Neptune Technologies and Bioressources Inc (NEPT) Q4 2019 Earnings Call Transcript

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Neptune Technologies and Bioressources Inc (NASDAQ: NEPT)
Q4 2019 Earnings Call
Jun 12, 2019, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good afternoon. My name is Gabriel, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Neptune Wellness Solutions 2019 Fourth Quarter and Fiscal Year-End Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Mario Paradis, CFO of Neptune, you may begin your conference.

Mario Paradis -- Chief Financial Officer

Thank you, Gabriel. Good afternoon, everyone, and thank you for joining us. As mentioned, the purpose of today's call is to review our results for the fourth quarter results ended March 31, 2019.

Joining me today is Jim Hamilton, our President and CEO; Martin Landry, our new Chief of Corporate Development & Strategy; and John Moretz, our Chairman of the Board. As usual, Jim will review Neptune's operational annual highlight, followed by myself with a discussion on quarterly financial results.

Before we begin, I'd like to remind you that all amounts are in Canadian dollars, and today's remarks contain forward-looking information that represents our expectations as of today and, accordingly, are subject to change. We do not undertake any obligation to update any forward-looking statements, except as may be required by Canadian and U.S. Security laws. A number of assumptions were made by us in preparing these forward-looking statements, which are subject to risks. Results may differ materially, and details on these risks and assumptions can be found in our filing with the Canadian securities commission and with the Securities and Exchange Commission.

Now, I'll turn the call over to you, Jim.

Jim Hamilton -- President and Chief Executive Officer

Mario, thank you. Thank you very much, and welcome all, and a special welcome also to Martin Landry, who is an incredibly well-known personality in this business, and it's just so wonderful to have his insights into the business and support. And Mario I think you would agree everywhere we go, we kind of -- he gets referred to like a celebrity, but it's great to have Martin on board. And we also have the pleasure of Mr. John Moretz. John, hello.

John Moretz -- Chairman

Thank you.

Jim Hamilton -- President and Chief Executive Officer

And as a special guest appearance, John of course is our Chairman, and has been an incredible partner and supporter of this journey we've been through the last couple of years together to make this business so wonderfully positioned for the future. And Mario and John and Martin are just three of the team that have been helping drive this business. And for those who are interested we're also going to start a profile and put a little more personality on some of the people, it's not just me and Mario the voices that you hear on the phone, but it's so many more, and we'll start to profile those people. And if you're interested on our website blog, you'll see a recent addition of Dr. Graham Wood who has been another great addition to the team.

So today we'd like to speak to and there's a presentation posted on our website for those who want to follow in terms of the agenda. Take a look at some of the highlights of the business in particular subsequent events quarter; we will look at the fiscal year end and fourth quarter results with Mario; and then we want to talk about some incredible news linked to some of the recent sales contracts that we've booked and as well as outlook for the future, and some questions and answers.

And let me if I just welcome you to look at the Page 5, events subsequent to the quarter. I'm looking at the team here. I can't remember in my tenure at this company that we've had such an incredible developments in our business representing a lot of work of late.

First and foremost, we are very happy to announce this evening that we are going to turn on an additional 1,300 metric tons to bring it up to 1,500 metric tons extraction capacity in our Sherbrooke plant. In addition to that, the associated value added activities in terms of formulation and packaging, this is just wonderful -- that is on top of two recent announcements on commercial deals with two great companies of The Green Organic Dutchman, TGOD, as well as Tilray bringing in an additional about 360 plus metric tons as minimum of processing of cannabis over the next couple of years.

Story continues

And let's not forget recent also announcement that we've made is the signing of a definitive agreement of SugarLeaf Labs hemp processor in the United States also with the 1,500 metric tons capacity. So, not only we are increasing six-fold here in Canada to 1,500 metric tons, we'll have a combined 3,000 metric tons of processing capacity in cannabis both here in Canada and well as the United States to support both domestic markets as well as global markets around the world. So, it's just been an incredible couple of months and weeks to bring these situations to bear, and we'll talk more about them in a moment.

But before we get there, I think we should close out the fourth quarter, Mario, and the last fiscal year, and I'd just like to invite Mario to take us here for next few minutes on some of the financials.

Mario Paradis -- Chief Financial Officer

Yes. Thank you, Jim, and good afternoon, again, everyone. I'd like to remind you that our results are in Canadian dollars, and today's remarks may contain forward-looking statements.

My comments today will focus on the quarterly performance, unless otherwise indicated. I also want to remind you that we stopped to consolidate Acasti Pharma after the third quarter of last year. However, comparative results of operation in the consolidated financial statements still include Acasti numbers for the period ended March 31, 2019.

Consolidated results for the fourth quarter and fiscal 2019 results can be found in our press release, and in Neptune's consolidated financial statements, and related MD&A available on SEDAR, EDGAR, and in the Investor Section of Neptune's website. You'll find a detail of the financial results of the quarter and for the fiscal year in the appendix of the deck.

