Neptune Wellness Solutions Inc.
Q3 2018 Earnings Call Transcript

Published: 15 Feb 2018

[Operator:]

[Foreign Language]. Good afternoon, ladies and gentlemen. This is the operator. Welcome to the Neptune Wellness Solutions Third Quarter 2018 Earnings Conference Call. At this time, 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] I would now like to turn the call over to Mario Paradis, Chief Financial Officer. You may begin.

[Mario Paradis:]

Thank you, Operator. Good afternoon everyone, and thank you for joining us. As mentioned, the purpose of today’s call is to review our results for the third quarter results ended December 31, 2017. Joining me today is Jim Hamilton, our President and CEO. As usual, Jim will review Neptune’s operational highlights, followed by a discussion on quarterly financial results by myself. Before we begin, I’d like to remind you that all amounts are in Canadian dollars unless specified, 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 US securities laws. A number of assumptions were made by us in preparing these forward-looking statements, which are subject to risks. Results may differ materially, and details on these risks and assumptions can be found in our filing with the Canadian Securities Commission and with the Securities Exchange Commission. I’ll now turn the call over to Jim.

[Jim Hamilton:]

Hey Mario, thank you very much and good afternoon one and all. Welcome to our third quarter call and Happy Valentine's Day to all. Mario, you have the great pleasures of spending Valentine's with me, and we're happy to be here and report to everybody on our third quarter results. I just wanted to begin with a headline just in terms of our cannabis business development. It's underway and on schedule. We’ll get into much more detail on that in a moment. Just first, a little bit on some of the numbers. Revenues for the quarter to $7.3 million, reflecting an increase in our solutions or nutrition business. And don't forget, when you're comparing prior quarters, of course we sold our krill oil business back in August of last year. We had indicated for solutions business, we had a goal of double digit growth this year, and we're well on track there. In fact, if we're looking at what has been shipped and open orders, we’re at actually 98% of that target as we speak. So assuming we can get everything out the door, we’ll be right on the money there. A gain of $8.8 million realized from the deconsolidation of Acasti. And again, Mario will speak much more to that. But we will be seeing over this quarter and next, a removal of the Acasti presence from our balance sheet and statements going forward. It should be much easier to get a clear view of the Neptune business. Net income for the quarter at $6 million. And just on the business, a few comments. Our MaxSimil sales have been performing. We did an announcement about an exclusive deal we did in one of the channels, a sports channel. And I'll just say in this quarter, I just wanted to say that our MaxSimil product, we like a lot. We love value added differentiated products in the nutrition business, because it’s a great way to drive growth. Some of the other announcements were made in the quarter of course was the $5 million investment in terms of modifying our site. We’re winding down or have wound down krill operations and we’re winding up to move into the cannabis space. And we announced $5 million in terms of site compliance and some equipment there, and that is on track. We’ll speak to that in a moment. We also talked about extending our MaxSimil license into cannabis. We also have subsequent event, I’m just looking at page five, of working with a major krill oil provider in terms of an exclusive on krill oil in cannabis, and a co-development arrangement or agreement with a firm called Tetra Bio-Pharma regarding a purified krill - actually cannabinoid oils targeted towards pain and inflammation. We love these guys. They are pharma development organization with a ton of experience. And all these announcements are done for one reason. Our focus is about extraction, purification and differentiated value added products, and we are very intrigued and very excited about the potential of looking at both MaxSimil and krill oil for that matter, in terms of carrier oils with some of these cannabinoid items. I mean could they enhance absorption for example with CBD and make a much more effective and differentiated product form? We’ll have trials that we're working on right now with a local university and are looking forward to some results come this summer. And in regards to Tetra Bio-Pharma, looking at these carrier oils, these compounds with purified cannabis and indications for pain and inflammation and targeting both human, but also to that channel which we like very much. So our differentiated value added product forms, just moving to Page Six, trying to express this in bit of a model. Our focus is within the box in the center. Again, extraction, purification and formulated delivery forms. And we love it when there's IP, that there is a clinical research and that there's unique delivery forms. This by the way is no different than what we did with the krill business over the years in terms of the IP delivering it both in value added branded ingredients, but also in soft capsules. And our goal is to do the same with this business, and we're working hard to excuse accordingly. Just a couple of comments on the site. We mentioned back in November, when we did a review of where we are with our strategy and our plans going forward, and two steps for the site. Step one, our $5 million investment in terms of site security, license compliance and extraction and purification. We spent the last day and a half with our board going through in detail. And again, let me just say that everything we're doing in the site for step one is on time and on track. We’re very, very pleased with the schedule towards completion of that first phase in the middle of this year as we indicated back in November. And step two, we're doing quite some work around solvent extraction and purification, and let's be clear where this is our legacy. This is our roots is solvent extraction. We’ve done a ton of work in the lab and landscaping trials. And let me just say that again, I think we reviewed that with the board actually this morning and we're very, very pleased with what we're seeing there. Just flipping to the license, what we shared back in November, as well as the licensing process. And again, I'd like to say that we are on time and on track with the process, the relationship and the conversation we have with Health Canada in terms of how that is developing is all green lights thus far. This, remember is not a sequential process with construction, but a parallel process and we are very, very confident that our licensing will move in tandem with our construction towards the middle of this year for the issuance of a producer’s license. With that, I just wanted to maybe offer Mario a chance to speak here, to talk about some of the numbers and we’ll come back with a few last comments and then some questions. Mario, please.

