Q3 2021 Neptune Wellness Solutions Inc Earnings Call
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Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Neptune Wellness solutions incorporated third quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to for ASP.
One on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your house.
Megan Mcgrath. Thank you. Please go head.
Good morning, everyone and thank you for joining US yesterday afternoon, we issued a press release announcing our results for the third quarter of fiscal 'twenty 'twenty. One we also issued our management's discussion and analysis and consolidated financial statements.
These documents have been filed with the Canadian Securities and regulatory authorities of the U S Securities Commission and are available on the company's corporate website.
Before we begin I'd like to remind you that all amounts discussed today are in Canadian dollars.
On 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 statement, except as may be required by Canadian and U S Securities laws of.
A number of assumptions were made by us in preparing these forward looking statements, which are subject to risks results may differ materially from what is projected and details on these risks and assumptions can be found in our filings on SEDAR and with the Securities and Exchange Commission.
Joining me on the call today, we have Michael Cammarata, our President and Chief Executive Officer, Dr. Tony re now Chief Financial Officer on Global Chief Operating Officer, and Kelly Kaufman General Counsel.
Tony will begin the call by providing an operating update and a review of our second third quarter financials.
Kelly will follow with a review of our recent acquisition of Sprout and Michael will follow with an update on our strategic path now I will turn the call over to Tony Tony. Please go ahead.
And good morning.
Neptune fiscal first quarter results reflect the significant transformation.
In place at the company.
Several investments and changes are now in place that's.
That's what drives on accelerated revenue growth.
Beginning fiscal of 'twenty 'twenty two.
And have even more impact in fiscal 2023.
The third quarter financials include the impact of shifting away.
From Beecher be extraction, along with the Covid demand volatility and challenges in the global supply chain.
We expect future quarters to show on the benefit of the shift into branded consumer products.
And the resulting higher level of sustainable profitability and cash flow.
Just allow me to provide you with an update on Neptune transformation from.
On BGP extraction to a fully integrated helped umbrella on this company with a platform of innovative Brian.
Last quarter, we outlined the four main steps of our transformation process.
One innovation true.
Good cost control.
Hi.
The new framework for the business to allow for greater scale and flexibility.
And stuck for execution.
I'd like to highlight some of our recent wins in this transformation process, which we're confident will translate into improved results in upcoming quarters.
Last week.
We announced the acquisition of Sprouts, and organic baby food and snack company.
This acquisition is incredibly exciting and provides us with a new product line finished touch business and further opportunities for revenue growth from cross synergies.
Neptune as general Counsel, Charlie Kaufman will discuss more on stroke in a moment.
In the third quarter, we launched moving in Canada, Neptune branded proprietary line of cannabis products.
Early adoption has been strong.
So from first purchase orders.
Secured many more.
We have recently added on additional product crashes.
I have received the supplier order from the Ontario cannabis store, the wholesaler and so on line retailer for recreational cannabis in Ontario.
The launch of mood ring was on March and critical step in.
And our interest your transformation process.
Yeah true with this initial success and look for more wins.
In the near future.
One important note on revenue recognition for our be true see cannabis products in Canada.
International accounting standards, we cannot recognize revenue until it's all true after product a curse at the return on location.
Results were already how sure are motoring product, we have not yet recognized revenue on the third quarter.
As these products on year chiller market. They start counting the world will continue to impact results for the fourth quarter and early fiscal 'twenty 'twenty true.
But we hope to achieve a more regular cadence on shipments and revenue recognition after a few force.
On cost control on business framework, we have taken steps to modernize the P&L to more properly aligned with our CPG business model we.
We have introduced new Cape your eyes to clarify business objectives, and ensure internally ownership on those objectives.
And we are completing our S E T integration.
Or on your recipe system, that's set to go life on a per one to start.
Our new fiscal year with system wide rollout.
We expect this implementation to have a positive effect on.
On our cost controls going forward.
And finally on our Neptune innovation pipeline.
We continue to build on our personal care and innovation brand.
We now have on Amazon store, where consumers can purchase or on Neptune products.
We continue to get closer to the consumer marina or distribution capabilities.
We increased our online direct to consumer presence from the third quarter and we will continue to look for ways to increase on line a retrial person in 2020.
We are excited about these accomplishments and proud of the Neptune team for their efforts this quarter.
Particular, I would like to speak to the value proposition.
Visualization on cannabis in the United States.
Earlier this year the Democratic Senators.
At least a statement the cannabis reform would be a priority for the current congressional session.
While the details around the potential sales or limited comments from Senate majority leader, Chuck Schumer suggested leaving power to the state.
Implying the book would be similar to the States Act.
