© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon. My name is Gabriel, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Neptune Wellness Solutions 2019 Second Quarter Earnings Conference Call. [Operator Instructions] Thank you.Mr. Mario Paradis, CFO of Neptune, you may begin your conference.
Thank you, Gabriel. Good afternoon, everyone, and thank you for joining us. As mentioned, the purpose of today's call is to review our results for the second quarter results ended September 30, 2018. Joining me today is Jim Hamilton, our President and CEO.As usual, Jim will review Neptune's operational quarter and highlights, and I will discuss our quarterly financial results.Before we begin, I'd like to remind you that all amounts are in Canadian dollars, and today's remarks contain forward-looking information that represents our expectations as of today and, accordingly, are subject to change. We do not undertake any obligation to update any forward-looking statements, except as may be required by Canadian and U.S. Security laws. A number of assumptions were made by us in preparing these forward-looking statements, which are subject to risks. Results may differ materially, and details on these risks and assumptions can be found in our filing with the Canadian securities commission and with the Securities and Exchange Commission.Now I turn the call over to you, Jim.
Mario, thank you very much. Good afternoon, everybody, and hello from Las Vegas. We are here attending something called the MJBizCon. This is, what we understand, the largest cannabis trade show in the world with north of 20,000 people in attendance. And this follows, actually, several days also here in Las Vegas with one of the largest nutrition products shows. So it's been a very, very busy week with customers, which you can probably hear in the tone of my voice. But we're very happy to be here. We're very happy to be with you today and share with you -- on Page 4 there is a presentation on our website, if for those following along, where we want to talk a little bit about some of the highlights. Mario will take over with some comments on the financials. And then, a little bit more detailed commentary both on our cannabis business progress, nutrition business and then some concluding comments, and we'll welcome questions at that time.Just flipping to Page 5. And we are very, very, very happy with how things are progressing with our license. For many of those who are following, know that we received approximately 8 weeks ago our readiness letter, which was wonderfully received. Mario is very happy to get that. And we submitted our evidence package immediately thereafter. And I would like to inform everybody that we're very happy and pleased over the engagement that we've had the last weeks and days with Health Canada in terms of the very, very final stages of getting our processing license.Relative to the site, we'll show you some pictures in a moment, but our Phase 1 investment is completed and is ready go pending the licensing. And the Phase 2 expansion brings us up to 200,000 kilos' equivalent of process material, is on time and on track for completion March 2019. And we have a great revenue quarter, and our nutrition businesses is very, very solid. You will see Mario will talk about that as well as some of the other numbers, and our cash balance and balance sheet remains very, very strong.So with that said, maybe Mario, you can take us through some of the more detailed look at the financials, and then we'll come back talk about the business stuff. Mario, take it away.
Yes. Thank you, Jim. Good afternoon, again, everyone. I'd like to remind you that our results are in Canadian dollars, and today's remarks may contain forward-looking statements. My comments today will focus on the quarterly performance unless otherwise indicated. I also want to remind you that we stopped to consolidate Acasti Pharma after the third quarter last year. However, the comparative results of our quarterly results of operation in the consolidated financial statements still include Acasti's numbers for the 3-months period ending September 2017.In addition, considering our recent entry in the cannabis industry, we'll discuss our 2 reportable operating segments being in the nutraceutical and the cannabis segments. Corporate, general and administrative expenses, net finance costs and income taxes are not allocated to the segments, and they are presented as unallocated costs. Consolidated results for the second fiscal quarter 2019 can be found in our press release and in Neptune's consolidated financial statements and related MD&A available on SEDAR, EDGAR and in the Investors Section of our Neptune website.And now at Page 7, 7 of the deck. Total revenues coming from the nutraceutical segment for the second quarter were $7.1 million, an increase of 18% when compared with the same period last year after excluding krill oil manufacturing business.Revenue also increased 37% sequentially from the first quarter this year. Our quarterly gross margin as a percentage of sales were 28% compared to 29% for the same period last year and in line also with our expectations. In term of dollars, gross margin, including royalties, generated $2.4 million, a $0.3 million increase over last year, mainly related to increased royalty revenues.In terms of EBITDA contribution from the nutraceutical segment, the adjusted EBITDA for the quarter was $1.5 million compared to an adjusted EBITDA of $1 million last year. This 50% increase is directly related to higher royalties and also to the reduction in selling, general and administrative expenses following the exit from the krill oil manufacturing business last year.R&D expenses related to the cannabis segment were $1.6 million and mainly consisted of salaries and fixed costs at our manufacturing plant in Sherbrooke, including the depreciation, in order to prepare the sites and start the cannabis oil extraction business in compliance with Health Canada requirements. The non-IFRS operating loss in the cannabis segment before taking into consideration noncash stock-based compensation and the depreciation and amortization was $1.3 million for the second quarter and stable with the first quarter of the year.Corporate, general and administrative expenses totaled $1.9 million during this quarter compared with $1.4 million for the same period last year. This increase in $0.5 million is mainly due to the increase in compensation, including $0.5 million -- excuse me, $0.4 million of non-stock-based compensation and also to some legal fees and other expenses. The non-IFRS consolidated operating loss for the quarter was $1.2 million compared to a loss of $0.2 million last year, excluding Acasti's results. The variation is mainly related to our exit of krill oil business, investment in the cannabis business development and the increase in corporate G&A expenses.Turning now to our liquidity. At the end of September 2018, our cash position was $20.5 million, and total debt was $4 million. Our Phase 1 now being completed, we did announce budget $4 million or 80% has already been paid, and we still have approximately $1 million to be paid during the current quarter. As for the $5 million Phase 2 investment, most of the investment should be disbursed before the end of the current fiscal year. We continue to have a strong balance sheet and a cash position to execute our growth strategy.Now I'll turn the call to you, Jim.
