Neptune Wellness Solutions (NEPT) Q3 2021 Earnings Call Transcript

Neptune Wellness Solutions (NEPT 20.00%)
Q3 2021 Earnings Call
Feb 10, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Neptune Wellness Solutions Inc. third quarter 2022 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Morry Brown.

Please go ahead, sir.

Morry Brown -- Investor Relations

Thank you, operator, and good morning, everyone. Thank you for joining us today for the Neptune Wellness Solutions fiscal third quarter 2022 earnings conference call. With me today are Michael Cammarata, president and chief executive officer; and Randy Weaver, interim chief financial 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.

This morning's conference call contains non-IFRS measures, specifically adjusted EBITDA to provide investors with a supplemental measure of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. Management also uses adjusted EBITDA in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess our ability to meet our capital expenditure and working capital requirements. Adjusted EBITDA is not a recognized, defined or standardized measure under IFRS. Our definition of adjusted EBITDA will likely differ from that used by other companies, including our peers, and therefore, comparability may be limited.

Non-IFRS measures should not be considered a substitute for or in isolation from measures prepared in accordance with IFRS. Investors are encouraged to review our financial statements and disclosures in their entirety and are cautioned not to put undue reliance on non-IFRS measures and view them in conjunction with the most comparable IFRS financial measures. We do not undertake any obligation to update any forward-looking statements, 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 risks as laid out in our public filings found on SEDAR and EDGAR. I will now turn the call over to Michael.

Michael Cammarata -- Chief Executive Officer

Thank you, Morry, and good morning, everyone. This morning, we reported our fiscal third quarter 2022 results. The revenue for the quarter totaled $18 million. This is an approximately 17% increase from Q2 and our fourth quarter in a row of revenue growth.

As part of our strategic review announced at our Q2 earnings, we have a renewed focus on our core growth drivers. This includes Sprouts Foods, our primary food and beverage brand; Biodroga, our B2B personal care and beauty brand and Mood Ring and PanHash, our Canadian cannabis brand. We have made significant strides in positioning these brands for continued growth, while also improving margins. Before I go into a more detailed breakdown of our highlights for the quarter, I would like to call out two important developments post quarter end.

I am pleased to announce the appointment of Neptune's first female chair of the board, Julie Phillips. Julie Phillips, who has been a member of our board since this past summer. Julie succeeds John Moretz, who announced his retirement following a nine-year term on Neptune's board. Julie has provided an Neptune with valuable guidance and broad industry connections as a board member and played a critical role as a member of the Strategic Review Committee.

I, along with the board of directors and management team are excited to have her take on a larger role in the strategic development of Neptune. I would like to also provide an update on Sprout's CoComelon partnership. We are excited to share that a few of the SKUs are starting to become available on Amazon and direct-to-consumer channels. Next week, we will formally announce the full line of CoComelon products with a coordinated marketing and PR campaign.

And I'm delighted to add that we have an agreement in place with Walmart to launch the CoComelon line at 900 stores. With this launch, Sprout Foods will now sell into the top organic baby food retailers in the United States, accounting for access to approximately 90% of the overall market. This is a significant achievement as Sprout Foods only had access to approximately 50% of the U.S. organic baby food retail market this time last year.

The CoComelon product launch into Walmart is an exciting win for us and also represents an amazing opportunity to strengthen our relationship with one of the world's largest retailers. We expect our first CoComelon products to ship in fiscal Q4 of this year and are hopeful for a positive market reception once we hit Walmart shelves as CoComelon content continues to be popular and represent a powerful brand for families we are excited to share more details with you next week following the full product launch announcement. I will now turn to the operational highlights from the fiscal third quarter, beginning with our cannabis line of products. During the quarter, we hit several important milestones in our cannabis business.

Following the launch of our vapes and pre-rolls, we now offer a broad portfolio of cannabis products across our PanHash has and Mood Ring brands, including the most in-demand product forms in Canada. These product forms represent approximately 85% of the total cannabis market. Furthermore, we hit our $1 million Canadian per month run rate for cannabis sales in the third quarter. This is a result of continued demand across our entire product portfolio and expansion into new stores.

