Q1 2022 Neptune Wellness Solutions Inc Earnings Call
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Okay.
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Good morning, and welcome to the Neptune wound installation Q1.2022 earnings call. My name is Katie and I'll be coordinating your call. Today. If you don't have to ask a question. During the presentation you may decide by pressing star one on your telephone keypad.
I will now hand, the Kool aid, which Youll have Steve West Vice President of Investor Relations to begin.
Please go ahead.
Thank you operator, and good morning, everyone with me today are Michael <unk>, President and Chief Executive Officer and Dr. Tony We're now chief.
Operating officer.
As a reminder, all amounts discussed today are in Canadian dollars and our remarks may contain forward looking information, representing our expectations as of today and may be subject to change we.
We do not undertake any obligation to update any forward looking statement, except as maybe required by Canadian and U S Securities laws.
Assumptions were made in preparing these forward looking statements, which are subject to risks as laid out in our public filings found on SEDAR and Edgar for your scheduling purposes. We are tentatively planning to release, our second quarter financial results before markets opened on November 11th and host our earnings call. Later that same morning at 10 am Eastern time.
I'll now turn the call over to Michael.
Thank you, Steve and good morning, everyone. This morning, we reported our first quarter results, we reported revenue of $12.4 million, which was above our pre announced range of $10 million to $12 million. Both our reported revenue and gross profit improved compared to fourth quarter, which illustrates that our transformation to.
To deliver a diversified health and wellness CPG company is working we expect this growth trend to continue through the rest of the year now let me update you on some operational highlights from first quarter in cannabis, we launched mentoring flower intra burkha. The four territory, where we are selling our branded cannabis products murdering Florida citrus coast dried flower.
<unk> is now selling in Alberta, and British Columbia during the quarter. We also introduced three additional metering products, Florida, Citrus coast dried flower high THC capsules high THC oil and British Columbia and in Quebec, We launched our high CBD capsules and oils under the Pan has brand while we are rapidly.
Building on our cannabis brands, we are just beginning to realize our full potential at the end of the first quarter Neptunes cannabis brands were sold in four main territories, representing more than 80% of Canada's total legal market. We ended the quarter with eight skus sold in about 400 of the approximately 2000 stores and our four territories, where we.
We operate moving to Nutraceuticals, we continued our expansion efforts during the quarter. We continued to undertake several ongoing clinical studies evaluating maximo as a lipid delivery platform when combined with supplements such as <unk> and vitamin K two we anticipate announcing those results in the coming weeks and expect that they will be in line with.
<unk> past studies, which have shown maximal improved bioavailability and answer our ability to leverage the maximal technology across virtually any vitamin or supplement makes this a very valuable asset for Neptune, turning to organic food and beverages. As previously announced in addition to a Walmart dot com and target U S store launches we have signed.
An exclusive licensing agreement with Coco Mellon the <unk>.
Number one children's entertainment show with more than 10 billion views on Youtube worldwide. Our increased retail distribution for sprout is already leading to stronger sales growth as anticipated when we made the acquisition and we expect this growth to continue long term now before I turn over this call the Tony for her financial discussion I would like to discuss the strategic review.
You, we announced this morning, the number one priority of the executive team and the board of directors is to create long term shareholder value in that regard. The executive management team has asked the board of directors to establish a review committee to review the company's business plan capital deployment and long term strategy to identify opportunities to enhance shareholder value.
Alternatives are not limited in scope and could include changes in the strategy operations, a strategic business combination divestiture or spin off a portion of the company or even continuing to execute the company's current business plan I want to provide some context on our cannabis vertical as an example, cannabis is our largest source of cash burn and carrier.
Significant gross profit and operating profit losses due in large part to higher premiums taxes overhead and cost of capital. It is also the only vertical with negative gross profit margin that said, we reversed the trajectory of our cash burn for cannabis last year by moving up the value stream from extraction to manufacturing and <unk>.