With some social equity and tax components.
We are cautiously optimistic on the opportunity for passage and we're at the ready to capitalize on changes in cannabis regulations.
Whenever they occur.
Now I will walk through the results of the third quarter.
The third quarter revenue of $3 3 million was down 91% sequentially from 64% year over year.
On a sequential basis. The revenue decline was primarily due to two factors number one.
Our planned exit from the low margin non repeat b to b cannabis extraction business in Canada.
Favorite higher marching Brent equity accelerating D to C business and true logistic challenges.
Due to COVID-19.
First on the exit of extraction business.
This was a planned exit and a necessary step in our transformation to be true she comes from a product.
Which has already begun with our successful launch of humor.
We're excited about the opportunities ahead on us and Canada in our B to C business, which we believe would provide much higher margins and returns.
Restaurants overtime.
The second major business event in the quarter, which impacted sequential revenue same cost is related to the hand sanitizer on market and COVID-19 related volatility.
Yeah.
In the first half of the fiscal year, we had significant revenues from sales of pet sanitizer and other related products.
Unfortunately, given the spike in demand and desire of retailers true remain in stock.
Retailers all the order on hand, sanitizer and subsequently canceled orders.
He is from elevated levels.
This resulted in minimal revenue from this product and a write down of inventory during the quarter.
We expect from sales to return in the future.
When inventory levels normalize.
As discussed last quarter, we had anticipated revenue from the large purchase orders we received during the quarter.
However continued international freight and transportation challenges.
Resulted in an inability to ship product in a profitable manner.
As stated earlier, we are committed to profitable growth and made the decision to delay shipments of these items.
However, we note that these purchase orders are still intact and we are actively negotiating on this front, including with new suppliers and we expect these issues to be resolved during calendar 'twenty 'twenty one.
We expect that revenues continue to be volatile from quarter to quarter, while global supply chain on logistics are under pressure and as we introduce new product line and skus as they become available.
However, when smoothing out some of the volatility this year, probably look on the first nine months of the fiscal year, we see that revenues are up over 100 per cent.
Total net loss in our third quarter was a reported 74 million loss with adjusted editor.
Also a loss of 11 5 million.
During the quarter, we took 39 million impairment related to our b to B business.
14 million and ex.
Celebrated amortization.
And 7 million inventory write down cash.
Cash on cash equivalents were 32 million at December 31.
While we no longer provide forward looking guidance I want to provide the following broad overview of the goals for our business for the next 12 months.
We will continue on our path to becoming an innovator front accelerates.
In the last 12 months, we have launch forest remedies Ocean remedies Emerald ring, and we will continue to introduce more brands and Skus This year.
And 'twenty 'twenty, we expanded and solidified several important retailer relationships.
Which will allow us to scale with all on you.
And products quickly.
Finally, we intend to ramp up on what Canadian cannabis business for entering new markets and introducing new products.
We expect fourth quarter to probably continue to be a transition quarter for the company.
But we hope for this to normalize by early next fiscal year.
I would now like to take the opportunity to introduce Kelly Kaufman Neptune as general counsel and head on strategic initiatives.
Yeah.
Thank you Tony I'm thrilled to be joining the Neptune wellness team as general counsel I'd like to take this opportunity to discuss our recent acquisition of Sprouts brands and Morgan Stanley's relationship in more detail last week, we announced our acquisition of Sprouts is a three brand portfolio of organic plant. These babies.
Food and Talbot snacks route is a great fit for Neptune is the products people and corporate philosophy. It perfectly within the transformation we are undergoing.
All three brands.
Nosh and nurture me are disrupting the baby's food market, which has historically been dominated by processed foods with roughly $28 million in annual net revenues sprout already has a foothold in the organic baby food market.
See significant revenue and cost synergies with this acquisition on the revenue side, we believe that our distribution network. Both in the U S and internationally can provide early additional distribution points for existing sprout products. We also see opportunities for product expansion within that channel portfolio for example, in our Nutraceuticals business.
On the cost side, we expect to be able to provide benefits from our manufacturing capabilities as well as through our combined retail relationships.
We are very excited to have sprouts and on our portfolio and we look forward to sharing more of our plans for the company as we move forward.
Our acquisition of Sprout also begins a new important relationship for Neptune with Morgan Stanley.
Prior to Neptune is acquisition of the majority of Sprouts outstanding shares Morgan Stanley without largest shareholder.
This transaction Morgan Stanley is now a significant shareholder of Neptune and Lincoln is better from Morgan Stanley has joined the Sprout board of directors.