[Mario Paradis:]

Thank you, Jim. 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 for our nutraceutical business, unless otherwise indicated. Consolidated third quarter fiscal 2018 information for the three months period 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. I’d like to remind you that, as previously announced, our fiscal year-end has been changed from February to March. Consequently, the third quarter ended on December 31, 2017, and the comparison period is the three months period ended March 30, 2016. Financial information for the three months period ended December 31, 2016 will not be discussed, and there are no significant factors, seasonal or otherwise, that would impact the comparability of information. So if you look now on page nine of the presentation, total revenues for the quarter were $7.3 million, an increase of $5 million or 41% over the three months period ended November 30, 2016. The revenue decline is mostly due to our exit of the krill oil manufacturing and distribution activities, related to the divestiture to Aker BioMarine in the second quarter. We had some sales during the third quarter derived from the krill business amounting to $0.9 million for the manufacturing of clinical supplies for Acasti Pharma as per the agreement with Aker BioMarine. We do not anticipate any additional revenues derived from the manufacturing of krill oil going forward. Our solutions business grew very well, with 7.5% in comparison with last year, and 2.6% sequentially over the second quarter this year. Included in the total revenue are royalties revenue for $500,000. Royalty revenues increased by $136,000 versus the prior year’s period, with the rise mainly oriented to the reversal of deferred revenues following the termination of the license agreement with BlueOcean Nutrascience in December 2017. In terms of gross margin dollar, we generated $2 million in the third quarter, including royalties revenues, an increase of $1.5 million over last year and a decrease of $0.1 million over the second quarter. Our quarterly gross margin dollar as a percentage of sales, decreased to 22%, down 4 percentage points over the last year, largely due to an unfavorable product revenue mix. Our investment in R&D in the third quarter was related to our cannabis business initiative. R&D spend amounted to $1.7 million and is mainly related to our team advancing this project. SG&A totaled $2.5 million during the quarter, compared with $3 million last year. And SG&A expenses decreased by $0.5 million over last year, mainly due to a decrease in the total compensation. Adjusted EBITDA for the quarter was negative by $1.3 million, compared to a positive EBITDA of $1.3 million last year. The variation of $2.6 million versus last year is directly related to lower sales resulting from our exit of the krill oil business and the corresponding lower gross margins in dollars, and the investment in the cannabis business, slightly offset by lower SG&A expenses. During the third quarter, Acasti Pharma closed a successful equity financing on December 27, 2017. Immediately after the financing, our ownership was reduced from 34% to 19.8%. Consequently, starting on January 1, 2018, Acasti’s results of operation will not be consolidated into our statement of earnings. In the third quarter however, the result of the operation of Acasti were consolidated in Neptune's statement of earnings up until December 27, 2017. As a result of the deconsolidation of Acasti, we also recorded a non-recurring gain of $8.8 million. Acasti’s balance sheet was not consolidated in our December 31, 2017 statement. As of quarter end and going forward, the investment in Acasti will be recorded at fair value in our balance sheet under other assets. Our quarterly net income after the gain to consideration - the gain on deconsolidation of Acasti and financing expenses, was $6 million in comparison with a net income of $11.2 million last year. You may recall that last year, the net income included a $13.1 million as a royalty litigation settlement. Turning now to our financial position. We continue to be in a very healthy position, with a strong balance sheet. As indicated on page 10 of the presentation, as of December 31, 2017, we had cash of $28.6 million and a debt of $4.5 million. In addition, and also mentioned at the last call, we are still anticipating that our cash position will continue to be strong and be in a range of $23 million to $24 million at the end of this fiscal year. I’ll now turn the call over to you, Jim.

