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spk00: Good morning and welcome to the Neptune Wellness Solutions Q1 2022 earnings call. My name is Katie and I'll be coordinating your call today. If you'd like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. I will now hand the call over to your host, Steve West, Vice President of Investor Relations, to begin. Steve, please go ahead.
spk05: Thank you, Operator, and good morning, everyone. With me today are Michael Camerata, President and Chief Executive Officer, and Dr. Tony Renau, Chief Financial and Global 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 do not undertake any obligation to update any forward-looking statement, except as may be required by Canadian and U.S. securities laws. Assumptions were made in preparing these forward-looking statements, which are subject to risk as laid out in our public filings found on CDAR and EDGAR. For your scheduling purposes, we are tentatively planning to release our second quarter financial results before markets open on November 11th and host our earnings call later that same morning at 10 a.m. Eastern Time. I will 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 to $12 million. Both our reported revenue and gross profit improved compared to fourth quarter, which illustrates that our transformation 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 Moon Ring Flower into Alberta, the fourth territory where we are selling our branded cannabis products. Moon Ring Florida Citrus Cush Dried Flower is now selling in Alberta and British Columbia. During the quarter, we also introduced three additional Moon Ring products, Florida Citrus Cush Dried Flower, high THC capsules, high THC oil in British Columbia, and in Quebec, we launched our high CBD capsules and oils under the Panhass brand. While we are rapidly building our cannabis brands, we are just beginning to realize our full potential. At the end of the first quarter, Neptune's 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 2,000 stores in the four territories where we operate. Moving to nutraceuticals, we continue our expansion efforts during the quarter. We continue to undertake several ongoing clinical studies evaluating Maximal as a lipid delivery platform when combined with supplements such as CoQ10 and vitamin K2. We anticipate announcing those results in the coming weeks and expect that they will be in line with Maximal's past studies, which have shown Maximal improves bioavailability and onset. 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 our Walmart.com and Target U.S. store launches, we have signed an exclusive licensing agreement with Cocomelon, the number one children's entertainment show with more than 10 billion views on YouTube worldwide. Our increased retail distribution for Sprouts is already leading to stronger sales growth as anticipated and we expect its growth to continue long-term. Now, before I turn over this call to Tony for her financial discussions, I would like to discuss the strategic review 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. These alternatives are not limited in scope, and could include changes in the strategy, operations, a strategic business combination, divestiture, or a spinoff or portion of the company, or even continuing to execute the company's parent business plan. I want to provide some context on our cannabis vertical as an example. Cannabis is our largest source of cash burn and carries significant gross profit and operating profit losses due in large part to higher premiums, taxes, overheads, and cost of capital. It is also the only vertical with negative gross profit margin. That said, we reversed the trajectory of our cash burns for cannabis last year by moving up the value stream from extraction to manufacturing and selling our own branded products. Thank you. Cannabis today generates less than 10% of the revenues, but accounts for more than 20% of the total cash burn. We believe cannabis will be a great long-term business, but the board must consider if cannabis or other businesses are right for Neptune today. We are moving quickly to maximize shareholder returns and will provide any updates at the appropriate time. With that, I turn the call over to Tony to discuss our financial results.
spk01: Thank you, Michael, and good morning, everyone. Our first quarter fiscal year 2022 revenue amounted to $12.4 million, which increased 10% versus the comparable year-ago period and increased 83% versus our fourth quarter fiscal year 2021 revenue of $6.8 million. This year-over-year growth was driven by increased Sprout and B2C cannabis sales, partially offset from exiting the oil extraction business. Gross profit during the quarter was a loss of $2.9 million compared to a gross profit of $3.3 million in the comparable year-ago period. Our reported gross margin was minus 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, Mood Ring and Panache, into 80% of the Canadian market, exiting the extraction business and sprout integration. By excluding from cost of sales, depreciation and amortization expenses, various fixed and indirect costs, as well as costs related to sugar leaf, a consolidated gross profit of 13% could 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 increase in net loss is mainly attributable to higher costs of goods sold and SG&A. Adjusted editor loss during the quarter was $15.9 million, a decline versus our adjusted of $2.5 million in the comparable year-ago period. The decline in adjusted EBITDA is mainly attributable to last year's transformation and non-recurrent higher cost of goods and certain non-recurrent SG&A costs. With regards to SG&A amounting to $20.4 million, an increase of $7.5 million comparable to the same period of this prior year. That increase is driven by non-recurrent additional legal fees and Sprout integration costs of $4.4 million and $2.4 million mainly in Sprout salaries and additional $0.8 million in insurance expense. We should note that 31% of SG&A expenses are non-cash items in the 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 higher expense items. We incurred an additional $5 million to build inventory for Sprout in anticipation of our expanded and announced retail launches and an advance of approximately $4 million to Sprout for operating expenses. Going forward through the year, we expect cash burn to decelerate as revenue growth continues to accelerate and improve our margins. In addition, for fiscal year 2022, we expect quarterly reported revenue to grow throughout the fiscal year and expect gross margin to improve for the full year. However, we currently expect gross margin to be negative for that same period due to production ramp-ups for our brand portfolio in light of the anticipated revenue expansion for Neptune. I will now turn the call back to Michael.