Selling our own branded products, we went from selling no branded cannabis products in February to selling products in more than 80% of the legal Canadian market. Today looking forward. We believe we have two to three years from profitability in cannabis depending on our very plants and continued success of our flower rollout barring any significant regulatory hurdles.
However, cannabis today generates less than 10% of the revenues, but account for more than 20% of the total cash burn we believe candidates will be a great long term business, but the board must consider if candidates or other businesses are right for Neptune today, we're moving quickly to maximize shareholder returns and we'll provide any updates at the appropriate time with that.
I turn the call over to Tony to discuss our financial results.
Thank you Michael and good morning, everyone. Our first quarter fiscal year 2020 carrier revenue amounted to $12.4 million, which increased 10% versus the comparable year ago period.
And increased 83% versus fourth quarter or fiscal year, 'twenty 'twenty, one revenue of $6.8 million.
This year over year gross profit driven by increased sprout and DTC cannabis sales, partially offset from exiting.
Extraction business.
Gross profit during the quarter was allows up to $9 million compared to a gross profit of $3.3 million in the comparable year ago period, our reported gross margin was -23% versus 29% in the comparable year ago period.
These declines in gross profit and gross margin were primarily due to ramping up our new cannabis brands more rain and panel asked into 80% of the Canadian market exiting the extraction business and.
While integration.
Moving from cost of sales keep appreciation and amortization expenses.
There is fixed and indirect costs as well as costs related to surely a consolidated gross profit of 13% put be derived a positive difference of 36% when compared to the 23% gross profit loss of the quarter.
Net loss attributable to Neptune for the quarter was $23 million, which declined versus a net loss of $11.4 million in the comparable year ago period. The income loss is mainly attributable to higher cost of goods sold and SG&A.
Adjusted EBITA loss during the quarter was $15.9 million a.
A decline versus our adjusted.
Of $2.5 million in the comparable year ago period.
The decline in not just the editor is mainly attributable to last year's transformation and non recurrent higher cost of goods and certain non recurring SG&A costs.
With regards to SG&A amounting to $24 million, an increase of $7.5 million comparable to the same period of the prior year.
That increase was driven by non recurring additional legal fees and sprout integration crop.
$4.4 million and $2.4 million, mainly in sprout salaries and additional <unk> 8 million in insurance expense.
That's 31% of SG&A expenses are noncash items.
Total amount of $6.1 million.
Moving to our balance sheet, we ended the quarter with $48.6 million in cash on hand.
The decrease in our cash position versus the fourth quarter was due to our core operating cash expenses plus the non recurrent fireeye expense items, we incur an additional 5 million to build inventory for sprout and anticipation of Rx and announced retail launches and in advance of that.
Approximately 4 million interest sprout for operating expenses going forward for the <unk>.
Cash burn should decelerate as revenue growth continues to accelerate and improve our margin. In addition for fiscal year 'twenty and 'twenty two.
Quarterly reported revenue to grow throughout the fiscal year and expect gross margin to improve for the full year. However, we currently expect gross margins to be negative for that same period.
The ramp up for our brand portfolio in light of the anticipated revenue expansion for Neptune I will now turn the call back to Michael Thank you, Tony and I would like to take some times more operational details on our plan to drive revenue growth and improved gross profit margins for the full year, let me start out with.
Sprout spouse ended last.
About $28 million in sales and since then we have launched into Walmart dot com target dot com and in target retail stores across the U S. We have also launched sprouts into metro grocery and Canada and expect additional retail distribution in North America, We have recently announced our exclusive licensing deal for sprout and Coca Mellon the worlds.
Leading children's entertainment show with more than 110 million subscribers on Youtube, we are finalizing new packaging designs with the Coco melon characters and expect production to begin this fall our nutraceutical growth strategy is focused on the diversification of our supply chain and the expansion of our manufacturing base for <unk>, we are expanding our capabilities and offerings to a wide.