<unk> could not be better positioned for success as part of Neptune is growing brand portfolio. Additionally, Neptune has a full pipeline of future M&A opportunities before us and we will continue to expand our brand presence in North America and internationally.
I will now turn the call over to our Chief Executive Officer, and President Michael Cammarata to discuss the company's strategic initiatives.
Thank you, Tony and Kelly and good morning, everyone I can on Kelly sentiment on the sprouts organic foods transaction and the relationship with Morgan Stanley. We expect the acquisition to have more value than it appears at first glance, we see Morgan Stanley, it's more than a new shareholder, but as a partner on our long term growth strategy.
We will be working together to identify future merger and acquisition opportunities, we see sprouts as a key part of our portfolio of innovative and disruptive brands in the plant based health and wellness area.
Neptune is becoming a brand accelerator and we believe we can continue to grow sprouts brands with additional points of distribution and a larger product portfolio. We are excited to realize the synergies that will come from having sprouts and its three brands as part of Neptune.
The acquisition of Sprouts comes out the historical third quarter for Neptune as we move from <unk> extraction to finish line branded product revenues at our Sherbrooke facility.
We are now have the capability to produce multiple product lines. At this facility. We are licensed from products from teachers to discipline to CBD and gummies.
Although on revenues were impacted by the transition from extraction in the third quarter. This shift will lead to a higher and more sustainable margins and the ability to create brand loyalty for our high quality cannabis products as Tony mentioned, we are extremely pleased with the early success of mood ring and British Columbia.
The initial numbers people are expectations and those of the territory. We are now in a 150 points of distribution, which we estimate could be around 20%, 30% of the BC market. The moving products are sold online and through distribution channels as we have ramped our product to meet the higher than expected demand in BC.
And we will be rolling out additional territories in Canada in the upcoming quarters, including Quebec. It is important to note as Tony mentioned that the current Canadian accounting rules do not allow us to book revenues for these products until we received the sell through data from the individual retailers and the timing may vary by retailer.
We expect to start booking modest revenue from these products in Q4, we believe that our relationship and our experience in this market through our previous extraction business has allowed us to make the shifting to BDC products efficiently and will further allow us to ramp up the businesses over the next year.
We have also made some exciting changes recently in our nutraceutical business. We have brought on a new general manager to run this business and are making changes to increase efficiency and accelerating innovation. For example, we have made the decision to consolidate the nutraceutical offices into our headquarters in Montreal, which we will.
Back to lead to lower costs and increased collaboration.
This focus on efficiency is already bearing fruit as the team has presented multiple products and revenue opportunities to senior management, we will update you with more details on these opportunities are realized.
And that health and wellness space, we are anticipating several product launches in the near future as we discussed the fulfillment of our earlier purchase orders was delayed in Q3, and we are starting to see improvement in Q4, and we expect a more meaningful fulfillment uptake by Q1 as logistical barriers clear and product availability improves.
We have been pleased so far with our Amazon relationship and we expect the volume through Amazon to increase in the upcoming quarters moving.
Focused on achieving an improved gross profit margin as we move on health and wellness brands for we are also excited to talk about the launch of our forest remedy brands. We've had discussions with 39 retailers, thus far and we expect to have product available both online and in stores within six months to a year, we will start to report on.
More details after completing these discussions with the retailers.
On a corporate level there are several recent initiatives I would like to highlight.
Our new S&P implementation is expected to go live on April 1st and we expect this initiative to help us contained on our cost and support our growth trajectory. We are excited to introduce today, our new General Counsel Kelly Kaufman.
Kelly comes to us from a cost of sales and marketing and will be leaving on a legal HR and strategic initiatives. We expect Kelly to be an integral part of items of strategy as we negotiate and solidified an increasing number of retailer and supplier relationships.
We are exploring ways to monetize our P&L as we move to a CPG model, especially in how we report cost. These changes will likely come next fiscal year, and we hope they will provide investors with more insight and transparency into our business structure and the opportunities that will come with increased scale.
We're also updating on corporate and individual brand websites to better in line with our new products and our strategy. We think you will be impressed by what you see.
We have also been laying the groundwork for our environmental social and corporate governance strategy, which is continental referred to as ESG you see will be a key pillar of our corporate philosophy, who Neptune ESG will not be in Africa will be core to our strategy and operations. Some recent ESG achievements include a higher proportion of women's day.
<unk> members.
A year ago, our workforce was less than 23% now Neptune is at 41% well on our way to our goal of 50 50. We note that this is inclusive of our factories.
We are making progress of our goal of introducing carbon negative products with an overall company goal to be carbon negative. This means our products non business operations will have a positive environmental impact. We are proud of the steps. We are already taking for example packaging for our Doctor James did all products has environmental.