Mario, thank you very much, and you just fast-forward to Page 11 and talk a little bit about our cannabis business and progress towards commercialization. I just wanted to review again with everybody our multiphase path to growth, which is in the near term, is to be focused upon immediate commercialization of this business. It's nothing like to be in business to be business. And that will be for us a B2B focused on extraction, purification and formulation of differentiated forms, and we're executing, I think, very, very well against that.Longer term, of course, we have designs on doing much more. I do believe, and as I shared with so many of you in our meetings, that this is a fundamental, a global, a new consumer product phenomena. And that consumer product phenomena globally will be anchored in wellness and in the medical channel. That is where the regulatory frame will permit entry, and this very much will be our focus in the longer term in a B2C global fashion and work in that regard towards that end through M&A and licensing activities, which we have underway as we speak.Looking to Page 12, I just wanted to share with everyone that, as I mentioned, a global wellness business that has expanding opportunity for product application based on extracts. And there's also a very interesting and expanding regulatory pathway to consumers that is also developing. I mean, a lot of us look at the classic Canadian frame around cannabis, but there is more pathways to consumer. And there is expected to be more through natural products, beauty cosmetics, animals, et cetera.Moving to Page 13 and a little bit more commentary on the license, as I mentioned at the opening of the call. And the issuance of the license to process under the new regulations is progressing, as mentioned earlier. We have submitted our evidence package. And this is, again, progressing very, very well. We've had engagement with Health Canada towards that end. And we're very happy with the progression there.I think it's important to note, Mario and I were just talking before the call, under the new regs post October 16, there's been no new licenses to process or produce issued, but we think that could change imminently.Looking at Page 14, our Phase 1 investments, as I mentioned, was completed end of August. This is our site in Sherbrooke, cGMP nutrition products facility, which will -- that's about 50,000 square foot. But last time, we shared some pictures from the outside. Here's a couple of pictures inside in terms of one element of our Phase 1 installation. Our lab, which is fully outfitted and operational. And for those who haven't yet, we posted a video on the website couple of weeks ago, which was basically a walkabout inside the facility, and I would welcome everyone to take a tour if you haven't done so already.And looking at Page 15, just on that tour, you'll see Phase 1 investment, which was $5 million, largely around site security and compliance. But the Phase 2 investment to bring us up to 200 metric tons of processing capacity is on time and is on track, and we have definitely opportunity to expand that site further.Okay. Hey, just jumping to Page 16. As I mentioned, there was a big nutrition product show here in the last days in Las Vegas. And I'd like to quote our Vice President of Sales in Nutrition, Marc Vaugeois, when he said, "Jim, in my 28 years, I don't know if I remember ever being so busy at a trade show. We were mobbed." And I was there, and we were. I think there's a reason for this. I think we were able to profile some super innovations that are very, very relevant to nutrition product companies in today's space.And just jumping to Page 17. One of the -- key example is a line that we've developed for nutrition products called -- what we are calling internally, essentials. This is a nutrition product approach to the endocannabinoid system.And there is a page -- checking to Page 18. There is a growing conversation, clearly, in the broader base consumer products market, around the endocannabinoid system. But many and many major corporations cannot participate in that conversation because the legal framework in their country, and especially in countries like The United States, doesn't permit them. But if there is a way for them to engage consumers in that conversation, they are very, very motivated to do so. And these are some examples of products that we've been formulating, that we were sharing as samples in discussions with so many major marketers in the space. These are turnkey solutions that, again, allow big brands that entry into the market in a federally legal way that can preposition them to formulate more broadly should the regulations allow. Moving to the next slide. Fantastic innovation that we got, a tremendous engagement with and projects. KetoCharged, a product designed to reap the benefits of ketones even though you're not on a ketogenic diet and can be very, very helpful and an important opportunity for companies participating in the weight management space as well as sports nutrition. So just to a little bit on nutrition products. In conclusion, Page 19. I would say our cannabis business is on track and moving towards our goals of commercialization this fiscal year. We are working closely with Health Canada to conclude this process on licensing, and it is moving very, very nicely. Phase 2 expansion is on track and on time towards the 200-metric-ton processing capability. And our solutions business, you heard from Mario, we had a very good -- Mario, it was one of our best quarters in nutrition ever.
