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Good day, everyone, and welcome to the Neptune Wellness Solutions Inc. Second Quarter 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Valter Pinto, Managing Director of KCSA Strategic Communications.
Thank you, operator, and good evening, everyone. Thank you for joining us today for the Neptune Wellness Solutions' Fiscal Second Quarter 2022 Earnings Conference Call. With me today are Michael Cammarata, President and Chief Executive Officer; and Randy Weaver, Chief Financial Officer. As a reminder, all amounts discussed today are in Canadian dollars. And our remarks may contain forward-looking information representing our expectations as of today and may be subject to change. Today's conference call contains non-IFRS measures, specifically adjusted EBITDA to provide investors with supplemental measure of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. Management also uses adjusted EBITDA in order to facilitate operating performance comparisons from period to period, prepare annual operational budgets and assess our ability to meet our capital expenditure and working capital requirements. Adjusted EBITDA is not recognized, defined or a standardized measure of your IFRS. Our definition of adjusted EBITDA will likely differ from that used by other companies, including our peers, and therefore, comparability may be limited. Non-IFRS measures should not be considered a substitute for or in isolation for measures prepared in accordance with IFRS. Investors are encouraged to review our financial statements and disclosures in their entirety and are cautioned not to put undue reliance on non-IFRS measures and view them in conjunction with the most comparable IFRS financial measures. We do not undertake any obligation to update any forward-looking statement, except as may be required by Canadian and U.S. securities laws. Assumptions were made in preparing these forward-looking statements, which are subject to risks as laid out in our public filings from SEDAR and EDGAR. I would now like to turn the call over to Michael.
Good evening, everyone, and thank you for your time today. I'm excited to share a number of updates with you that are part of our larger growth strategy for Neptune, and that position the company for success. So let's jump right in. This morning, we reported our fiscal second quarter 2022 results. The revenue for the quarter totaled $15.7 million, a 27% increase from Q1. This was our third consecutive quarter of revenue growth since making the strategic pivot to focus on branded revenue. We continue to make improvements to our top line as well as our gross and operating margins. Our scaling efforts have gained traction. We have reduced expenses across our brands and subsidiaries. During the quarter, our market position and product demand was better than expected in cannabis, organic food and beverage and nutraceuticals, which continues us on our path to profitability. Before we move on to our operational highlights for the quarter, I would like to provide shareholders with an update on our strategic review committee through which the Board, in partnership with management, began evaluating the company's business plan, capital deployment and long-term strategic recommendations to enhance shareholder value. Through a thorough review of the company's near-term opportunities and existing operational and financial position, the management developed a comprehensive action plan focused on unlocking shareholder value through the improvement of Neptune's cost structure as well as through the reallocation of resources towards high-growth projects. Per our announcement, the Board of Directors has approved the management's comprehensive action plan, which we have begun implementing immediately. The plan includes cost-cutting initiatives and reorganization of the company's operations and resources towards high-growth and high-margin opportunities that are estimated to generate an annual cost savings of over USD 10 million. These measures will provide immediate and reoccurring cost savings, positioning Neptune for profitable growth and improved cash flow going forward. Randy Weaver, our newly appointed Interim Chief Financial Officer, who was instrumental in developing these action steps and will elaborate on the individual measures in the financial section shortly. To that end, I would like to welcome Randy to the Neptune team. I feel confident that his financial expertise will be invaluable as we execute on our action plan. Now I'll turn to the operational highlights from the fiscal second quarter. First, let's talk about cannabis. During the quarter, cannabis continued to be a key growth driver