Finally benefits included including nutrition per B's when it is planted in your backyard.
We will be talking more about these plans these product innovations in upcoming quarters, including some new exciting Omega three products, we have and world class team of product innovators and developers at Neptune committed to leading this plant based revolution.
Finally, I want to say a few words on makena bits in the United States.
With the new administration and the shift in control of the Senate, we believe that the changes to the legal status of cannabis.
Our now more likely than they've ever been before.
We have adapted our strategy to be prepared if and when legal changes related to cannabis occur. However, our long term strategy does not depend on legalization and we have significant growth opportunities ahead of us regardless of any changes in the legislation process.
'twenty 'twenty was an exciting year for Neptune as we navigated the transformation to a CPG platform in the midst of Covid related volatility as you can see from our recent sprout acquisition. We are accelerating our momentum have changed and we look forward to reporting on more exciting initiatives ahead, we have made.
Profound changes to our business and we could not have achieved this transformation without the dedication of our employees I want to take this moment to thank them for the average and I'm excited about many of the opportunities that lay ahead of us.
Neptune is dedicated to making products that have a positive impact on individuals and the planet.
We believe there is a tremendous market opportunity for plant based products and we look forward to updating you each quarter on our successes and now I will turn over the call to the operator for questions.
Ladies and gentlemen at this time, if he would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from day line of Aaron Grey with Alliance Global partners, even though ask a question.
Hi, good morning, and thank you for the questions. So.
So my first question is kind of regarding the hand sanitizers.
On the supply chain issues that you kind of mentioned during the quarter on specifically how it relates to the status on the $100 million of purchase orders you had previously mentioned on the last call. So you.
You had mentioned in December kind of a delay to for Q fiscal 'twenty 'twenty, one or beyond.
Sounds like you're starting to see some improvement into <unk> and you mentioned a C Moore.
Next quarter, but just wanted to know if we can get some more clarity first of all the price per week up in December now couple months removed from that so just want to get more color in terms of one day that was more related to kind of air versus now see shipping I mean with that kind of being two months removed kind of further color on trains a day transition you've kind of seen up to date to.
To those kind of supply is being able to come in now on kind of get those sold you mentioned shifting some supply as well within the MBNA from Mexico to show cause any kind of incremental color you can give in terms of some of these supply chain issues and how it relates to those purchase orders, which you said are still in place, but also being mentioned there being some different issues with inventory.
And every person orders for those products as well so kind of any incremental color you could give there would be helpful. Thanks.
Yeah, I'll take that it's from Michael can ride on so the purchase orders are not related to hand, Sanitizers 300, plus million dollar purchase order. So that's coming up with a different product line.
Regarding the hand, Sanitizers, specifically, we did have to shift out some of our international inventory to domestically made U S made products for some of our retailers and we did see that.
There is a switch on demand on the consumer side.
So they're normalizing those levels at retailer. So the unique thing that we were able to do was actually be able to develop a U S made high quality.
That actually doesn't leave.
That sticky feeling or anything along those line toy product disappearing from getting great reviews, and we've had a lot of success with sustaining retail distribution in the hand, sanitizer market and having opportunities to pick up additional.
Distribution point, so I'll hand, sanitizers have evolved our latest formulation.
We're also introducing a doctor Jane Goodall.
Natural plant based on hand, Sanitizers that'll be rolling out to retail. So we feel that we have a competitive edge both on the product formulation with Dr. James <unk>.
On a base natural.
Uh huh.
That's entering the market for hand, Sanitizers, and then on Neptune brand hand, Sanitizers, which we've moved to a U S distributor made and manufactured we've also lowered the cost of the manufacturing to be very highly competitive in the hand, sanitizer market and to be able to retain margin.
And it shifts to the 100 plus million dollar purchase orders that we discussed.
The international supply chain issues that we've seen.
What.
Twofold, one when air Freighting product that costs would normally be around 200 to 300000 and accelerated to over $1 3 million, we were competing with product launches with Apple and others.
And Microsoft.
Internationally at the end of our year on calendar year.
And then it shifted to us moving to containers and tripping it processes those products for those purchase orders than we saw a shortage global shortage of containers.
So we've had two folds hit us what's really knows we're committed to focusing on the profitability and not.
Just rushing in orders there to to make timelines, we wanted to build a sustainable long term business and we want to grow our profit.
Margins and also we've been looking at our P&L to even give more transparency and we've been working with our accounting teams and even the former CFO of Unilever to be able to monetize our P&L too.
Be able to of North America, but monetize our P&L to be able to better reflect true direct cost to what it costs us to make the products. So the investors can see more along the lines of what the gross profit margin is and each sales so.
