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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 Fourth Quarter and Fiscal Year-end Results 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 fourth quarter results ended March 31, 2019. Joining me today is Jim Hamilton, our President and CEO; Martin Landry, our new Chief of Corporate Development and Strategy; and John Moretz, our Chairman of the Board. As usual, Jim will review Neptune's operational annual highlights, followed by myself with a discussion of the 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. securities 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 Exchange Commission.Now I'll turn the call over to you, Jim.
Well, Mario, thank you very much, and welcome all and a special welcome also to Martin Landry, who is an incredibly well-known personality in this business and it's just so wonderful to have his insight into the business and support. And Mario, I think you would agree, everywhere we go, we kind of -- he gets to referred to like a celebrity, but it's great having Martin on board. And we also have the pleasure of Mr. John Moretz here. John, hello.
Thank you.
And as a special guest appearance, John, of course, is our Chairman and an incredible partner and supporter of this journey we've been through in the last couple of years together to make this business so wonderfully positioned for the future. And Mario and John and Martin are just 3 of the team that have been helping drive this business. And for those who are interested, we're also going to start to profile and put a little more personality on some of the people, it's not just me and Mario the voices that you hear on the phone, but it's so many more and we'll start to profile those people and if you're interested on our website blog you'll see a recent addition of Dr. Graham Wood, who has been another great addition to the team.So today, we'd like to speak to -- there's a presentation posted on our website for those who want to follow in terms of the agenda. Take a look at some of the highlights of the business. In particular, subsequent events to quarter, we will look at the fiscal year-end and fourth quarter results with Mario. And then we want to talk about some incredible news, linked to some of the recent sales contracts that we've booked and -- as well as outlook for the future and some questions and answers. And let me -- if I just welcome you to look at Page 5, events subsequent to the quarter, and I'm looking at the team here, I can't remember in my tenure at this company that we've had such an incredible developments in our business, representing a lot of the work of late. First and foremost, we are very happy to announce this evening that we are going to turn on an additional 1,300 metric tons to bring it up to 1,500 metric tons extraction capacity in our Sherbrooke plant. In addition to that, the associated value-added activities in terms of formulation and packaging. This is just wonderful -- and that is on top of 2 recent announcements on commercial deals with 2 great companies of The Green Organic Dutchman, TGOD, as well as Tilray, bringing in an additional about 360-plus metric tons as a minimum of processing of cannabis over the next couple of years. And let's not forget recent also announcement that we've made is a signing of a definitive agreement of SugarLeaf Labs, a hemp processor in the United States, also with 1,500 metric tons capacity. So not only are we increasing sixfold here in Canada to 1,500, we'll have a combined 3,000 metric tons of processing capacity of cannabis both here in Canada as well as the United States to support both domestic markets as well as global markets around the world. So it's just been an incredible couple of months and weeks to bring these situations to bear, and we'll talk more about them in a moment. But before we get there, I think we should close out the fourth quarter, Mario, and the last fiscal year, and I'd just like to invite Mario to take us here for the next few minutes on some of the financials.