for us as we more than doubled our Canadian store count to over 1,000 from 400 stores in the prior quarter. And as such, our revenue growth has accelerated in each category across Mood Ring and PanHash brands. Our current store presence marks the halfway point along our path to penetrate 2,000 store market where we operate, Alberta, British Columbia, Ontario and Quebec, representing over 80% of Canada's total legal markets. Following the launch of our flower brand in the first quarter and in August of this year, we achieved significant growth, represented by a 4.7x increase in flower sales compared to the prior quarter, as consumer demand for Neptune's carefully selected strains grew well beyond our expectations. Additionally, we are excited to announce the launch of our Mood Ring vape products in the territories of Ontario, Alberta and British Columbia. One vape product line in Ontario and 2 vape products in line across Alberta and British Columbia. Our new vapes feature premium strains with 510 thread cartridges and are produced sustainably with biodegradable mouthpieces. The product leverages our patented extraction process which produces large quantities using low amounts of energy. We see a significant opportunity to scale these high-margin products across Canada which will help us meet our CAD 1 million per month run rate. The vape market is a fast-growing segment of the Canadian cannabis market. Currently, the third largest category by sales in Canada according to Headset data. We plan to continue introducing new cannabis products in the coming quarters and additional SKUs within our existing product lines to scale growth. Last month, we were granted an extraction patent, which protects the process that we have developed through years of science-backed research. With this patent, we are able to license our processes to cannabis manufacturers, which would expedite their time to market and improve yields and ultimately, presenting an opportunity for Neptune to generate additional sources of reoccurring high-margin revenue for years to come. Furthermore, we see an opportunity to license this technology, allowing us to gain exposure to developing cannabis markets such as in the United States without the need to establish operations. Next, let's move on to nutraceuticals. We have achieved a record revenue quarter for Biodroga, our B2B supplement subsidiary. This was largely driven by a continued increase in consumer demand for immune boosting supplements as well as the launch of our recent innovations, which attracted new partners. Like most in the industry, we have seen modest supply and retail price increases for our products, which have been absorbed by the consumer. Launching innovative turnkey solution products is critical for this category as our partners rely on us produce exciting new products to keep consumers engaged. Our data demonstrates that consumers are interested in alternative delivery forms. As a result, we have been working on and recently launched a line of vitamin sprays and pumps in the U.S. and in Canada. Thus far, the products have been well received and expected to expand our distribution over the rest of this calendar year and into next. We also are proud to have recently launched our new Biodroga website and have been increasing our participation at industry events to elevate Biodroga's brand awareness. Now let's turn to organic food and beverages. We have significantly improved our market position and financial strength in the second quarter, following one, the full integration of Sprouts; two, the continued expansion in the U.S. market; three, the introduction to select Canadian retailers; and four, their improvements in the supply chain. Despite industry-wide supply chain issues, we were able to manage fulfillment on strong consumer demand throughout the quarter and successfully expanded into hundreds of new cells, leading to quarter-over-quarter top line growth. As mentioned in our strategic review update, we have improved supply chain efficiency and reduced overall supply chain costs, which will lead to gross margin improvements and improved cash flow.During the quarter, we started production of the CoComelon characters relating to our licensing agreement with CoComelon, the world's leading children's entertainment brand. We expect to begin distributing these products by the end of the year. Finally, while we're not yet prepared to talk about the impact of ESG today. I want to make it very clear. Neptune cares deeply about and is committed to integrating ESG throughout all of our business. We will have more to say on this topic next quarter. With that, I will turn over the call to Randy to discuss the financial results.