Yes.
And I was just so excited to be part of the team here last couple of days with customers and some very relevant projects that had just very, very impactful conversations. And we have a solid balance sheet, including $20.5 million in cash.So those would probably conclude our formal remarks. We would be open to any questions or discussions. So thank you very much for listening.
[Operator Instructions] First question comes from the line of Doug Loe from Echelon Wealth.
Just a couple of things. Mario, I just wondered how much of the revenues in your nutritional business is actually devoted to any of cannabis oil formulation work so far? Just want to get to kind of sense on, comparing prior quarters, how much the cannabis business is sort of impacting legacy Biodroga business.
It's approximately $0.6 million that is coming from, let's say, retained business.
Okay. No, that's great. And then, Jim, appreciate some of the new insights into some of the branded products that you expect to launch imminently. You have mentioned in prior conference calls, the possibility that -- an angle into the nutritional supplement space that layers on cannabinoid formulations could involve some combinations with existing nutritional supplements, including krill oil, I think you might have mentioned in a prior call. Just wondered how your thinking might have evolved there as the chemistry around cannabis oil formulations might relate to some of the work you're already doing in nutritional supplements and what imminent product launches might be forthcoming in that realm. And I'll leave it there.
Doug, thank you very much. For me, and I think I've probably shared before on these calls, I think the parallels between nutrition products in this industry are staggering. I think this industry, the cannabis industry, has parallels that are striking to the nutrition and wellness products of the '80s. And I think if one can learn from the growth and the development of that industry and apply those lessons to this business, there could be some very, very interesting gains in that regard. As we say, we believe we can bring decades of experience of nutrition products to this industry. And what is a great way to achieve success in nutrition products and, again, value-added differentiated products that deliver on consumer needs. And these aren't single-entity products that are often condition-specific, formulated for a specific design. So if one can marry formulation combined with some clinical work and provide a practitioner or that store manager with the raw material for conversation to engage the customer, that's where you have the best value opportunities. So that's what we believe. I think an example of that is work that I've mentioned before that we have underway, by looking at some of our proprietary products, MaxSimil as an example, an omega-3, which is more readily absorbable. Krill oil, we have a license with the world's largest krill oil provider. And to look at could these carrier oils provide a beneficial vehicle through which to deliver a formulated product, we sense that they may, and we are very anxious to see some of the results of this research work, which is due very, very shortly. And just maybe one last comment there, just if you could imagine for a moment, a product like our omega-3 MaxSimil fish oil, which we know is good for inflammation, combined with a CBD product, and you have, again, a differentiated and possibly a more efficacious product for the inflammation space sold through a controlled channel. So this is some of the things that we're working on and we believe will be powerful for this business going forward.
So that's super -- we're maybe -- I'll just in, operator, while I've got the line here. Jim, you've obviously talked about the additional $5 million in the growth CapEx that you're investing in adapting Sherbrooke for solvent extraction of cannabis oil. Extracting oils from biological organisms is obviously something that the firm has abundant expertise in. Just wondered if there, in any of the batches that you might have run through the facility so far, like any surprises on some of the idiosyncrasies and how you might be able to optimize yields and so forth as they relate to cannabis oil extraction.