spk05: Thank you, Toni. And I would like to take some time and more operational details on our plan to drive revenue growth and improve gross profit margins for the full year. Let me start out with Sprouts. Sprouts ended last week with about $28 million in sales. And since then, we have launched into Walmart.com, Target.com, and in Target retail stores across the U.S. We have also launched Sprouts into Metro Grocery in Canada and expect additional retail distribution in North America. We have recently announced our exclusive licensing deal for Sprouts and Cocomelon, the world's leading children's entertainment show with more than 110 million subscribers on YouTube. We are finalizing new packaging designs with the Cocomelon 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 Viadroga, we are expanding our capabilities and offerings to a wider 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 revenues with existing and new customers. We are focused on opportunities to leverage Maximal through additional high-margin licensing opportunities. We are in a startup phase of conducting a clinical study on Maximal's efficacy on advancing the CBD and THC bioavailability and onset time. Pending positive results, we will be exploring licensing 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 innovations team has developed a line of nutraceutical sprays and pumps, which are a 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 sprouts. Imagine the convenience for parents to be able to deliver the necessary vitamins and supplements to their infants and toddlers that cannot or will not take pills or gummies. Also in development is a line of hydrogel patches as another convenient supplement delivery mechanism for consumers. Elimination eliminates many problems with existing transdermal patches, such as skin allergies, irritations, and rashes, providing a better consumer experience. Our innovation team has also developed KetoTrudge, using our proprietary emulsification process to deliver an energy boost derived 100% from non-GMO coconuts. This new line of products targets a customer who lives a low-carb, high-protein lifestyle such as keto to support brain health, weight management, and sports nutrition. I am most excited about two new products we have developed. First is EcoTable, a complete line of biodegradable and compostable tableware, such as plates, bowls, cups, and utensils. EcoTable is made from sugar cane remnants left over from the processing of sugar. This environmentally friendly source of material has a much lower impact on the environment than traditional paper plates and contains no chemicals or bleachers. Not only does Ecotable outperform traditional paper plates, but it's cost-competitive and 100% biodegradable and compostable. We are working hard to finalize orders for later this year. The second product is a new lineup of nutritional supplements, 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 cannabis. 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 400 of the approximately 2,000 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. Vape is one of the largest and fastest-growing cannabis segments, so we are rapidly moving to manufacture and market our motoring branded line of vape cartridges as quickly as possible. The second part of our growth strategy is to continue 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. I would also like to briefly touch upon our CBD beverage launch we announced earlier this year. The formulation, package design, the initial distribution, and the launch plan 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 tuned. That concludes my detailed operational plan. But before closing, I want to touch again on the strategic review. The top priority for both Neptune's executive team and the board of directors is 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 Neptune's future is 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 Neptune's future. Finally, I would like to thank our associates for their amazing work around the world to build Neptune into a leading health and wellness CPG company. Operator, you may now open the line for questions.
spk00: Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you'd like to remove your question, please press star followed by two. And when preparing to ask your question, please ensure your phone is unmuted locally. Our first question comes from Aaron Gray from Alliance Global Partners. Aaron, your line is now open.
spk04: Hi, good morning, and thank you for the questions. So first question for me is on Sprout. So some of you guys have a lot of initiatives with Cocomelon and also getting some more brick and mortar distribution. You know, Michael, just looking back at last year, $28 million, I believe that's USD, right? So it's called about $35 million Canadian. You know, for the quarter, it looks like a run rate of about $28 million Canadian. So we'd just love to get some commentary maybe on over-the-year trends, you know, within the Sprout business, and then how you kind of see, you know, kind of the growth going forward and when best to expect those distribution initiatives to kind of flow through the top line for Sprout. Thank you.