So, let's start with our cannabis segment. During the fourth quarter, in fact, by the end -- more at the end of the month, March 2019, we started our commercial cannabis extraction business for which we will operate few days in March, where we generated CAD12,000 in revenues. As part of our operation, lab testing and batch release increase the lead-time to market and delayed slightly our revenue recognition from cannabis extraction.

R&D expenses related to the cannabis segment which basically consisted of salaries and fixed costs at our manufacturing plant in Sherbrooke including the depreciation, in order to prepare the site and start the cannabis oil extraction business in compliance with Canada's requirements, were CAD1.9 million compared with CAD1.5 million for the same quarter last year. The increase of CAD0.4 million is mainly related to additional compensation from full time employees and depreciation of the property, plant and equipment.

During this quarter, SG&A related to the cannabis segment totaled CAD0.4 million compared to CAD0.3 million last year, and consisted mainly of the business development team, which incurred traveling and representation expenses.

The non-IFRS operating loss of the cannabis segment, before taking into consideration the non-cash stock based comp, and the depreciation and amortization was CAD1.5 million for the fourth quarter in comparison with an operating loss of CAD1.1 million in the same period last year.

Let's now look to the Nutraceutical segment. Total revenue for the fourth quarter including royalties revenue were CAD5.7 million, down by CAD1.3 million over the fourth quarter last year. Total revenue decline is mainly due to lower sales in the Nutrition business due to timing of orders from some customer and also to lower royalty revenues related to lower sales from our licensee.

Our gross margin as a percentage of sales was stable compared with the same period last year of 26%. In terms of dollar, we generate CAD1.5 million, a CAD0.6 million decrease over the same period last year, mainly related to lower sales and a decrease in royalty revenues as discussed earlier.

SG&A totaled CAD1.1 million during this quarter compared to with CAD1.3 million last year, and this decrease is mainly due to lower marketing expenses in the quarter. The adjusted EBITDA for the quarter was CAD0.5 million compared to an adjusted EBITDA CAD1.2 million, and this variation is mainly related through over sale and lower royalty revenues.

The corporate G&A for the quarter was pretty stable in comparison with last year with CAD2.4 million. The consolidated quarterly non-IFRS loss for the quarter is CAD2.7 million compared with a loss of CAD1.8 million, mainly related to the nutrition performance and additional investment in the cannabis segment in the fourth quarter.

The quarterly net loss increased significantly by CAD7.6 million to reach CAD12.4 million in comparison with a net loss of CAD4.8 million last year. One item impacted significantly the net loss in the last quarter as we took a provision for litigations for an amount of CAD7.9 million, of which CAD6 million was settled after the quarter with financial instrument meaning no cash was disbursed. You will find more detailed information related to decide this item in note 11 of the consolidated financial statements.

Turning to our liquidity at the end of March 2019, our cash position was CAD10 million and total debt was CAD2.8 million, excluding the operational credit margin. The cash level is in line with our expectation and we are evaluating options to fund our growth with a focus on prudence and minimizing equity dilution. In that respect, discussions are actually taking place in order to establish non-dilutive credit facilities as we -- and we are very confident to have a positive conclusion soon.

So, as we mentioned, lot of times during meetings with investors and in recent presentations, we will be EBITDA positive for the current fiscal years, as our activities will ramping up significantly following Health Canada amendment approval that we hope will be coming soon. So on that Jim, I will turn the call over to you.

Jim Hamilton -- President and Chief Executive Officer

Mario, thank you very much for those who are following along with the presentation. I just referred you to Page 7, which is -- just wanted to reiterate our strategy that we're fundamentally a B2B company, and our objective is to be the world's leader in extraction, purification, but just not extraction and purification, but also the formulation of value added and differentiated cannabis products clearly based on science.

Just looking at Page 8, that's something we've shared with you before. But I think it's really important that people understand the demand dynamics that we see in the market today. And let's start with the Canadian context at -- and I'm looking at market today that's roughly about 70%, 75% of the Canadian market is a weed. It's not based on extracts, but we think that will change significantly with the pending legislation that allow new product forms of future such as vape pens, topicals, edibles, et cetera.

And when you look at some of the market research and in, call it, more free markets, more advanced markets such as California, the majority is based on an extract, and many people that we've spoken to, see it not as 60%, but rather moving even higher than that. So, we are seeing demand for extracts growing and paralleling with pending legislation to better match markets that are more developed.

And I think importantly, and we often forget in our equations, in our calculations, that the demand for CBD and hemp. And remember you don't smoke hemp. You take that as an extract in some kind of delivery system. So, when you look at the pending legislation in Canada, when you look at the CBD demand for hemp-based products in Canada, and beyond, we see a very, very robust demand profile going forward.

And so much so, in Page 9, we have approved today at the Board in Mario and John resoundingly the expansion of our Phase 3A, what we call it, because we are fully committed and fully commercially booked for the capacities that we have installed in Phase 1 and Phase 2. And our sales teams are already engaging in discussions, in terms of filling out a Phase 3. Phase 3 will add approximately 1,300 metric tons or 1,300,000 kilos of processing capacity and this is a staggered approach.