Thanks, Michael. First, I'm thrilled to join Neptune's management team. It's an exciting time. We're completing an incredible transformation in a very short period of time, becoming a diversified CPG company. As we look ahead, we have lots of opportunities to scale our brands across high-growth markets: cannabis, nutraceutical, food and beverage, with truly good-for-you products and good-for-the-planet products. Now let's get into our financial results for the quarter. We can discuss the operational and financial action steps as well that we've recently taken to unlock shareholder value.Our second quarter 2022 revenue was $15.7 million. That's an increase of 27% from first quarter revenue of $12.4 million and a decrease of 38% compared to the year ago quarter. The year-over-year comparisons are somewhat difficult because of our business transformation. The decline between years was primarily driven by a reduction in COVID-19-related products that we're no longer selling as well as our transition out of our B2B extraction business in favor of the current B2C cannabis business. Those declines were partially offset by an increase in food and beverage from our Sprout acquisition. The quarter-over-quarter sales growth was mainly attributable to the expansion of Sprout products across North American retailers and record sales from Biodroga, our B2B nutraceuticals business. Negative gross profit during the quarter was $1.5 million, including inventory impairments of $3.7 million related to SugarLeaf and innovation operations. That compares to negative gross profit of $4.7 million in the year ago period. It's an improvement of $3.2 million or over 65% even with the inventory impairment. SG&A expenses for the quarter were $17.8 million, a decrease of $600,000 compared to the same period of the prior year. The SG&A decrease was driven by a reduction in advertising fees related to AMI warrants and other onetime expenses in the comparable period, partially offset by increases in salaries and benefits, marketing, insurance and bad debt. Net loss attributable to Neptune for the quarter was $14 million, which declined from a net loss of $22 million in the comparable year ago period. The decrease in net loss is mainly attributable to increased gross margins, a decrease in SG&A and a positive revaluation of derivatives. Adjusted EBITDA loss during the quarter was $9.5 million, an improvement of $3.5 million versus our adjusted EBITDA loss of $13 million in the comparable year ago period. The improvement in adjusted EBITDA is mainly attributable to increased gross margins due to the exit from several product lines.Moving on to our balance sheet. We ended the quarter with $30.8 million in cash on hand. We expect our cash on hand to be adequate for the foreseeable future. Currently, we have little debt, all of which is subordinated and at the same time, we have assets to leverage. We may seek additional financing in various forms to ensure we have the right funding structure in place to support our growth trajectory. In the past, we have been successful with these fundraisings. We expect to be successful again. However, there can be no assurance that will be the case. I would like to now talk about additional details related to the action plan coming out of Neptune's strategic review. As Michael noted, the Board of Directors approved initial actions for a comprehensive action plan related to our strategic review. Our plan includes cost-cutting initiatives and reorganization of the company's operations and focusing our resources towards high-growth and high-margin opportunities. We're estimating annual cost savings of USD 10 million or CAD 12 million. We've already begun executing these actions. Immediately, we're prioritizing Biodroga, Sprout Foods and cannabis as the key growth drivers of our business moving forward. We're putting all of our resources toward their success. We expect each of these to contribute positively to our results with limited additional investment.Let's talk about Biodroga first. Biodroga remains a positive contributor and a cornerstone to further develop our suite of nutraceutical products, which can be sold across multiple brands. After a record sales quarter in Q2, we plan to strengthen our brand awareness and promote new products through industry participation and driving traffic to our new website. Sprout has also demonstrated continued progress in the 2 most recent quarters and remains on track with the CoComelon product launch by the end of this year.We will continue to increase distribution of existing Sprout products and introduce new product offerings. We're implementing several initiatives to improve Sprout's margins and optimize its supply chain.Moving on to cannabis. During our strategic review, we took a hard look at the right strategic direction for this part of our business. Over the last year, our cannabis business in Canada has achieved improved efficiencies and steadily increased its revenues since changing to branded products. We are approaching our goal of $1 million per month run rate, which we expect we will hit in the latter part of our fiscal year.We also now expect that our cannabis business, with limited additional investments, will begin making positive contributions during the second quarter of our coming fiscal year and will be an important part of our growth strategy. We plan to continue executing new product launches like the Mood Ring baked products, and we'll continue expanding our full cannabis product offerings into the 4 Canadian territories where we operate.We're eliminating noncore operations and reallocating the most promising projects from these groups, including adult Forest Remedies' gummies, and ECO TABLE to the corporate team for further evaluation and action. We've implemented a media personnel reductions to streamline our operations and ensure we have the right organizational structure for the size and scope of our current business. We're placing a temporary freeze on nonessential hiring. These decisions remove SG&A costs while not affecting our growth plans.Finally, I want to emphasize that we are fully committed to continuing to build a culture of improved transparency and accountability across the entire business, ensuring we are positioned for success in the long term. We believe this action plan leads to immediate and recurring cost savings as well as streamlining our focus on our high-margin growth opportunities.In closing, as we look to the remainder of our fiscal year, we remain confident in delivering sequential revenue growth and expect gross margins as well as adjusted EBITDA to continue to improve. We will share a more complete outlook for the full year and comment on next fiscal year with our next quarterly call. Let's now turn the call back over to Michael.