Yes. Thank you, Jim, and 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 of last year. However, comparative results of operation in the consolidated financial statements still include Acasti numbers for the period ended March 31, 2018. Consolidated results for the fourth quarter and fiscal 2019 results 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 Neptune's website. You'll find a detail of the financial results of the quarter and for the fiscal year in the appendix of the deck.So let's start with our cannabis segment. During the fourth quarter, in fact, by the end -- more at the end of the month, March 2019, we started our commercial cannabis extraction business, for which we operated few days in March, where we generated $12,000 in revenues. As part of our operation, lab testing and batch release, increased the lead time to market and delayed slightly our revenue recognition from cannabis extraction. R&D expenses related to the cannabis segment, which basically consists of salaries and fixed costs at our manufacturing plant in Sherbrooke including the depreciation in order to prepare the site and start the cannabis oil extraction business in compliance with Canada's requirements, were $1.9 million compared with $1.5 million for the same quarter last year. The increase of $0.4 million is mainly related to additional compensation from full-time employees and depreciation of the property plant and equipment. During this quarter, SG&A related to the cannabis segment totaled $0.4 million compared to $0.3 million last year and consisted mainly of the business development team, which includes traveling and representation expenses. The non-IFRS operating loss of the cannabis segment, before taking into consideration the noncash stock-based comp and the depreciation and amortization, was $1.5 million for the fourth quarter in comparison with an operating loss of $1.1 million in the same period last year. Let's now look to the nutraceutical segment. Total revenue for the fourth quarter including royalties, revenue were $5.7 million, down by $1.3 million over the fourth quarter of last year. Total revenue decline is mainly due to lower sell in the nutrition business due to timing of orders from some customer and also to lower royalty revenues related to lower sales from our licensee. Our gross margin as a percentage of sales was stable compared with the same period last year at 26%. In term of dollar, we generated $1.5 million, a $0.6 million decrease over the same period last year, mainly related to lower sales and the decrease in royalty revenues as discussed earlier. SG&A totaled $1.1 million during this quarter compared to -- with $1.3 million last year and this decrease is mainly due to lower marketing expenses in the quarter. The adjusted EBITDA for the quarter was $0.5 million compared to an adjusted EBITDA of $1.2 million, and this variation is mainly related to lower sale and lower royalty revenues. The corporate G&A for the quarter was pretty stable in comparison with last year with $2.4 million. The consolidated quarterly non-IFRS loss for the quarter is $2.7 million compared with a loss of $1.8 million, related to the nutrition performance and additional investment in the cannabis segment in the fourth quarter. The quarterly net loss increased significantly by $7.6 million to reach $12.4 million in comparison with a net loss of $4.8 million last year. One item impacted significantly the net loss in the last quarter as we took a provision for litigations for an amount of $7.9 million, of which $6 million was settled after the quarter with financial instrument, meaning no cash was disbursed. You will find more detailed information related to this item in Note 11 of the consolidated financial statements.Turning to our liquidity at the end of March 2019. Our cash position was $10 million and total debt was $2.8 million, excluding the operational credit margin. The cash level is in line with our expectation and we are evaluating options to fund our growth with a focus on prudence and minimizing equity dilution. In that respect, discussions are actually taking place in order to establish non-dilutive credit facilities as we -- and we are very confident to have a positive conclusion soon. So as we mentioned a lot of times during meetings with investors and in recent presentations we will be EBITDA positive for the current fiscal year as our activities were ramping up significantly following Health Canada amendment approval that we hope will come in soon.So on that, Jim, I will turn the call...
Mario, thank you very much. For those who are following along with the presentation, I'll just refer you to Page 7, which is -- I just want to reiterate our strategy that we're fundamentally a B2B company and our objective is to be the world's leader in extraction, purification but just not extraction and purification, but also the formulation of value-added and differentiated cannabis products, clearly based on science. Just looking at Page 8, it's something we shared with you before, but I think it's really important that people understand the demand dynamics that we see in the market today. And let's start with the Canadian context that -- and I'm looking at market today that roughly about 70%, 75% of the Canadian market is weed. It's not based on extracts, but we think that will change significantly with the pending legislation that allows new product forms in future, such as vape pens, topicals, edibles, et cetera. And when you look at some of the market research in -- I would call it more free markets, more advanced markets, such as California, the majority is based on an extract. And many that people we've spoken to see it not as 60%, but rather moving even higher than that. So we are seeing demand for extracts growing and paralleling with pending legislation that better match markets that are more developed. And