The lineup of supplements products package design manufacturing and fulfillment, we are evolving it to be a full service turnkey business, which we believe will lead to additional revenue with existing and new customers. We are focused on opportunities to leverage maximal through additional high margin licensing opportunities we are in a startup.
<unk> of conducting a clinical study on maximal efficacy on advancing the CBD and THC bio availability and onset time pending positive results, we will be exploring licensee maximal into the global cannabis industry, which may provide an opportunity to enter the U S. Cannabis market ahead of federal legalization I want to update you on some.
New products, we are developing which are in various stages of sales discussion. Our innovation team has developed a line of nutraceutical sprays and pumps, which are convenient delivery platform for consumers to take vitamins and Nutraceuticals. We are exploring opportunities for the sale of these products to other CPG companies as well as line extensions for sprout.
Imagine the convenience for parents to be able to deliver the necessary vitamins and supplements to the infants and toddlers that cannot or will not take pills are gummies also in development is in line of hydrogel patches as another convenient supplement delivery mechanism for consumers the patient.
<unk> eliminates many problems with existing trains normal patches, such as ski analogies irritations and rashes, providing a better consumer experience. Our innovation team has also developed keto chart using our proprietary amongst suffocation process to deliver an energy boost drive to 100% from non GMO Coke.
This new line of products targets, a customer who lives a low carb high protein lifestyle, such as keto to support brain health and weight management and sports nutrition I am most excited about two new products. We have developed first as eco table, a complete line of biodegradable and compostable tableware such at play.
<unk> bowls cups, and utensils PTO table is made from sugarcane remnant leftover from the processing of sugar. This iron mentally friendly source material has a much lower impact on the environment than traditional paper plates and contains no chemicals are bleaches not only does eco table outperformed traditional paper.
Place, but it is cost competitive and a 100% biodegradable and compostable, we're working hard to finalize orders for later this year. The second product is a new lineup of nutritional supplement including meal replacement powders and ready to drink shakes. The initial response from potential customers has been.
Very positive and we plan to start shipping these products in the fourth quarter and finally I want to discuss candidates as I mentioned previously we are now selling cannabis products in four main territories accounting for more than 80% of the legal Canadian cannabis market at the end of the quarter, we were selling products into full.
<unk> hundred of the approximately 2000 stores, we have access to our growth strategy for the year is two pronged first we plan to increase the number of form factors, we can sell into the territories.
It's one of the largest and fastest growing cannabis segments. So we are rapidly moving to manufacture market our mood ring branded line of vape cartridges as quickly as possible. The second part of our growth strategy.
To increase the number of retail stores that sell Neptune products, we have made tremendous progress so far and we are adding new stores. Nearly every day I am very proud of the work that our cannabis team has done to grow our brands from zero a few months ago to a business that we believe will achieve a $1 million per month run rate later this fiscal year.
Also like to briefly touch upon our CBD beverage launch we announced earlier this year the formulation packaged design the initial distribution and the launch plans are in place and being executed and we plan to launch our CBD infused teas and beverages later this summer and start out in Florida, one of the most vibrant cannabis and hemp markets in the world more to come stay tune.
And that concludes my detailed operational plan, but before closing I wanted to touch again on the strategic review the top priority for both Neptunes executive team and our board of directors at creating long term shareholder value, we've already exited underperforming legacy businesses that negatively impacted our ability to generate cash we also recognize.
More can be done so the board at the request of the executive management team initiated the strategic review to understand additional decisive steps that could lead to profitability as soon as possible. There is no set timeline, but the committee is moving quickly through the process I believe neptunes future is very.
Very bright we have a great plan to drive dynamic top line growth, which will lead to gross margin expansion over time I could not be more optimistic about neptunes future. Finally, I would like to thank our associates for their amazing work around the world to build <unk> into a leading health and wellness CPG company.
Operator, you May now open the line for questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
For me to your question. Please press star followed by Keith.