Thank you, Randy. Before we open the call for questions, I would like to provide a bit more color on our growth strategy, operational initiatives and our vision for the future. Starting with cannabis.We are rapidly expanding across Canada's territories and have seen outstanding consumer interest in our flower products, which are experiencing strong levels of demand. We attribute the success of our flower products to the unique seasonal selections we offer, carefully chosen by our cannabis team. This has driven quarter-over-quarter growth across all of our cannabis categories. And as a result, we are quickly approaching our $1 million monthly run rate for cannabis, which we still believe will occur by the end of this fiscal year.The next important milestone for our cannabis business will be the successful rollout of our Mood Ring vapes. As a result of the strong growth of our flower products to date as well as the launch of our higher-margin Mood Ring vape products, we now anticipate a positive contribution from cannabis by the end of next fiscal year. While we continue to establish ourselves as a trusted premium cannabis brand, we are also building a foundation in the maturing CBD market through our various brands and forms such as Mood Ring and PanHash CBD oils. We are also building on the traction from our other health and wellness products, particularly in our nutritional supplements.We are leveraging the most advanced delivery systems and our patented MaxSimil technology to offer consumers flexible products such as vitamin sprays, gummies, soft gels with increased absorption and onset compared to other products. MaxSimil's a key determiner within our supplement portfolio. It's our omega-3 fatty acid delivery technology that uses enzymes to mimic the natural human digestive system to pre-digest omega-3 fatty acids.Earlier this year, in a randomized, triple-blind, crossover-controlled clinical trial, MaxSimil was proven to be 3.5x more absorbent than standard fish oil. In addition, we have established study protocols for a clinical study on MaxSimil's efficacy in advancing both CBD and THC bioavailability and onset and expect patient enrollment to begin in the coming months.The results of both of these studies will allow us to further accelerate the marketing of MaxSimil by making additional health benefit claims and educating our distribution partners and consumers of the benefit of our product. And we see significant opportunities to license MaxSimil with CBD and THC, particularly in the United States.Turning to Sprout. We are focusing on our efforts on establishing Sprout as a leading organic baby and toddler foods brand through the introduction of new product lines, notably the CoComelon product launch, scheduled for the end of the year. Today, we have continued to generate quarter-over-quarter sales growth and increasingly penetrate the North American retail chains. In Canada, we are now available in select Metro and London Drugs and Sobeys stores.As I look to where Neptune was 12 months ago, I am extremely proud of how quickly we have implemented the strategic shift in our business strategy to a fully integrated consumer packaged-good company and our improved operational performance. As a result, this quarter, the measures we are taking as part of our comprehensive action plan will further enhance our performance and financial position through an annual cost savings estimated at over USD 10 million.Neptune continues to be focused on creating natural, plant-based, sustainable, purpose-driven brand with truly good-for-you and good-for-the-planet products. We believe there is always a greener, healthier, better way and are committed to embedding environmental and social governance in all levels of our business.Before I conclude today's prepared remarks, I would like to thank our employees for their dedication and hard work as well as thank all investors and stakeholders for their commitment to Neptune and our long-term mission to deliver all-natural products that Neptune and its customers can stand behind. Operator, you may now open the line for questions.
[Operator Instructions] And our first question will come from Aaron Grey with Alliance Global Partners.
And Randy, welcome aboard to the team. So first question for me. I wanted to dive into the cannabis business. You guys talked about the quarter-over-quarter trends, seem to highlight Sprout and Biodroga more than cannabis, but at least according to some of the third-party data, cannabis seems to be doing very well quarter-over-quarter. So just wanted to get some further commentary specifically about how cannabis did during the quarter.And then also in terms of your commentary on reaching the 1 month by the end of the fiscal year. Again, according to our data, appears that you might already be approaching that. So I just wanted to kind of dig a little bit further into that commentary. And then lastly, on cannabis, positive contribution by 2Q fiscal 2023. Just want to clarify, that's a gross margin when you say positive gross contributions? I just wanted to clarify that.