Regarding the hand, Sanitizers, we switched out of any supply that was international to domestically made in the U S. We're working with our retailers not only on on Neptune brand, but our Doctor Jane Goodall hand, Sanitizers that's launching.
Both have higher qualities in and competing heavily with the brands that have been in that industry for a long time.
And then internationally regarding the backfill of purchase orders that we have.
We are putting things on cargo ships, we had a little bit issues with getting containers, we are starting to see improvements on the global supply chain.
A lot of the components for those products come from overseas and we expect to start seeing improvements modest ones on Q in Q4, and then expanding obviously in Q1.
I think I can okay on that.
Okay.
Thanks, Michael that was on I appreciate I appreciate the commentary there.
And details. So second question for me you know congrats on the sprout acquisition.
So kind of mentioned a little bit detail there on on the potential kind of synergies you guys see particularly on the top line.
Related to that in terms of the points of distribution could you provide kind of some some timing in terms of how you expect to be able to realize some of these synergies.
And more color specifically in terms of the points of distribution do you expect to be realized through the acquisition and how you guys look to leverage your own kind of distribution platform related to that.
Yeah. So I think we're already starting to see and we've been working on a plan.
That maximizes the synergies before the between both entities.
A couple of parts of the synergies one is on a cost basis.
We're looking to assets portfolio free brands that synergize, all three of their supply chains.
The improved gross profit margin ought to give us a extremely good positioning on that.
With the distribution, we've we've had success internationally expanding distribution for them.
That will start taking place in upcoming quarters with Onboarding on additional international customers and then domestically are they will be rolling out chain wide to target over 200 stores eight skus.
In upcoming months.
So where we've seen domestic success and distribution, we're adding international distribution, we have a great team and a health and wellness Division.
As we've had to build on global supply chain.
Uh huh.
Covid times that comes over from Walmart.
So we we've been definitely a.
Thoroughly looking on how the opportunities are they do have a great reputation and its been strong and in the domestic distribution. So adding target was definitely something that we're really excited about and then internationally expanding our footprint overseas.
On the products will be shown at the Dubai food show and are coming up as well and we are working actively on completing the registrations.
In over 20 countries. So.
So that's something that you'll see in international growth from you'll see domestic growth in the U S distribution and also within Canadian where the on boarding a Canadian.
Retailer grocery store as well.
So youre going to see growth simultaneously domestically and internationally and also cost synergies after three brand portfolios.
And we're really good at Morgan Stanley and the management stayed on.
To support the growth and been working with us on the plan and we're really excited to bring it to fruition.
And it really starts on footprint in the plant based foods.
And we expect a lot of product innovation, but also be very supportive to our nutraceutical business as I talked about a little bit we're looking for synergies and on vitamins and expansion and it's the heavy interest in kids vitamins and and and other products. So you'd expect to see line synergies between on nutraceutical side on the product development area.
You as well.
Okay. Thanks for the color. Thank you and if I could just squeeze in one more you mentioned.
Alright, do you expect further M&A, so just any kind of color on potential targets and synergies that you would expect their tier would be similar along the lines. We just saw with sprouts kind of in there that's.
Help them on the site products day, you know that kind of smaller and growing it.
Benefit from your distribution platform range.
Kind of a color in terms of different verticals or areas of supply chain you'd expect from M&A to occur it would be helpful. Thanks.
Yeah, we're looking heavily in plant based arena personal care home care a household and then obviously your plant based foods and so and also tactical on our infrastructure support because as we've started at our brand is starting to go to distribution and scaling we want to be able to continue to be able to support that.
Brands from E Commerce to all the way into international.
Domestic.
North America focused growth so when it looks at brand just really looking for brands that have purpose that fit within our values weird obviously, he's trying to set our ESG strategy vary.
In line with our consumers.
And I think that the brands that we're looking at and opportunities that we see are really some brands are the historical on some brands that have the momentum and that that align with our philosophy. So we definitely are looking at the cross category, because we have a platform.
We've built out over the last year and a half that can support a lot of brands and distribution globally and domestically and we've made a lot of optimization in our supply chain, both having domestic supply chain.
Okay. So North America, but also on international supply chain. So we want brands that'll be synergistic and that will add to our gross profit margin in our topline and bottom line.
Alright, great. Thanks for the color on I'll pass it along.
Your next question comes from day line of Channel. That's currently with Cowen human or ask a question.
Hi, good morning, Thanks, very much for taking the questions.
So just going back to the purchase orders.
Specifically related to three Q on the shift.
Or on the delay in revenue recognition can you quantify.