I think, importantly, and we often forget in our equations, in our calculations, the demand for CBD and hemp. And remember, you don't smoke hemp. You take that as an extract in some kind of a delivery system. So when you look at the pending legislation in Canada, when you look at the CBD demand for hemp-based products in Canada and beyond, we see a very, very robust demand profile going forward.And so much so, on Page 9, we have approved today at the Board, I'm looking at John, resoundingly the expansion of our Phase IIIA, what we call it, because we are fully committed and fully commercially booked for the capacities that we have installed in Phase I and Phase II. And our sales teams are already engaging in discussions in terms of filling out Phase III. Phase III will add approximately 1,300 metric tons or 1,300,000 kilos of processing capacity. And this is a staggered approach, remember we've said, this facility is constructed and built, it has run, it has extracted materials before, but we're choosing to turn on an element of section of it and we're doing so for reasons of speed and for investment. We think it is a natural and a wise first step in terms of capacity expansion and that investment will be approximately $4 million and will be largely for security in those rooms, combined with some material handling equipment, et cetera, to allow for the nature of handling of this product. Now our goal is that we'll have this constructed and completed in the latter half of this year and we'll be working with Health Canada to get the amendments approved accordingly [ in a good site ]. So this will be a sixfold increase in our capacity in Canada and we're very, very excited by the capabilities and the -- I would say the quality and the cost profile that, that capacity will allow us to deliver in future.Page 10 is not just about extraction, as I mentioned earlier, it is also about the value-added delivery forms. And for those who are following, there's a picture of the 2-piece hard-shell capsule equipment that has been installed. And I think important to touch on some of the commercial agreements that we've recently signed include a large element of loading of capacity onto these equipments. We will be expanding our packaging capability as well as other delivery forms capabilities in our site and we have approved today with the Board an additional investment of $7 million, and that construction will begin, again, with an expectation we'll have that completed in the coming months of this year.Page 11. And I thought we would include this because it's interesting, cold storage capacity. This is a picture of cold storage rooms that we used in our facility when we were extracting omega-3s. And one of the big problems with this industry today is just capacity to handle materials and it becomes especially important as the volumes are going up, as demand for extracted marijuana and hemp begin and we'll also be investing to expand our storage into this area. And there'll be additional investments, minor investments here rather, mostly around just security. So I was just chatting with Martin and I think the example is, for those who may not be familiar, in this industry in Canada literally they were vaults with -- like you would see in a bank is how these materials would be held. Legislation has since evolved in a bit over a short period of time, but many companies that we're engaging with have material handling constraints in terms of where they can handle materials. So that's a value-added capability that we can offer.Just moving on to outlook and Page 13. Let's just talk about some of the commercial agreements that we published. Added contract volumes minimum of about 360 metric tons over the next 3 years. And much of this that we'll be extracting will be put into consumer-ready value-added delivery forms. And there's a ton of engagement happening with our technical teams and including our technical and IT partners, such as Lonza, in order to develop and then formulate these products and then quite a bit of sharing of information and technologies going further in terms of vape pens and other such products as topicals.I would be remiss, Page 14, if we didn't speak to -- I'm looking at our North Carolina resident and Chairman, John Moretz, talk about great things in North Carolina and that's SugarLeaf Labs. I was there about 2 weeks ago, touring the facility with the Founder and Principal, Pete Galloway, and the team is just doing great work. Remember again, as I said before, 1,500,000 kilos of extraction capability, we really love their access and the relationships with the growing and farm community in the tobacco belt. And not only the gear but also the quality and the quality capabilities of the organization. And again, as we said before, the dynamics of what is happening in the consumer products natural health industry in the United States with CBD is just off the chart. We're so excited to be there at the ground floor.As we mentioned, this would be an 18 -- a value of $18 million initial purchase price, which would represent about $12 million in cash and $6 million in share, and then earn outs, multiples, as we go forward. And, Mario, the average of that earn out if all of this is achieved over the next 3 years would be on or about 5x multiple. And we are working to close that as we speak and we'll get in a little more detail on that in a moment, sometime between now and later July. Let me just add, we had the privilege of having Pete Galloway visit us here for our board meeting this week and it was just incredible to see the engagement of our team and Pete and all his experience with extraction. And I think he met some like-minded kin, if you will, in the extraction and cannabis game. And, John, I think he made a tremendous conversation today this morning at the Board and we're excited by what we see.
Very much.