I would say there is always learning, and we've done a tremendous amount of off-site R&D batch processing. We've also been to numerous countries around the world and stood shoulder to shoulder with people that are working on same to observe and to learn. And I would say there's learnings. I don't know if there's surprises, Doug. But there's been learnings. And some of those learnings were the fuel for which we did those patent filings and that we announced a couple of months ago. Where, I guess, there were surprises, Doug, in the end because our team looked at the results and thought, "Oh boy, this is interesting. We better put some patents around it." Of course, there's always the difference between the lab scale and the big scale. But some of the things we've seen did surprise us, and it surprised us in a very positive manner.
[Operator Instructions] Your next question comes from the line of [ Frank Michaels ] from -- he's a private investor.
I got a couple of questions, specifically on the timing and just going historically through the events and presentations. I've heard before on time and on track. And initially, the licenses were due to arrive July, August, that was the presentation made in New York back in November, back in November 2017. June this year 2018, references are still the same. There's no time line changes yet. At a presentation in August, everything got switched around, and the actual license to produce now is Q3, Q4, which is front-row center right now. So I presume you have a fairly clear expectation right now that you will be seeing the license approval anytime now. And then, the -- I guess, this license of sale now has been pushed off a quarter or 2 into the 2019 year. Can you talk about a little bit more -- get a little bit more clarity on that? And...
Michael, I think there's -- thanks for the question. I think there is 2 elements to that. One is the site readiness, and one is the licensing process. At the highest level, what we've been working towards is convergence: convergence of site readiness, convergence of the license and convergence of commercial agreements. And I would say on the commercial agreement side, we're very, very pleased and happy about our Canopy agreement. I would say on the site readiness, which is related to my on time and on track messages, we are on time and on track. Where our frustration has been is with the federal government agencies. And I would say some of the feedback that we've shared on our statements before was based on government feedback, which clearly has not eventuated in terms of the attention and the speed with which the agency has been working. Having said that, we're very, very pleased, as I said, to get the readiness letter, and we're very, very pleased with the engagement we've had post submission of our evidence package. And if things continue to move at the agency in a successful way, we will see the convergence of license, site and commercialization.
And just a follow-on. I guess, is there a possibility because given the slide deck presentation, license to produce and inspection and sale license, there's a -- the common denominator there was Q4 2018. What is the likelihood of both licenses coming in back to back or in the same time? And then what's the -- what would be the ramp-up from a production capacity and being able to get revenue?
Michael, our view is with the processing license, we're good to go for commercializing our Canopy contract on a B2B basis. And that's going to keep us plenty busy in the near term with business. The sales license, which would allow you to sell finished forms to the consumer through organizations like the SQDC will come in due course. And normally, there is some additional compliance issues that one has to demonstrate for that. But it will not prevent us from commercialization on a B2B front.
So if you get the license to produce, say, end of November or before Christmas holidays, you're pretty much ready to ramp up and have sales to Canopy fairly quickly?
That's our belief.
How quickly is quickly? I mean, how ready are you guys to actually produce Canopy?
We're ready to go. What we need is, we need the government green light to move forward. But as any business, one has to take it one step at a time. And -- so we're ready to go. We have engagement with our customers right now as we speak in terms of quality agreements and how to move forward. There's always testing and commissioning of the equipment. One has to demonstrate consistency batch to batch. This is the normal start-up procedures. But good news is there is strong capabilities within the team. Good news is there's strong demand for the product. Good news is there is strong will on all sides to move this fast as possible. And that is clearly our commitment.
So is start-up a month, a week?
Michael, I think we're going to leave it there, okay, for my comments on this. Let's just say that we have convergence occurring as we've been working towards -- and we're very, very pleased with how that's progressing right now, especially on a licensing frame of light.
And my second question is more on the formulation and the brands. Is that something that's being developed internally? Or is that a combination, partnership arrangements with others with respect to the gels, the beverages and topicals...
There's -- I would say, Mike -- how do I answer that effectively? I believe and my experience has taught me that it is normally better through alliance and/or acquisition to achieve those goals. Development in-house always takes more time. And I would say, we are very, very, very active on the technology front and the formulation, development front, through relationships around the globe. And that's in fact one of the reasons why we are here in Las Vegas as we speak.
There are no questions. I will turn the call back over to Jim Hamilton.
Thank you very much, operator. Mario, thank you for all your work in the quarter and on the business. As I mentioned, at the front of this call, we've had an incredible few days here in Las Vegas and had an incredible quarter in terms of how this business is moving forward. And I think the quarters to come, Mario, are going to be equally fun and exciting. So thank you, everyone, for your attention and support, and we look forward to talking to everybody soon.
This concludes today's conference call, you may now disconnect.