What you believe the.
Impact was to your three Q revenue specifically as it relates to the purchase orders. Thank you.
Tony.
Sure or can you hear me well hopefully so.
These purchase orders that we have announced.
Q3, and that Michael just mentioned on not related to hand, Sanitizers and they are all intact.
We are negotiating with suppliers are true.
To deliver these products to our different clients. It is difficult to say how much. They are they are on a quarter by quarter on a basis. Because these are long term purchase orders.
We believe that we're going to fulfill them as soon as those international trade challengers are being resolved our goal is to true.
<unk> port profitable.
Merchandise and to make these business lines.
From a gross margin profitable and in Q3 that was just not possible for both international challenges. So we believe that those purchase orders they will unfold over the next quarter.
Quarters as total supply chain challenges are are easing up and they say to me all intact and they are related to different Neptune innovation products.
And I would also want to add too we've been very fortunate that one of our CPG partners Unilever has entered into that category and it'll be supporting manufacturing in that effort. So we do see that.
Some of our synergies with our CPG partners have helped us broaden our supply base for those particular products that we are launching.
Got it.
Thanks very much.
So.
It's it's mid February were I guess halfway through fiscal through your fiscal <unk>.
Not looking for guidance or anything like that but if theres any kind of color you can offer.
In terms of how your revenues are trending quarter to date, maybe relative to the previous quarter, maybe year over year.
Any broad color you can provide there would be helpful. Thank you.
Sure.
Yeah.
For the reasons debt, we have seen in the past that we are not providing a guidance because even though the year over year growth.
But from a quarter to quarter perspective.
Revenue growth can be much more.
So just.
In order to give you an idea of overall trend.
I believe that in this quarter Q3, we have gone through.
Through the debt and we're now moving back up.
Sure.
Yeah.
Think that's that's that's a fair a fair statement to say that we have moved.
And the more difficult time for us and moving back up and I think what we can also see is that.
We will.
We will increase in Q4 and and and year over year.
You have seen or we are kind of close to doubling revenues fiscal year over year. After nine months and I think that trend certainly quite good news.
Got it and I'll add to that we also one other thing on on the Sprouts brand. We've actually had very good talks with Tesco. So you on the international footprint, so that would be another distribution point.
To the earlier question.
Got it.
Thanks, Michael Thanks, Tony just last one from me. This is on SG&A, obviously was inflated.
This quarter due to.
On the one off big depreciation and amortization, but excluding that from an absolute dollar perspective.
Did go down.
Sequentially.
So I guess as we look at the SG&A line.
I know that there was a 25% head count reduction is that is that fully baked into that debt adjusted number which according to my math, it's about $17 $5 million for the quarter.
Or is there more white powder in terms of how you can leverage your SG&A line.
Going forward is as we look out to fiscal 'twenty two.
Yeah. So in Q3 as you say most of the SG&A on B.
Yes.
The measures we have taken are fully baked in so yes, we have a couple of non.
Non cash debt.
We have identified in.
So in the editor adjustment in SG&A and some accelerated.
Appreciate it.
So false mostly the SG&A, yes, it went down because we.
As you all know we are managing our cost control on our cost structure extremely carefully.
And that will continue to go on because our goal is still to work ourselves.
Next fiscal year's two EBITDA positive so most of that.
It was what's baked in is baked in culture right.
And I'll, even add to that it's definitely we're looking to.
On a year over year basis to obviously grow top line and also improved cost and I think we're on the trajectory to do that.
Mhm.
Thanks, very much I'll hop back into the queue.
Your next question comes from day line as John Chu with the Jordan Capital markets. You May now ask your question.
Hi, Good morning. My first question is just on the hand sanitizer outlook, you talked about over saturation impacting demand for that.
It's also on any impression you're expanding into Costco is west coast day in U S. Midwest.
Our retail outlet there. So can you maybe just talk about.
Whether or not you did expand into that or whether or not that did not happen and that also contributed to debt declined.
Decline in debt hand, sanitizer revenue.
Yeah, I think the there's two parts of that we have a great relationship with Costco and we'll be launching products with them and working with them on new product lines. When it comes to the particular hand sanitizers. They had to some retailers not just costco, but other retailers had to move out of different brands and it takes some time to sell off so for instance, some REIT.
<unk> had 18 other brands are.
And then the retailers have cut it down to three.
Or less and we've been made the cuts.
But we all were not going to be able to.
See the growth till they move through you know 18 on the brand with a hand sanitizer.
The good thing that we have noticed on.
On a different distribution points that we're in is that our brand is performing.