Page 15, just the roadmap to added capacity. And one of our frustrations that we have communicated before to this round and -- as well as presentations, we've had the privilege to be invited to with the BMO and GMP and others is that we have regulatory constraints that are limiting our capabilities. Now this is a near-term constraint, a regulatory constraint and as we said before, we have capacity that is installed technically there, ready to go. We have to hit the go button, but we do need the permission of Health Canada to turn that on. Moreover, we have people in and trained and ready to go, but we also need security approvals and the clearances for them. So we are regulatory constrained in our facility today. Now this is not a long-term issue. This is a very short-term issue, but is one that we face and the industry has faced. But maybe I can just pause here for a moment and speak to a little bit of what we're seeing with the dynamic of the Health Canada regulatory approach.But I think it's important, and there's been different reports on this, one recently we saw from Cowen, that, give or take, 50% of the Canadian market is out of stock, underserved. And we see that either through SKU vacancies, if you will, on the store shelves or stores actually just closing because they have no inventory today. Now Health Canada has responsibility and an ambition to fully fulfill the legal channel demand, and I think they're recognizing that there has been some dilemmas and some problems. And we're seeing this in a couple of ways.Now we had the privilege of a senior-level meeting recently here in Montréal and had a discussion with them in 2 ways. One is, for those who have been following this, there has been a decision by Health Canada to not entertain, if you will, new applicants as freely as they once did, and only once new capacity is constructed and built and ready to go will they commit resources to review it as we understand. Number two is they're taking a risk-adjusted approach to how they review amendments. And I think that is great news for us, and that's what we understood from our conversation. Companies that have a history of performing well with the regulatory authorities, as we have; companies that have performed well in the Health Canada audit, as we did a short couple of weeks ago; companies that submit their dossiers in a very complete and articulate way are favored. And I would say we score well in all those. At least that's what Health Canada told us, and we feel confident that Health Canada is putting the moves in place to prioritize people -- companies such as ourselves and that we will see these constraints removed shortly, but to be continued.Will that be weeks? Will it be more than weeks? We'll see. To be continued. But that is going to be one of our biggest drivers for our revenue acceleration in the near term. Demand is not our problem. Inventories are in the house. The capabilities are there. The commercial contracts are in place. And I think with the regulatory constraints removed, we'll see a very interesting acceleration on this business.And I'd like to reiterate Mario's comment that we also foresee a year with a very interesting and positive EBITDA position, and we are -- can see a significant sales ramp-up in the coming periods going forward. We have not spoken about the value add of SugarLeaf here today, but clearly, once that transaction is closed, we'll be able to get more insights in terms of how that will contribute to the business. Moreover, I think once we get these regulatory constraints cleared up, we'll be in a better position to give sort of further clarity on the invisibility on that ramp-up.So I think that would conclude our formal remarks, and at this stage, we would welcome questions and comments.
[Operator Instructions] Your first question will come from the line of Ryan Macdonell of GMP Securities.
So maybe just to start off, I had noticed, previously, you had given guidance or an outlook for processed volumes, but I didn't see it in your deck this morning. Are you able to update that for us?
Yes. I mean I think I know, Ryan, the chart to which you refer, and I think if you were to graph that chart, once again, you would see a maximum bar in year 2, in year 3, and you would see probably a half bar of maximum this fiscal year driven by the constraints that we face from a regulatory standpoint at this point in time. If the regulatory things can clear more quickly and clearly, if our Phase IIIa comes online sooner, that bar may look differently. But if I was to graph that bar today, it would probably be something around 1/2 and then full and full.
And then maybe sticking with revenue for a second. Can you kind of give us a bit more color potentially across the kind of rough split that you guys expect we could maybe see between tolling revenue and white labeling revenue in fiscal '20 and fiscal '21?
Yes, Ryan, it's Mario. So I think the white label revenue is -- will represent probably less than -- I would say less than 15% of total revenues. So the -- as you know we are charging services, and I'm talking here about the kind of tolling business model, so where we don't buy the materials and so the materials are provided by our customer. And the -- if you look at the service that we're going to charge, the fee versus the white label and the delivery form services, that's probably a range of [ 85 50 ].
And just to clarify, is that for fiscal '20? And is that out of total cannabis revenue? Or not including nutraceutical revenue?
