financial expenses, net, (ii) taxes on income, (ii) depreciation and amortization, (iv) share-based compensation expense, and (v) other unusual income or expenses, and after giving effect to the change from the equity method of accounting for our joint venture to the proportionate consolidation method. Non-GAAP net income represents net income, excluding: (i) share-based compensation expense, and (ii) other unusual income or expenses.

The Company presents Adjusted EBITDA as a supplemental performance measure because it believes it facilitates operating performance comparisons from period to period and company to company by excluding potential differences caused by variations in capital structures (affecting interest expenses, net), changes in foreign exchange rates that impact financial asset and liabilities denominated in currencies other than our functional currency (affecting financial expenses, net), tax positions (such as the impact on periods or companies of changes in effective tax rates) and the age and book depreciation of fixed assets (affecting relative depreciation expense). In addition, both Adjusted EBITDA and non-GAAP net income exclude the non-cash impact of share-based compensation and a number of unusual items that the Company does not believe reflect the underlying performance of our business. Because Adjusted EBITDA and Non-GAAP net income facilitate internal comparisons of operating performance on a more consistent basis, the Company also uses Adjusted EBITDA and non-GAAP net income in measuring our performance relative to that of our competitors. Adjusted EBITDA and non-GAAP net income are not measures of our financial performance under GAAP and should not be considered as substitutes for, but rather as supplements to, net income, operating income or any other performance measures derived in accordance with GAAP or as alternatives to cash flow from operating activities as measures of the Company's profitability or liquidity.

Adjusted EBITDA and non-GAAP net income have limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of the company's results as reported under U.S. GAAP as the excluded items may have significant effects on the Company's operating results and financial condition. When evaluating the Company's performance, you should consider Adjusted EBITDA alongside other financial performance measures, including cash flow metrics, operating income, net income, and the Company's other U.S. GAAP results.

The following table presents a reconciliation of Adjusted EBITDA and non-GAAP net income to GAAP net income or loss for each of the periods indicated (unaudited):

  Three Months Ended September 30, Nine Months Ended September 30,
      2017     2016     2017     2016  
  U.S. dollars in thousands
Reconciliation of Adjusted EBITDA to net income (loss):        
Adjusted EBITDA $ 2,280   $ 1,254   $ 3,012   $ 5,592   
Accounting for joint venture   (138 )   (156 )   (667 )   (382 )
Depreciation and amortization   (797 )   (686 )   (2,276 )   (1,996 )
Business development related expenses   (380 )   (278 )   (380 )   (278 )
Share-based compensation expenses   (802 )   (675 )   (2,365 )   (1,970 )
Operating income (loss)   163     (541 )   (2,676 )   966  
Financial income - net     231       173     621     391  
Income (loss) before taxes on income   394     (368 )   (2,055 )   1,357  
Taxes on income   (77 )   (84 )   (305 )   (337 )
Share in profits of equity investee   107     122     504     271  
GAAP net income (loss) $ 424   $ (330 ) $ (1,856 ) $ 1,291  
  Three Months Ended September 30 Nine Months Ended September 30,
    2017 2016     2017     2016  
  U.S. dollars in thousands
Reconciliation of Non-GAAP net income to GAAP net income (loss):        
Non-GAAP net income $ 1,606   $ 623   $ 889   $ 3,539  
Merger and acquisition related expenses   (380 )     (380 )  
Business development related expenses     (278 )     (278 )
Share-based compensation expenses   (802 )   (675 )   (2,365 )   (1,970 )
GAAP net income (loss) $ 424   $ (330 ) $ (1,856 ) $ 1,291  
 
    Three Months Ended September 30, Nine Months Ended September 30,
    2017 2016     2017     2016  
  U.S. dollars
Reconciliation of Non-GAAP diluted EPS to GAAP diluted EPS:        
Non-GAAP diluted EPS $ 0.07   $ 0.03   $ 0.04   $ 0.15  
Merger and acquisition related expenses   (0.02 )     (0.02 )  
Business development related expenses     (0.01 )     (0.01 )
Share-based compensation expenses   (0.03 )   (0.03 )   (0.10 )   (0.09 )
GAAP diluted EPS $ 0.02   $ (0.01 ) $ (0.08 ) $ 0.05  