Much better than the peers and competing with some of the biggest brands in hand sanitizer, we have seen some of the big competitors and hand, sanitizers actually lose money to try and win back.
Real estate from us.
And we're committed to profitability and focusing on developing long term relationships with not only to consumers, but our retail distribution partners and so we do feel that we're in a good position and we're starting to see a good movement.
Movement, obviously because of our sales data on a particular brand, but also a real estate start to open up I think Q4 will be more like a stabilization side, but across the board, but I think as we move into Q1 and Q2.
You should start to see the up tick.
And hand, Sanitizers as a business unit and I think that's something that Neptune has done very good over the last year is to have multiple product lines and to be able to adapt with demand on the consumers, but also be able to hold our product line is the highest standard and also work with global and domestic supply chain vaccine improve gross profit margins to be.
Highly competitive against some of the biggest brands in the world.
Yes.
Okay. So that as a follow up you recently got some approval on the disinfect on white side.
What's the timing for that and is there any risk that by the time, you're trying to get your market out.
The retail market that you could see.
Take in more and more over saturated market similar to what we saw on the hand sanitizer side.
So when it comes to disinfect and surface wipes the regulated by the EPA in the states and different bodies across different countries. The barrier to entry is much harder similar to our cannabis business right. The licensees that we've had to attain and get take years and months and and and and require a lot of work to do there.
P as very similar.
When it comes to licenses in the U S and in the different bodies in Canada and other countries.
The the format that we have on wipes is gonna be a lot of beta businesses as well so the more contract oriented.
So well commitments that debt.
Longer term and we're even seeing that across some of our other portfolio products in our health and wellness space that we're negotiating contracts that could last for three years four years.
And debt a very unique to us so it's not as easy for other like range that came in during a pandemic time, but didn't focus on quality they're.
They're still sitting on the shelves are products that are focused on quality, you know sold out and the retailers are moving out of those products. When it comes to wipes those are heavily geared to a lotta beta be custom.
Customers, so our government businesses.
And different territories with a with a high standard of licensing and requirements. So I think that the the wipes are uniquely positioned.
For longer term stable business and growth because the contract base not necessarily all just a retail focused and there's not a lot of competitive brands in that space.
Okay. That's helpful. And then maybe just a last question on the mood ring launch I don't see any products listed in Ocs, yet and maybe give us a sense on when you think you might be entering Quebec with that.
The brand as well.
I think we have a press release coming out pretty shortly.
Talk about that.
Yeah Yeah.
Good question.
We are in very.
On your conversations with S. T D C.
They like very much.
We do a we have a new brands that we're going to announce.
Sure Jason.
Thank you.
And essentially what they told us is that whatever we.
We take so theyre looking for good product for high quality products.
Our allowance.
The rest of the channel that was extremely successful.
The products are very high quality.
For a harsher.
Had coverage like.
Sure.
Sir.
Looking very cool.
We're looking forward very much true true.
Quebec and it should be coming on.
So just stay tuned on that one.
Okay.
That that was a unique and why it's a unique situation because the tower in the U S. We working with the retailers to develop brand partner with them and build brands and collaborate with them on when we launch new brand to get them faster distribution and more points and more support but in Canada. We actually in this scenario, we created a brand with a tear.
Rytary to to launch and we're really excited about it. So yes, it's not going to be listed on the mood ring. It will be listed on their brand net we're gonna be launch announcing.
With that a territory.
Shortly.
Okay.
Okay, Thanks, I'll get back into queue.
Your next question comes from the line if Doug on line with RBC capital markets to me now ask your question.
Yes, good morning.
Couple of questions, starting with the U S opportunity I know Michael that you walked through what she does senator Schumer and book or talked about recently and I hope to see that.
Soon but.
Maybe you can give us a little bit more information on your thinking with respect to the U S opportunity and especially in light of.
The fact that you did write down the sugar beef assets again.
Just compare contrast, what you've done there.
Yeah, so actually the write down is in correlation with us making the transition in the U S. So the goodwill and impairment on I'm not accounting for Tony can maybe add more color after I speak but.
As Ty when there was written was tied to Pacifically hemp extraction right. So as we're making this shift like we did in Canada to go from just extraction to finished form.
It obviously had an effect on the good well on the impairments.
So as we're looking at sugar leaf that facility and focusing more on a finished one products to be ready for any shift.
And beyond extraction, because we we get much more value, where we can control the whole quality process from extraction to the finished form and we've seen that with the reviews that we're getting in Canada, and our quality scores like our distillates like our teams that we've been working on in Canada.
Canada on our distillate, yielding more than almost 98%.
Almost 99%.