[Jim Hamilton:]

Mario, thank you very much for that, and just a few comments for those who are following on page 12, just looking ahead. Let me just say that relative to our cannabis business, again on time, on track. We’re fully focused on executing our strategy there to develop this opportunity, again around extraction, purification and product forms that are value added and differentiated. That's all we're focused on and focused very, very hard on that. Relative to our nutrition business, which is a great platform for us to grow in future, again that’s - in terms of our goals this quarter of double digit growth, 98% of that has either been shipped or is on schedule to ship. And if we can get everything out the door this quarter, it definitely will be achieved. And as Mario touched, a solid balance sheet and again, on track with exactly what we had predicted for this quarter. Let me just say too that relative to the cannabis business, just maybe a small comment, that the analogy for me looking at this industry as compared to what I've seen in the nutrition products industry, the analogies are just staggering for me. I think this is a major consumer product segment that we'll see developing globally. We’re seeing country after country start to engage and modify their regulations. We’re seeing science develop. We’re seeing opportunities to take this business out of the gray market into the legal channel. And I think it's exactly where this company should be, and I think it’s exactly fitting with our mission to lever our science and innovation capabilities towards wellness products. And we're looking forward to doing much more in this space, and we're looking forward to reporting more as we progress. And with that, should there be any questions, Mario and I would be happy to engage on the same. So Operator, I hand it to you.

[Operator:]

[Operator Instructions] Your first question comes from the line of Doug Loe from Echelon Wealth Partners. Please go ahead.

[Doug Loe:]

Yes, thank you very much and good morning gentlemen. Thanks for the update on the quarter. Two questions for me, one kind of technical one, one market based. So Jim, on Slide seven you had talked about all of the initiatives that you're undertaking to adapt the Sherbrooke facility to cannabis oil extraction. And I mean, you indicated in step two that solvent extraction and purification is a core focus, which of course was the core focus of the facility for krill oil extraction. So wonder if you can just kind of walk us through what sort of logistical or specific initiatives have to be undertaken to sort of adapt that facility to cannabis extraction. Presumably you're kicking the tires on adapting the facility to ethanol extraction versus acetone. Maybe just a few specifics and over what timeframe the facility would be operationally ready for solvent extraction. So that's the first thing. And then second of all, just kind of gazing at your press release here vis-à-vis your new Tetra alliance. And you do allude to veterinary markets as being one of the two focuses for the partnership. You haven't really talked about veterinary markets before. So just sort of wondering if you might just walk us through what some of the key market dynamics are there as they relate to your cannabis business and the alliance with Tetra. And I'll leave it there. Thanks.

[Jim Hamilton:]