ENZYMOTEC LTD.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

  Three Months Ended September 30, Nine Months Ended September 30,
    2017     2016 2017 2016  
  U.S. dollars in thousands   (except per share data)
NET REVENUES $ 13,672   $ 11,412   $ 38,687   $ 37,112  
COST OF REVENUES *   4,166     3,877     14,218     12,034  
GROSS PROFIT   9,506     7,535     24,469     25,078  
OPERATING EXPENSES:
Research and development – net *		        
  2,071     1,866     6,452     5,568  
Selling and marketing *   5,065     4,312     14,518     13,506  
General and administrative *   2,207     1,898     6,175     5,038  
  Total operating expenses   9,343     8,076     27,145     24,112  
OPERATING INCOME (LOSS)   163     (541 )   (2,676 )   966  
FINANCIAL INCOME – net   231     173     621     391  
INCOME (LOSS) BEFORE TAXES ON INCOME   394     (368 )   (2,055 )   1,357  
TAXES ON INCOME   (77 )   (84 )   (305 )   (337 )
SHARE IN PROFITS OF EQUITY INVESTEE   107     122     504     271  
NET INCOME (LOSS) $ 424   $ (330 ) $ (1,856 ) $ 1,291  
OTHER COMPREHENSIVE INCOME (LOSS):        
Currency translation adjustments $ 84   $ (26 ) $ 231   $ (15 )
Unrealized gain (loss) on marketable securities   65     (107 )   267     130  
Cash flow hedge   (60 )   66     (954 )   7  
Total comprehensive income (loss) $ 513   $ (397 ) $ (2,312 ) $ 1,413  
EARNINGS (LOSS) PER SHARE:        
Basic $ 0.02   $ (0.01 ) $ (0.08 ) $ 0.06  
Diluted $ 0.02   $ (0.01 ) $ (0.08 ) $ 0.06  
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES:        
Basic   23,270,226     22,759,493     23,041,113     22,716,862  
Diluted   23,875,744     23,360,482     23,041,113     23,384,968  
* The above items are inclusive of the following
share-based compensation expense:		                
Cost of revenues $ 41 $ 40 $ 120 $ 120
Research and development - net   120   101   339   299
Selling and marketing   278   216   758   643
General and administrative   363   318   1,148   908
  $ 802 $ 675 $ 2,365 $ 1,970

ENZYMOTEC LTD.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS

  September 30 December 31
    2017   2016
  U.S. dollars in thousands
Assets      
CURRENT ASSETS:    
Cash and cash equivalents $ 10,586 $ 7,581
Short-term bank deposits and marketable securities   29,127   34,934
Accounts receivable:    
   Trade   10,524   10,038
   Other   2,647   2,027
Inventories   23,751   26,331
   Total current assets   76,635   80,911
NON-CURRENT ASSETS:    
Investment in equity investee   2,450   1,715
Marketable securities   39,083   33,152
Intangibles, long-term deposits and other   7,310   1,027
Funds in respect of retirement benefits obligation   1,218   1,136
   Total non-current assets   50,061   37,030
PROPERTY, PLANT AND EQUIPMENT:    
  Cost   44,572   42,673
  Less - accumulated depreciation and amortization   15,726   13,665
    28,846   29,008
       Total assets $ 155,542 $ 146,949
Liabilities and shareholders' equity    
CURRENT LIABILITIES:    
  Accounts payable and accruals:    
Trade $ 6,188   $ 5,126  
Other   8,440     3,803  
Total current liabilities   14,628     8,929  
LONG-TERM LIABILITY -    
  Retirement benefits obligation   1,484     1,420  
Total liabilities   16,112     10,349  
SHAREHOLDERS' EQUITY:    
Ordinary shares   60     58  
Additional paid-in capital   132,154     127,014  
Accumulated other comprehensive loss   (892 )   (436 )
Retained earnings   8,108     9,964  
 Total shareholders' equity   139,430     136,600  
 Total liabilities and shareholders' equity $ 155,542   $ 146,949  

ENZYMOTEC LTD.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS

  Nine Months Ended September 30
    2017 2016  
  U.S. dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES:    
  Net Income $ (1,856 ) $ 1,291  
  Adjustments required to reflect cash flows from operations:     
Depreciation and amortization   2,276     1,996  
Share in profits of equity investee   (504 )   (271 )
Share-based compensation expense   2,365     1,970  
Change in inventories   2,672     (6,681 )
Change in accounts receivable and other   (2,036 )   2,616  
Change in accounts payable and accruals   5,445     1,052  
Change in other non-current assets   48     (14 )
Purchase of IPR&D asset   68    
Change in retirement benefits obligation   79     152  
Net cash provided by operating activities   8,557     2,111  
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchase of property, plant and equipment and Intangibles   (3,474 )   (1,459 )
Investment in bank deposits and marketable securities   (25,240 )   (27,051 )
Long-term deposits   (19 )   41  
Purchase of line of products   (3,600 )  
Proceeds from sale of marketable securities   25,310     14,854  
Proceeds from disposal of an equity investee     64  
  Change in funds in respect of retirement benefits obligation   (97 )   (48 )
  Net cash used in investing activities   (7,120 )   (13,599 )
CASH FLOWS FROM FINANCING ACTIVITIES:    
Exercise of options by employees   1,568     143  
Net cash provided by financing activities   1,568     143  
NET CHANGE IN CASH AND CASH EQUIVALENTS   3,005     (11,345 )
BALANCE OF CASH AND CASH EQUIVALENTS    
  AT BEGINNING OF PERIOD   7,581     21,987  
BALANCE OF CASH AND CASH EQUIVALENTS    
  AT END OF PERIOD $ 10,586   $ 10,642