spk05: Yeah, I think that since we've talked about it last, we've announced the in-store Target launch, and I think that will have a positive impact on the growth. Target is one of the major retailers in this space, and obviously Walmart we've started a relationship with, and we expect hopefully for that to come in later this year with the Cocomelon characters. So Sprouts 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 Fund to really assist with it. So I think that Sprouts is definitely something that's performing better than we expected in areas and brought additional opportunity to Biodroga and other parts of Neptune.
spk04: Okay. Thanks for that, 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, you know, the business there. But then kind of later on, your prepared remarks, you know, talked about obviously being in 400 of the 2,000 stores, talking about the two-prong strategy, you know, more segment fapes and selling products. So we'd just love to kind of get, you know, how you're looking at the Canadian business there. you know, within Neptune, you know, today and going forward, you know, especially because, you know, we're hearing from problems such as Ontario in terms of some delays, potentially a new skew, which might have an impact. So love to get in terms of how you're kind of looking at, you know, the Canadian business based on your earlier commentary. Thank you.
spk05: Yeah, I'll add to that. I definitely, there is some territories and the regulatory parts change constantly, as you pointed out. We were fortunate enough to be able to submit our SKUs before they decided that they weren't going to review 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 the 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. Our capsules are performing very well, and I think that's something that's very unique, and it goes back to the relationship with Lonza on the capsules that we're using. The big impact, though, for the company on the bottom line and the top line is going to be coming with the flower and vape launches. We've already had great success with our flower launch. What we thought was going to be two weeks of inventory turned out to be less than five hours' worth of inventory. So as the flower is ramping up and we're about to enter the vape categories, we're going to see some, you know, hopefully surprises for the management and 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 products. And I think Neptune has made progress. uh some learnings that we've watched from our peers and being an extraction game where we were able to better tap into the consumer in the canadian market one being the consumer doesn't want a huge volume of one type of flower they want a consistent variation and seasonal flowers and be able to expand and try different things so we definitely rolled that out in our flower approach and we've seen great success like we thought we had weeks of inventory we had five hours of inventory so we are trending really good with flour if we can continue that trend with vapes and vapes is a huge category and growing and what's unique about neptune and what even though the the the extraction business was very complicated and and did it perform as like private management wanted it to The vape edge that we have isn't on extractor. We have a unique extractor that allows us to skip four steps. So we get it to a near-discipline form. And 50% of the vape cost is in the extraction, and 50% of it is in the actual hardware. So we'll be very competitive and be able to perform at all levels of volume. as it was designed to be a B2B service. So I think that the vape size 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've been very conservative with the rollout in Canada just to make sure we won with the taste profile and the product. And we picked the highest quality. We have some of the best product developers that have had years and decades of experience in cannabis. So that's something that I think that's 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 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.
spk04: Okay, thanks for that call, Michael. That's really helpful. 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, you know, I saw a note in there talking about sort of gross profit, you know, 13% positive could be derived, right, if you strip out some appreciation and sugar leaf accounting. So just wondering if you could maybe get some more commentary on that. Is that meant to be somewhat of an adjusted number that could get there and when you might think – that type of, how does gross margin could actually be flowing through, you know, the reported P&L? Thank you.
spk01: Sure. So, yes, so gross margin were minus 23%, but if we are adding those, if we are adding those costs back, we could derive an adjusted gross margin of... 13 percent, taking out sugar leaves, taking some out of the indirect cost and depreciation and amortization. And we believe that throughout the year we continue to see improved growth margins throughout the year, but we also believe that for the full year we might still see some consolidated negative margins for the year. But as revenue growing are accelerating, gross margin improvements will also be accelerating.
spk04: All right, great. Thank you. I'll jump back in the queue.
spk00: We take our next question from Gerald Pasquarelli from Cohen. Gerald, please go ahead.
spk03: Good morning. Thanks very much for taking the questions. Michael, based on your cannabis commentary, just I guess a housekeeping item, 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 of $1 million per month. Does that still hold and should we expect to see that, you know, by 4K this year or does that get pushed out? Any color you can provide there would be helpful. Thank you.
spk05: 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 it's performing better than we've expected. There is delays in reporting revenue as far as, like, we ship out, but we wait for POS data to include the revenue. So there is a lag between when we shipped and got the orders and got paid from the providences before it shows up in our P&L.