Yes. So no, it's excluding nutraceutical revenues, and for the delivery form, again, we are -- the limiting factor is the amendments because we're awaiting the expansion amendments, and we will have to file another set of amendments for the delivery form. So we foresee potentially these white label and delivery form in the last quarter of the year.
And maybe turning a little bit to the U.S. for a second. Speaking about fiscal '21, looking out a bit. Can you give us maybe some color on what the revenue split geographically might look on the cannabis and hemp side between the U.S. and Canada?
I think it would be -- Ryan, it's a great question. I think that's probably a better question post closure on the acquisition for us to comment on that. But I'd like to say that we are active in the, call it, the hemp CBD market as we speak now in the natural products industry as we've mentioned before. In fact, we have orders in-house that we're processing through our nutrition team as we speak. And for those who may have been on this call, this is old news, but I am just amazed at what I'm seeing that here is a product category that is now larger than vitamin E and on track to be much larger than omega-3. It is the topic of conversation, and I think every major consumer products company has some kind of project underway right now. It's really an exciting time on the hemp CBD market [ in our states ].
And maybe pivoting a little bit to talking a bit more about white labeling. Thank you for giving the outlook for CapEx. It's very helpful. Just wondering, this $7 million of CapEx for formulation, manufacturing, et cetera, I'm wondering how much of the -- of your intended capacity for these product categories does that encompass? And does it encompass all product categories that you expect to be involved in from a white labeling perspective?
Well, Ryan, I think for the space and the site that we've identified and what we'll be doing, I would say it would be on the high-value kind of forms if you will. So formulated 2-piece capsules, it would be the cartridges for vapes and other such sort of high-value tinctures, other values there. We actually had the conversation about sort of larger application forms. When I say larger, more bulky forms, and that could take the form of maybe more consumable kind of products. And we have room on the site footprint, if you will, to do that, but that would take probably more construction. Right now we're going to utilize what we have with the highest value margin-add products that we can identify.
Okay. Can you expand a little bit maybe on which product categories specifically you're referring to?
Yes. We like, Ryan, specifically the 2-piece hard shell a lot. And some who are maybe marijuana obsessed, they may find that a little bit surprising, but we're big believers in formulated products, especially broad spectrum, including an element of hemp CBD. And we say that because these are typically products taken chronically, not sort of on an occasion basis, a social occasion basis but chronically for things like inflammation, sleep, anxiety, what have you. So -- and we are very encouraged, if you will, by the data we're seeing in terms of the stability of these products and the ability, too -- and I think this is early. I want to be a little bit careful with the statement, but the ability, too, for this vehicle to retain the volatiles, the terpenes, which there is some growing evidence to suggest these could be a powerful component in terms of the whole health profile. So we like capsules a lot.We think vapes and the vape cartridges, clearly, if you look at the U.S. model, are a large part of this business. That will be part of it. And I would say there's also some interesting novel, unique delivery forms that one of our partner customers would like support with, and we'll be collaborating with them to jointly install and engineer some equipment for those specific applications. So those would be examples, Ryan.
Okay. Interesting. And just on the CapEx requirements, is this $7 million going to be enough to fund all the capacity needs you foresee for these white label product services?
I would say, for what we've identified and what we're doing today, Ryan, we don't -- and I don't mean to suggest this. We don't have a beverage project where we're going to build onto the plant and then install a lot of beverage equipment. That's not in scope right now. But for the applications that we're looking to deliver in terms of unique and value-added formulated products largely for wellness, this would be adequate investment for us in that point in time.And we also like the step approach to growing into the 6,000 metric ton capacity. We think this is for speed reasons and for the payback and value-add. It's an exceptional value. John was -- even John Moretz was smiling when he looked at the payback on that one. We like that a lot, Ryan. We're very encouraged by both these projects.
Maybe just one more from me again kind of on future products. I'm curious to hear your comments on and your discussions with clients be it LPs or otherwise. What are some products that you've been hearing lots of -- product categories that you've been hearing lots of interest from for white labeling services?