When preparing to ask a question please and show your phone is on mute.
Our first question comes from Aaron Grey from Alliance Global partners.
Your line is now open.
Hi, good morning, and thank you for the questions.
So first question for me is on sprout. So some of these guys have a lot of initiatives.
<unk> Mellon and also getting some more brick and mortar distribution, but.
Michael I was just looking back at last year $28 million, that's USD right. So let's call it about 35 million Canadian.
For the quarter it looks like a run rate of about $28 million Canadian So would just love to get some commentary maybe on.
Per year trends within the sprout business.
And then how you kind of see kind of a growth going forward and when expect those distribution initiatives kind of flow through the top line for sprout. Thank you.
Yes, I think that.
Since we've talked about it last week announced the in store target launch and I think that will have a positive impact on the growth target as one of the major retailers in this space and obviously Walmart we started a relationship with and we expect hopefully for that to come in later this year with the Coca Mellon characters. So.
<unk> is definitely going to be contributing heavily to our growth and it's definitely on a good path and we've been fortunate and have a great partner with Morgan Stanley capital growth to really assist with it. So I think that sprouts is definitely something that is performing better than we expected in areas and.
And brought additional opportunity to buy a drug or another part of Neptune.
Okay. Thanks for that color there Michael.
And then kind of looking at Canada, and the cannabis operations.
Could you give more detail there it seemed like you made a comment in terms of just kind of evaluating the business. There, but then kind of later on your prepared remarks.
Talked about obviously being 402000 stores talking about the two pronged strategy more segment face and so.
Selling products, so would just love to kind of get.
How youre looking at the Canadian business.
And Neptune.
Today, and going forward, especially because you don't have a problem such as im carrying on in terms of some delays potentially a new skus. It wont have an impact so love to get in terms of how you are kind of looking at the Canadian business based on your earlier commentary. Thank you.
Yes.
I'll add to that I definitely there is some territories and the regulatory parts changed constantly as you pointed out we are fortunate enough to be able to submit our skus before they decided that they werent going to reduce skus for a year.
But we definitely are doing really good and I think that the first part of the strategy was to get into the market and make sure that consumers love the product and that's something that we've seen we've seen our competitors adjust their pricing in the market to try and keep up with our run rates like our our capsules are performing.
Performing very well and I think that's something that's very unique and it goes back to the relationship with Wanda on the capsules that we're using the big impact, though for the company on the bottom line than the top line is going to come in with that flower and vape launches. We've already had great success with our flower lines.
But what we thought was going to be two weeks of inventory turn out to be less than five hours worth of inventory. So as the flowers ramping up and we're about to enter the base categories. We're going to see some hopefully surprises. If there is that the management and the continued acceleration in the growth.
But we did want to lay out a strategy that was conservative that gave us the ability to have flexibility with the operations because the key here is really winning the product and I think Neptune has made.
Some learnings that we've watched from our peers and being an extraction game, while we were able to better tap into the consumer in the Canadian market, one being that consumer doesn't want a huge volume of one type of flour. They want a consistent variation and seasonal flowers and be able to expand and try different things. So we are definitely rolled that out and not fly.
Our approach and we've seen great success like we thought we had weeks of inventory we had five hours of inventories. So we are trending really good with flower. If we can continue that trend with <unk> and <unk> is a huge category and growing and whats unique about Neptune and what even though the extraction business was very complicated.
And did it perform as like Prime management wanted it to.
The debate.
<unk> edge that we have isn't an extract there we have a unique extractor that allows us to skip four steps. So we get it to a near distillate form and 50% of that.
<unk> cost is in the extraction and 50% of it is in the actual hardware. So we will be very competitive and be able to perform at all levels of volume.
It was designed to be a b to b.
Service, So I think that the <unk> side and the flower size of the market is going to give us the edge in Canada that we need.
Focusing on the bottom line and the top line and the gross profit margin.