spk03: Got it. That's helpful. Your SG&A... definitely showed a nice improvement quarter over quarter. Um, you know, as you scale your revenues and, um, you know, maybe gross, gross margin improves a little bit, um, on the, on, on the COGS line. Can you just talk about the ability for the company to, to leverage the GNA line further? Like, um, are you, are you expecting GNA SGNA as a percentage of sales to continue to go down, you know, over the remainder of this year? Um,
spk01: you know to kind of protect your bottom line um your bottom line keep it up yeah sure maybe i can take that question on so yes we are we expect continuous improvement on sdna we have a variance for this quarter and that was mainly driven by non-recurrent expenses due to the acquisition and integration costs But if we would take them out, we would even have seen a little lower than expected SG&A. So we are going to be very disciplined on our cost control.
spk03: 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 on what you expect your CapEx to be this year? Looks like it's definitely running lower than last year, but any broad color you can provide. It doesn't have to be guidance, but how should we think about it maybe relative to last year, I guess.
spk01: Yeah, CapEx investments have been behind us, so we completed the transition. So we expect CapEx investments to be on the very low side, so there is no meaningful need to model up for any CapEx investments.
spk03: Got it. Very helpful, Colin. Thank you. I'll pass it on.
spk00: Our next question comes from John Chu from Desjardins Capital Markets. John, please go ahead.
spk02: Hi, good morning. Michael, I think you talked about a two to three year profitability outlook for the cannabis segment. So I'm just kind of curious, what kind of assumptions are being built into that? in order for you to get to that profitability level within that timeframe? And are you factoring in any of the early successes you're seeing in flour and whatnot? And so any additional color would be helpful.
spk01: Yeah, sure. I may take this one on. So we expect cannabis to ramping up pretty fast because of the success of the flours and the anticipated success of the vape. and also the good margins that these products are providing us. And we are comfortable giving a window of 18 to 30 months of reaching profitability for the cannabis business.
spk02: Okay. And then can you maybe just talk about some of the new product launches? And so you're talking vapes soon, I guess. And is there anything else in the pipeline? In terms of other products that you're planning to launch that can give us a bit more of some visibility from the top line and then this 18 to 30-month timeframe you have for profitability?
spk05: Yes, definitely the vape and the flower continued rollout are the keys for both the profitability and the growth. We are looking into and we have a study that I mentioned in my script about Maximo with a combination of THC and CBD. When that study If it's like the prior studies with other supplements, we anticipate that being a unique thing for both the U.S. and Canadian market because that would increase the – essentially make a THC 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 to the U.S. state operators. So that's something that I think is going to be something that we haven't factored in. That could be something that's high-margin licensing, obviously, and gives us the ability to play in the U.S. market as well.
spk02: Okay, so that's what you meant then, that entering the U.S. legalization is by – I guess, renting out the IP to MSOs?
spk05: Yes, because that'll allow us to license our maximal proprietary formulation patented to the MSOs without touching the THC. So that would allow us to be able to give a better onset for them on their edibles and digestibles. um and also give them access to our capsules so i think that that's something that's going to give us a strategic edge we are as we talked about looking at street uh strategic structuring that may also give us additional edge in the u.s market as well so we we feel very strong that we're well positioned to start taking market share aggressively in canada And now we're looking at how to optimize the U.S. side. So we definitely have gotten to the right point and focusing and gotten through the transition and all of the CapEx that was prior committed by the extraction plans that the prior management had. So now we're focused heavily on the execution and the growth and making sure that we're in Canada and in the U.S.
spk02: Sorry, remind me again, the timeframe upon which you might be able to understand whether or not the Maximo and that IP, I guess, is successful, and then when you can think you might be able to license that into the U.S.?
spk05: Their study will be late this year, and then we would be obviously able to execute on that.
spk02: Great. Thank you.
spk00: We take our next question from Doug Mame from RBC Capital Markets. Doug, please go ahead.
spk06: 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 really won't be profitable for two to three years. Tony, can you tell us the needs for further equity financing they're going to be required by the company over the next six to 12 months?
spk01: Sure. As we have said last quarter, we don't expect to raise any capital for the rest of the year. That hasn't changed. As we are accelerating revenues and improving gross margins, we don't expect any additional capital to raise.
spk06: Okay. So when we think about the losses and the cash burn that we just saw in 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?
spk01: Yeah, so first I would say, you know, for the cannabis, you know, we have given a window much closer than next two to three years. So the window is more around 18 to 30 months. And with regards to the cash burns, we believe that as revenue are accelerating and margin are increasing, that we have visibility that we don't need to raise capital for the rest of the year.
spk06: Okay, great. Thank you.
spk00: As a final reminder, to ask any further questions, please press star followed by one on your telephone keypad now. So we have no further questions bringing today's call to an end. Thank you all for joining. You may now disconnect your lines.
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