It's a good question, and Martin may want to pipe in on this one. But I would say we're seeing a lot of interest in topicals, and I would say we're also -- it's an application form that we're looking at. Ryan, I'd like to build on that a little bit. Where we see a lot of topical interest is especially in the United States because it's sort of a safe gateway into the hemp CBD business, and the major multinationals are probably more comfortable establishing a product line with that initially and then broadening that out. I think what we'll see in the United States is that as a first move and followed up rapidly with a formulated product, probably capsules again, where it's in combination with, for example, omega-3 or melatonin, and they'll use the structure function claims that they can get on the nutrition product along with hemp/CBD. And as the regulatory frames become more clear, there's more comfort with the majors. I think that's probably stepwise, but topicals are big on everyone's mind right now.
Your next question will come from the line of Doug Loe of Echelon Wealth Partners.
This is actually Siew calling in on behalf of Doug. Just 2 quick updates -- 2 quick questions from me, sorry. The first one, just looking for any further updates that you might have on your Lonza partnership, and the second being just a clarification on the time lines to the project that you outlines in your $7 million CapEx investment that was on Slide 10. Like when do you sort of see that being completed by? That's it for me.
Well, if I understood the question, first of all, I would say that the customer relationships that we announced in the last days, to a degree, include a major portion of our capsule capabilities that we're collaborating with Lonza on. That's in Canada. I would say part of our collaboration and motivation with working with -- again, just a little bit background on Lonza, they're a Basel, Switzerland-based API drug delivery form active ingredient company. And clearly, we wanted to start in Canada, but I think there is an ambition to explore possibilities beyond Canada, but this is a great place to start, and we're very, very pleased with the progress and collaboration with Lonza.Both investments, if I understood the question, will be starting -- the engineering is complete. The project plan has been put in place. We had the board greenlight that today, and they will begin. And the capacity expansion, remember, this is already built, it exists. It's mostly around security. And as people know and have listened to this call before, we basically have to put cameras up in every corner, so there's no space unmonitored. Doors have to be secured, and we'll also have to put in some handling. But fundamentally, I would call them not significant construction but rather adaptations of existing infrastructure. And that could be probably characterized in the course of months and then the following. Yes, so that's why we say the latter half of the year.I think on the application forms, we also have the room built. The utilities are there, but what we have to do is make it a clean and pharma-style GMP environment, and that will take us probably a similar timeline. So both, we think, have the potential to be ready this fall. The licensing, of course, is the unknown, but we do believe licensing will be a faster process in future as we move forward. Does that answer the question?
Yes, it does.
Your next question will come from the line of Chen Lin of Lin Asset Management.
First, I want to ask what today's press release referred with The Green Organic Dutchman. On their press release, they mentioned there's some kind of exclusivity. Can you comment on that? Do they exclude you from signing any other similar deal in Canada?
What we'll be doing with -- first of all, they are a great company and a great team, and we really, really enjoyed the engagement with them. They also have installed a very large capability not too far from us here in Montréal, so geographically, it's very conducive to the relationship. But number three, I think when you look at The Green -- TGOD, let's just call it TGOD, they have a very interesting and differentiated approach. I mean these guys are The Green Organic Dutchman. They are going organic, and this is a segment -- I'm looking at Martin right now, but this is, I wouldn't say, the majority of the market but is a clear segment of consumer preference. This is their focus. They will be working with us to help us with getting organic certified in some of our processes. And what we have agreed is that for certain elements of our process certified organic, we would work with them on an exclusive basis.
That's very much -- very good clarification. And also when you plan to expand to 1,500 before the end of the year, so you need -- you're probably implying earlier you need to -- Health Canada to come in to do another inspection to get another approval process before this would be online. Is that correct?