The timing is basically just rolling out the products, we have been very conservative with the rollout in Canada just to make sure. We won with the taste profile and the product and we pick the highest quality. We are some of the best product developers.
That have had years and decades of experience in candidates. So that's something that I think thats going to be able to give us the edge. So I do think that the Canadian market will perform very well for Neptune because we were had the learnings of the people that are in front of us. So we avoided a lot of the pitfalls that other companies walk right into it.
Okay. Thanks for that color, Michael that's really helpful. And then just one third one if I could squeeze it in.
Probably more for Tony here.
So on the gross profit margin just looking through the MD&A.
I saw they were talking about sort of gross profit, 13% positive could be derived right. If you strip out.
So I appreciation and sugar lease accounting. So I'm just wondering if you could maybe give some more commentary on that is that meant to be somewhat of an eminent.
The adjusted number that could get there and when you might think.
That type of modest gross margin could actually be flowing through in.
The reported P&L. Thank you.
Sure. So yes, so gross margin.
Your line is 23%, but if we are adding those if we are adding those.
Back because you're right an adjusted gross margin of error.
Oh, sorry, 2% taking out <unk>, taking some out.
Direct cost and depreciation and amortization.
We believe that throughout the year, we continued to improve gross margins throughout the year.
Also believes that the full year we might.
Fee income.
Consolidated.
And negative Marshalls at for the year.
As revenue growing.
Accelerating gross margin improvements will also be accelerating.
Alright, great. Thank you I'll jump back in the queue.
We'll take our next question from Gerald Pascarelli from Karen <unk>. Please go ahead.
Good morning, Thanks, very much for taking the questions.
Michael based on your cannabis.
Commentary, just I guess a housekeeping item.
<unk>.
Are you still expecting the revenue generation to start to flow through to the P&L starting in the fourth quarter of this year or has that been kind of pushed back.
And then I guess the second part of my question is I think you had offered a run rate revenue over $1 million per month.
Does that still hold and should we expect to see that.
In <unk> <unk> was this year or.
Does that get pushed out any color you can provide there.
Would be helpful. Thank you.
They still hold and hopefully we do better.
And so I definitely think that cannabis is something that we've definitely been able to continue to see improvements in and is performing better than we had expected. There is delays in reporting revenue as far as like we ship out while we wait for POS data to include the revenue. So there is a lag between when we ship and got the orders in GAAP.
Paid for Providence's before it shows up in our P&L.
Got it that's helpful.
Your SG&A.
Definitely showed a nice improvement quarter over quarter.
<unk> scale your revenues and.
Gross gross margin improves a little bit.
On the Cogs line can you just talk about the ability for the company to leverage the G&A lines further like some.
Are you are you expecting.
G&A SG&A as a percentage of sales to continue to go down over the remainder of this year.
They're kind of protect your bottom line your.
Bottom line, if you take out.
Yeah sure maybe I can take that question. So yes, we are.
Continuous improvement on SG&A, we have a variance for this quarter and that was mainly driven by non recurring expenses.
Acquisition and integration costs.
If we would take them.
I have seen a little lower than expected SG&A. So we are going to be very disciplined on our cost control.
Thanks, Tony that's helpful. If I could just follow up with one more and this is more of a housekeeping item as well but.
Any expectations and I don't know if I missed this but what do you expect to.
Your capex to be this year it looks like it's definitely running lower than last year.
Any broad color you can provide.
So it's meant to be guidance trying to.
How should we think about it maybe relative to last year I guess.
Yes.
Capex.
Investments have been behind us.
<unk> completed the transition so we expect capex investments to be on the very low side.
There is no meaningful need for.
Our model any capex investments.
Got it.
Very helpful color. Thank you I'll pass it on.
Our next question comes from John <unk> from Jonathan's capsule market. John Please go ahead.
Yes.
Hi, good morning.
Mike talked about.
Two to three year profit for the cannabis segment.