When we talk about positive contribution for the cannabis business, we're talking about the overall operation contributing positively to corporate overhead. And certainly, we expect to have positive gross margin before that. In terms of the quarter-over-quarter revenue growth, yes, the cannabis business is continuing to increase quarter-over-quarter, and we are approaching that $1 million a month figure. We don't release specific data on that, but we're getting very close. And I think that's why you see us changing the forecast for when we're going to achieve cash positive contributions for the cannabis business.
Okay. Awesome. So when you say for operations for cannabis being positive, is it fair to say EBITDA as a proxy for that?
EBITDA as a proxy for that? I suppose that's a fair comparison. Yes. So I think we certainly look at the business that way, and we're looking at absorbing all of its overhead there in the plant and contributing positively to the corporate overhead. So EBITDA would be a fair comparison to that, I believe.
Okay. Awesome. That's great to hear. And then just a second question for me, sticking to cannabis more kind of high-level, top line opportunities. A lot of movement within the market in terms of pricing pressure some of the current larger market share players losing share. You guys have been some of the gainers that appear according to third-party data. So Michael, we've talked about in the past in terms of the opportunities for you guys kind of gaining share there. A lot of people seem to be using pricing as a lever to gain market share. So as you're looking to continue to build out the flower brand and now entering Mood Ring with vape. Just want to see how you are now analyzing the marketplace and where you're seeing opportunities for market share gains.
Yes. I think it's really focusing on the quality of the product. And I think the seasonal selection has worked really well with us. Because we've definitely seen that the consumer is constantly changing its requirements and definitely what its profile is. So like, for instance, a lot of our flowers, they have over 24% THC with over -- up to 3% or more terpenes. So we've been really focusing on what the consumer is buying in flower and also looking at that profile and that taste. So think about like craft experience in the flower. So I think it's driven a lot of demand. And we actually learned a lot from our initial launches and definitely honing in and focusing on that.I think that when it comes into the vapes, I think that's an area because of our unique patent that we've gotten and a lot of our experience with that facility to be able to have a premium margin as well as be able to be reactive if needed. But we definitely are focusing on the trends and what the consumer's buying. Even our capsules that you kind of alluded to and -- in the market, we've actually been overperforming our expectations. And so we definitely are seeing that we have products that can be ranking #1 in certain areas.And so our focus is really looking at that consumer and making sure that we have the right product for them as well as being very cognizant of their adoption and obviously in the different territories. And I think vape is going to be a huge key for us and especially because of our technology and also our focus on making sure that we're supporting the consumer with their goals, too. Like we're planting trees with different purchases and stuff along those lines and really getting connected to the consumer and what their desires are.
And our next question will come from Gerald Pascarelli with Cowen and Company.
This is Victor Ma on for Gerald Pascarelli. Now that we're halfway through fiscal 3Q, can you give some color on how revenues are trending relative to what you delivered this quarter?
Can you repeat that? I didn't quite understand the question.
Yes, sure. So now that we're halfway through fiscal 3Q, can you give some color on how revenues are trending relative to what was delivered this quarter?
I think we talked in the remarks about sequential revenue growth. And I believe that's a fair comparison. We expect to see continuing revenue gains in both our Q3 and our Q4.
Great. I appreciate the color. And just one more question, if I can. How much of a benefit did Mood Ring have on revenues? And do you expect this to become more pronounced on the back half of this year or more so in fiscal '23?
It had a positive effect on revenues, and I expect it to continue for the rest of the fiscal year and into '23 and continuing beyond that actually.
[Operator Instructions] And we have no further questions signaled at this time. So I'd like to conclude today's conference call. Thank you, everyone, for your participation, and have a great day.