Yes. And I think, as I mentioned earlier, the licensing process in Canada has been probably the bane and the frustration of the industry. And I think the good news, as I stated earlier, is twofold. One is the initial licensing process is a gigantic hurdle, and it can be measured in years. And we're happy we started our process years ago and achieved that as -- a short while ago as January of this year. But we are licensed, and we are in this business. And we are manufacturing today, and that is a great place to be.The amendments, as I mentioned earlier, we anticipate will not be measured in years, will be measured in months, and we think these amendments and where Health Canada is going with their prioritization processes are very conducive to where we want to go and more quickly. So we're encouraged there, but I wish I could tell you when that is. We can't do that. But I don't think this will be a topic for our Phase II, and capsule production will not be a topic in August. But it likely will be a topic in late this year as we look for the amendments to come through on the Phase III. Commercially, however, it doesn't slow us down from already engaging with customers in terms of occupying that capacity, and I'd like to add that this is an active dialogue as we speak. As I said before, we -- line of sight, I think there's an interesting demand dynamic in the market right now and it is a capacity that will serve this industry very, very well.
And I believe I -- we talked to Mario before, and you have gave a guidance with your last year's deal with Canopy, is basically with margin of $0.50 to $1 per gram on the extraction marijuana side. Do you have any guidance for those 2 deals you just announced this week? Or give some rough idea what kind of margin, is that similar or higher than last year's contract?
So Mario, do you want to take that one?
Yes. So Chen, I think we -- I don't think I ever give guidance on the $0.50. I think I gave you probably an example on how to build your financial model. That being said, we have not publicly said what would be the total revenue of these 2 agreements. So again, we talk about the volume that we agreed with these 2 new partners. And coming along, we will disclose the revenues, and again, it will be easier for everybody to see what kind of revenue and margin. And don't forget that we are not selling products. We're selling services. So we're not buying materials. So the gross margin, when you compare with other LP that have materials, is completely different.
But Mario, you may want to comment in terms of what our fixed costs of the site are. We've shared that information before. That might be helpful.
Yes. So at full capacity, meaning the 200,000 kilograms, this site -- the total fixed costs, including variable cost, could be in a range of CAD 15 million per year, excluding white label and different type of delivery form. I'm talking about extraction here.
Just last question. In your SugarLeaf acquisition that's mainly for hemp, do you foresee any possibility for it to modify some of the equipment to extract marijuana?
That's a great question, and the answer -- we actually -- I think that was a question at this morning's Board and the answer was that the characteristics of the plant, while they're all in the same family, are fundamentally the same. Look, we believe there is, as I mentioned earlier, just a fantastic opportunity for hemp CBD in the United States, and it's evolving as we speak. And we are happy to have a footprint in the United States should marijuana ever become federally legal. It's something that we think we could adapt our organization and our process to very, very quickly. Of course, we cannot do that until there's a regulatory frame that would permit that. But we -- I personally believe, as I said before, we're a tweet away from that, that the majority of Republican voters are in favor. There's north of 30 states that have some kind of legalization. There's a ton of jobs, and there's a ton of tax revenues. And I think it will come. It's a question of when. And when that day comes, we're going to be very happy as a corporation to have that footprint, that team, those capabilities, that equipment in place to take advantage of it. And that was part of our motivation to look at the situation.
And your next question will come from Chris Damas of BCMI Research.
Yes. Congratulations on those deals. I'm an ex organic chemist, and I was curious, it sounds like you have legacy ethanol extraction equipment in size. Could you comment on flammability risk and how much of that $11 million is going into insure against that kind of hazard since you're going holus-bolus in ethanol versus supercritical CO2?
Yes. It's an interesting question and probably best answered by our head of manufacturing. Let me just say that when one is running with ethanol, clearly, the security and the safety measures are more. I'll give you an example. Your cameras need to be explosion proof as an example and you need more sensors through the process and the buildings, et cetera. So it is a -- from a technology standpoint, more demanding. And we're pleased that this building has already been constructed, and it's a legacy capability that we can adapt to this business. But it -- and you would know this with your ethanol experience. We like it a lot. It is -- for example, it takes about 20% the energy that CO2 does. It -- you can do in minutes what takes hours in CO2. And the purity, the quality of the product can be great. In fact, some of the motivation of our commercial agreements was an element of the sustainability and green capability that people could use when they're translating, communicating to their consumers about how their products are ultimately processed. So we like ethanol a lot. The percent exactly on the question you speak, I would have to refer to our production head.