So we're in a very good situation with quality and experience. So as we're looking at that facility in the U S that we have particularly the one that was weighted to the pyramid. We were looking at broadening the usage of that facility.
Finished form and two from tracks on all the way to.
Packaging.
And because we made we're making these changes with the business model in that area to move away from attraction to finish one product on branded revenues.
So we're launching brands both in Canada, and the U S that was something that triggered because of how it was written prior.
And the acquisition and the goodwill was tied to Pacifically hemp for extraction for particular customers. So as we've changed the model, we're focusing on fortune 100 customers and we're focused and fortune 500 customers and we're focused on making finished form not just doing extraction for farmers.
So that is that how to play into it and as Tony Tony wants to add any more to that she can.
Thanks.
Yeah, I think Michael.
You sort of when you said it perfectly well I don't think index.
Yeah.
Much to add at this point on lesser share more specific question.
Okay.
No. That's fine I think you did a great job answering that.
Second second.
Second question.
Maybe this is just been a mischaracterization.
This is probably a question for Kelly.
With respect to spread.
In the MD&A.
It appears that the company has been included.
In the U S House Subcommittee investigation on heavy metals.
And one of the things that we saw in the Reuters article last night was that.
Guess yourselves and two other companies.
Used to cooperate.
With the investigation is this and this characterization on inflammatory or something else or is an accurate representation of what's going on there.
Yeah.
Hi, yes. Thank you for the question this is Kelly.
So I'll start by saying that it's an inaccurate representation.
Prior to.
The acquisition of sprout.
Sprout had gone through them at.
At least two changes in leadership.
And all of these activities that you're reading about currently in the news actually occurred started back in 2019 early 2020.
And at that time, it was a voluntary.
Our lobbyists group and advocacy groups for baby food and some companies chose to participate.
And basically submit in information concerning their product line.
Those companies that chose to participate.
Ended up getting a mirrored in the press.
For their participation.
The leadership at sprout back at that time, none of whom are still currently with the company thought the more prudent approach would be to just lay low and not get caught up in prep campaign.
So.
Part, so saying that they refused to comply is an interpretation.
They chose not to they chose not to participate because it would appear that no. Good deed I'll go on churned in this situation.
So as part of our due diligence of our sprout acquisition.
We are aware of.
Of this issue.
We recognize that it's an issue that actually occurs in the NT.
Tier two chain its not simply limited to.
Baby's food products.
And we are going to take the position and have been in discussions with sprout and outside parties.
That's we're going to be a partner in the industry, we will cooperate.
With the Commission inquiry.
And we want to be involved in a positive solution to this issue throughout the industry.
So we will be actively participating and partnering with others.
In the industry to find solutions.
Yeah, and I I don't want like to even add like this is what Neptune health and wellness is about were going into the plant based area. Because we wanted to raise the standards. The fact that in baby food, particularly with one area, but the whole U S supply chain everything from your pickles to two other products has heavy.
<unk> into it and what we're trying to do is not just to meet or exceed the FDA requirements, but actually bring a new standard on a much higher level, so whether it be cannabis in Canada with us introducing maximal which says our IP that is very unique and people typically tied to Omega threes.
And curl oil but on.
Maximal actually is an enzyme that bypasses the digestive system and.
<unk> maintains that ingredient at a much higher level. So it goes directly into your system. So on a cannabis use.
If you put maxima with CBD or THC, it's an onset within two minutes versus you know people, having an edible and weighing 30 minutes not feeling anything on having too many edibles and ending up.
You know, causing havoc on our health system. So we have IP, that's very unique to us that can make product safer like we're doing in Canada.
That will be introducing maxima on with some of our products. We have a clinical study going on right now.
So the opportunity here for for Neptune to really disrupt the CPG industry has never been greater and I think that when you look at sprouts and it's been around for a long time and has a very loyal customers on a good distribution platform and meet or exceed them and the fact that Morgan Stanley is on par.
And work with us on on on the strategic planning of Sprouts, and its distribution and its changes in.
And even you know and on.
Our growth opportunities and synergies of other products that will be launching I think we're very uniquely positioned to not only meet or exceed our requirements in the territories, we operate but we're gonna be very active in and raising the bar in not only for you know plant based foods and B in specifically in the U S raising the bar on on all across.
The whole U S supply chain, because I think that that's something that we have an opportunity to raise the bar in the standard and really.
Connect with our consumers and that's the type of brands that we're looking at that have the same philosophy as us.
Okay very good to know thanks, Michael Kelly.
Thank you for centers and thank you, ladies and gentlemen for joining us today that concludes the Neptune wellness solutions incorporated third quarter earnings Conference call you may now disconnect.
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Thank you.
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