Well, Doug, thank you very much. On the site specifically, I think there's just some very, very interesting things that we're looking at right now. In terms of the step one, step one remember as we had mentioned before, was all about compliance and speed. And that's why we've chosen that pathway. Compliance in terms of site security. When you look at our initial investment to a degree, I'm looking at Mario, I think about 50% of that initial investment and more is all around compliance to the security level. So fencing and controls, cameras, access, et cetera. And also CO2, which we like CO2 for some particular applications in future. But also we like it from a speed of commercialization. On the solvent side of things, so we're very attracted to this ultimately because it's what we do. And we think it's a far more efficient and far more effective pathway. And we're doing a number of tests right now, and it could be acetone. It could be ethanol. There’s some pros and cons of each that we're seeing in our analysis. And all I can say is, we're very excited about some of the things that we're seeing. And don't forget too, Doug, that what we're looking at here is not just cannabis extraction, but we're also looking at the potential for hemp extraction in future as well, because we think the CBD via the hemp plant could quite potentially be a major part of consumer health products going forward in terms of volume in future. And that ties in to a degree with the Tetra announcement. And we like these guys a lot. I mean they're experienced pharma development people that know how to do clinical trials and know the indicators through which to design outcomes. The focus as I mentioned earlier, will be largely around information and pain management. We see a pathway from a regulatory standpoint in human relatively quickly, assuming the results are compelling in the Canadian context. But we're also looking at the vet channel because for those who have pets and animals and know the companion animal space, large dogs, horses, et cetera, are a exceptionally large market. And we think this would be largely a CBD based product, and we think there may be a regulatory pathway that we could fast track into the United States for that particular segment, which might allow us to be legally commercializing a product in a specific channel, based on a certain regulatory approval. We’ll see how that goes, but we're very excited by the partnership and the regulatory and scientific capabilities that we’ll both bring together on that one.

[Doug Loe:]

Good stuff. Thanks, Jim.

[Operator:]

[Operator Instructions] Your next question comes from the line of Brian McCreery from Caldwell Securities. Please go ahead.

[Brian McCreery:]

Jim, how are you doing?

[Jim Hamilton:]

We're good. Thank you, Brian.

[Brian McCreery:]

Good. Question on the barriers to entry into the whole cannabis oil business. Had a lot of clients ask me about that. They’re - there's other people making krill oil right now. I understand what you’ve put up on the screen there, research and alliance and delivery form and stuff. But can you break that out a little bit more for me? And maybe I'm not an expert in the cannabis industry. Your plant that you will develop and change over to be able to drive the cannabis oils, its size compared to existing plants out there, either in Canada or even in an international basis. Can you comment on that?

[Jim Hamilton:]

Absolutely, Brian. Thank you for the question. And maybe a couple of thoughts there. I think when you look first and foremost about differentiation in the space, I don't believe you'll see differentiation from crude extraction from CO2. Where you will see differentiation ultimately is through solvent processes, but more importantly, in the purification, distillation and isolation processes. Remember this is a complex compound that has many very, very intriguing sub compounds within it. And the isolation and the ratios thereof in future I think will be the secret to differentiation. And that's very much what we've done and that's what we will be doing is bringing that capability of powerful extraction, combined with purification and isolation. Number two is, I think scale is important. I think we have a facility here that is global scale. I will tell you, this is one of the - one or two GMP certified facilities that exists. We’ve been audited, not only by countries but by multinationals. It is a pharma grade facility. I will tell you, when companies like our partner Tetra Bio-Pharma come through and others, when they look at the quality and the controls and the cleanliness of this, they get very, very excited about the capabilities there. So I think it's a GMP facility with purity refinement solving capabilities, and with global scale. And maybe one last comment on global scale. We’ve seen investments by another company to construct a solvent based larger scale facility. And they reported that that would take them 20 months. And I think that is probably very reflective of how long it will take, but more importantly, once it is constructed, making sure that one has the operating procedures and the experience to do so. It takes time, and I think for this industry, we have a great advantage here in terms of the capabilities of the site and where we can drive it in the near term.

[Brian McCreery:]

Okay. Thanks, Jim.

[Operator:]

There are no further questions at this time. I’ll turn the call back over to management.

[Jim Hamilton:]

Great. Well, thank you very much, Operator. Mario, thank you for all the efforts and work through the quarter. We’re very, very excited by not only what we've got moving here as a business, we’re exceptionally excited by the category. And again, as I mentioned, we see this as a global phenomenon, global consumer products phenomenon and we like that. And we're excited to be here, excited to work in the space. We thank everyone for their attention. And as always, Mario and I are open to questions and your letters. So I wish everyone a great Valentine’s and we look forward to talking with everyone soon. Thank you very much.

[Operator:]

This concludes today’s conference call. You may now disconnect.