I'd certainly enjoy seeing that facility.
Well there's a great video online. If you want to check it out, it's about 60 -- 90 seconds. It walks through the plant, and you'll get a feel for the technology that is there, and we're very excited to be turning on an element of that computer process control fully automated operation. I think we haven't talked about this much, but I think there's a tremendous demand profile in not only for marijuana but hemp in Canada and export markets in future. But we also believe that this already constructed capability is probably the low-cost facility in the country. And we think that is a great advantage over the long term depending on how markets develop. So we're happy about this from a -- clearly an offensive standpoint, and we're very, very reassured by that long term in terms of its cost profile for future.
And that was $15 million to run the place for 200,000 kilograms of biomass processed. That comes out to $0.075 a gram? Is that correct?
Yes, that's correct.
And your next question will come from Chen Lin of Lin Asset Management.
I have another question just concerning the margin -- profit margin. What is the ongoing rate right now with Medipharm, with all the other -- your other competitor? How much they charge for the margin? Basically, how much they take marijuana and[Audio Gap]extraction? What is spread they are charging?
That's a great question, but you probably have to ask them.
Okay. All right. What's -- when you're talking to your customer, what's like, in general, the market not [indiscernible] market going rate for those extractions?
Yes. I would -- yes, look, it -- we don't really want to comment on that per se because it's not really helpful for our business with customers going forward. But I think one can read in various analyst reports what their expectation is for pricing and, it's probably not a bad estimate in our experience. And I think it's important to look at those estimates that are published by the experts and maybe compare them to some of the numbers that Mario just shared in terms of what our fixed costs are on our site is. And one could probably have a fairly good view on the operation. That would be my advice.
And we have no further questions at this time. Mr. Jim Hamilton, you may begin your closing...
Well, yes, thank you. And well, first of all, it was great having Martin Landry here and Martin, we look forward to your engagement with the business. And I welcome all the investors that would like to call me and call Mario and to also feel free to call Martin. And Martin will be on the road with us and on his own and talking to people. He'll also be helping us with not only his deep, deep network of contacts in the business but help us shape also the future moves for our business in terms of how we move forward with further relationships, collaborations, acquisitions, et cetera. And it's just great having somebody with such deep experience onboard. And I'd also like to acknowledge John Moretz who has been strangely quiet.
I haven't had a chance to say anything. All the wonderful news that you and Mario have been stating but I just wanted to say, being with Neptune for 5 years is -- first as a shareholder and now the Board, seeing it through a lot of twists and turns as many of you have experienced, today I've never been more pleased, ecstatic or encouraged of where our company is, not only that I'm involved with and not only that I'm invested with but one that I've followed through the years. We're in a position now of -- we're at the brink of just getting started. And the opportunity to what we have is really unparalleled by any company that I've ever invested in, much less been a part of.And I'm very pleased to state to all you shareholders and analysts out there that just as the quality of our GMP facility is in the scale and efficiency that, that can drive, these results and what's coming up in the near future for us all is a result of our management team, the leadership, the dedication and that has been so strengthened through the years. And Jim and the team have brought in some additional great power like Martin, Graham and others that have come into -- and Patty, that have come into the company along with the current staff that we have. And so as they always say, you got to have the right people on the bus, and we really do that now. And I think all of us have a lot to look forward to, and some unparalleled success is what we're planning for. And I want to thank Jim, you and the team for that.
Well, John, thank you not only as our Chairman but one of our largest investors. We appreciate that.So with all that said, thank you, everybody, for listening. Again, we welcome your questions as we go through the days and the weeks and the months to come. We look forward to talking to everybody formally again in August, and I believe, Mario, it's August 13 that we'll be, well, geez, mid-August is when we'll do our AGM, and we'll also have the first quarter results. And at that time, John, I think we'll have some more visibility on SugarLeaf and other business things. So thank you, everyone, for listening, and thank you for support. We'll look forward to talking to you all soon. Bye-bye.
This concludes today's conference call. You may now disconnect.