So I'm just kind of curious what kind of assumption.
Hilton plaque.
In order for you to get to that profitability level within that timeframe and are you factoring in any of the early success that you're seeing in flower and whatnot and so.
Any additional color would be helpful.
Yeah sure let me take this one so we.
We expect.
Cannabis to ramping up pretty fast because of the success of the flowers and the anticipated startup of debate.
And also <unk>.
We hope that these products are providing ups.
And B what.
So I'm comfortable giving a window of 18 to 30 months of reaching profitability probably cannabis business.
Okay, and then can you maybe just talk about some of the new product launches and so youre talking data soon.
And is there anything else in the pipeline.
In terms of the <unk>.
Products that Youre planning to launch.
Can you give us a bit more about visibility from a from a top line and then this 18 to 30 months timeframe you have for profitability.
Yes, definitely the Vapes from the flowers continued rollout are the keys for us both the profitability and the growth.
We are looking into and we have a study that I mentioned in my script about Max low with a combination of THC and CBD when that study.
If it's like the prior studies with other supplement.
We anticipate that being a unique thing for both the U S and Canadian market.
Because that would increase the make essentially make a <unk> three times stronger potentially and the onset within two minutes. So I think that will be a game changer. When it comes to IP for Neptune for both the U S market and the Canadian market and it also gives us the ability to enter the U S cannabis.
Market by licensing Maximo for the U S state operators. So that's something that I think it's going to be something that we haven't factored in that could be something thats high margin licensing, obviously and gives us the ability to play in the U S market as well.
Okay. So that's what you meant then carry income.
And training the U S.
The legalization.
Bye.
I guess when can you ask the IP to.
To msos.
Yes, because that allow us to license on maximal proprietary.
Formulations bounded to the msos without touching the THC, so that would allow us to be able to give a better onset for them on the edibles and digestible.
And also give them access to our our capsules. So I think that thats, something thats going to give us a strategic edge. We are as we talked about looking at strategic strategic structuring that may also give us additional edge in the U S market as well. So we feel very strong that we are well positioned to start taking market share aggressively in Canada.
Now, we're looking at how to optimize the use side. So we definitely have gotten to the right point and.
And focusing and gone through the transition and all of the Capex that was prior committed by.
The extraction plant at the prior management had so now we're focused heavily on the execution and the growth and making sure that in Canada and in the U S.
I'm, sorry remind me again, the timeframe upon which you might be able to.
Understand whether or not the latter.
IP.
Okay successful and then when you can take your way towards a licensed that into the U S.
The study will be late this year.
And then we would be obviously able to execute on that.
Okay.
Okay, great. Thank you.
We'll take our next question from Doug Lane from RBC capital markets. Please go ahead.
Thank you.
My question really has to do with the burn rate and the current cash position of the company and the fact that the.
Cannabis business, where we won't be profitable for two to three years.
Tony can you tell us.
Need for further equity financing.
We're going to be required by the company over the next.
Six to 12 months.
Sure.
Sure so as we have.
Last quarter, we don't expect to raise any capital.
For the rest of the year.
That hasnt changed as we are accelerating our revenue and improving gross margins, we don't expect any additional capital raise.
Okay.
So when we think about.
On the losses.
Cash burn that we just saw this latest quarter.
What you're telling us is that there's going to be a material improvement over the next quarter or two to ensure that you do not need to raise any further equity correct.
Yeah, So first I would say for the.
The cannabis.
We have given at window, perhaps closer then next two to three years. So the window is more route.
In Q2, 30 to 30 months and.
With regards to the cash burn.
Police that FX revenue accelerating in March and are increasing that we have visibility that we don't need to raise capital.
Capex for the rest of the year.
Okay, great. Thank you.
As a final reminder to ask any further question. Please press star followed by one on your telephone keypad now.
So we have no further questions, bringing today's cogent and thank you all for joining you may now disconnect your lines.
Yeah.
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