At the end of the quarter, we were selling into over 1,300 stores, up from 1,000 stores in the prior quarter. This represents just over 55% of the stores in the four territories where we operate. As we expand distribution, we also plan to increase our SKU count within each store, which represents significant growth opportunity going forward. Specifically, we expect new products that leverage our innovative extraction process, such as our Mood Ring vapes to gain market share.

Although we are in the early innings of our vape launch, we have received positive feedback on the product and are excited about the opportunity in this category for the fiscal 2023. We expect similar trends in our pre-rolls based on early feedback. Moving to personal care and beauty. We had a stable quarter as we focused on elevating our B2B nutraceutical brand, Biodroga by launching Biodroga's first stand-alone website and increasing our industry presence.

As a result of our efforts, Biodroga's pipeline doubled within the quarter. The pipeline consists of new and existing customers' requests to develop unique products for their brands. We expect the increase in Biodroga's pipeline activity will translate into revenue growth in the fiscal 2023. We are extremely encouraged with the early progress to build Biodroga's brand awareness across the industry.

Additionally, we have made significant progress in supporting MaxSimil, Biodroga's core technology. Earlier this year, we published a study showing MaxSimil's increase in omega-3 absorption by up to 3.5 times more than a stand-alone fish oil. Since then, we have completed two additional human clinical trials studying the impact of MaxSimil when combined with CoQ10 and vitamin K2, respectively. The results of the CoQ10 study showed a significant increase in absorption when CoQ10 is combined with MaxSimil compared to taken alone.

For our vitamin K2 study, the results showed a significant increase in bioavailability for vitamin K2 when combined with MaxSimil compared to other supplement forms. These positive results are important in our effort to set Biodroga apart in the B2B supplement market. We will continue to strengthen MaxSimil's health and efficacy claims across additional supplement and remain on track with our THC and CBD studies. We believe the positive impacts of MaxSimil on absorption and bioavailability across lipid-based supplement will also translate into THC and CBD.

The ability to lower the onset time for THC can unlock significant opportunities for our cannabis brands as well as licensing opportunities in the United States. Turning to organic food and beverages. We delivered another quarter of revenue growth at Sprout and executed on the supply chain improvements and profitability initiatives laid out in our strategic review, the benefits of which will be realized in the future quarters. We successfully transitioned our inventory management system away from a cumbersome and costly in-house system to a reliable network of third parties.

This has helped keep our fill rates strong despite supply chain challenges across the industry and should drive profitability improvements in the coming quarters. During the quarter, Sprout along with the entire industry experienced inflated shipping costs due to supply chain disruptions caused by COVID-19. However, we were able to offset these costs with price increases across our product portfolio, consistent with industry standards. In Canada, we continue to scale through Sobeys, Metro and London Drugs stores.

I would like to also provide an update on the ESG. As we said last quarter, Neptune cares deeply about and is committed to integrating ESG throughout our business. We recognize the need to do this in the right way, taking the time to measure our impact, benchmark against the industry peers and establish short- and long-term commitments. We plan to produce a fiscal year 2023 ESG report that will provide transparency on both where we are on our ESG journey and our long-term ambitions.

ESG's principles are at the core of our mission at Neptune and we are excited to share more details as we move forward. With that, I'm going to turn over the call to Randy to discuss our financial results.

Randy Weaver -- Interim Chief Financial Officer

Thank you, Michael, and good morning, everyone. Neptune reported third quarter revenue of $18.4 million, a sequential increase of 17% from our second quarter revenue of $15.7 million. This is our fourth consecutive quarter of sequential improvement in revenue reflecting the transition of Neptune to a consumer-focused CPG company away from our historical business model. We have been able to capitalize on the existing strengths of Neptune while capturing improved margins and bringing us closer to our goal of profitable growth.

The sequential improvement in revenue was driven primarily by our cannabis brands, which generated $4.4 million of revenue, a sequential increase of 190% versus Q2 and a new high watermark for us in cannabis. This growth was fueled by category expansion as we launched vapes in November and pre-rolls in December and reflects initial inventory build in these categories, resulting in $1.7 million of shipments during December. Now, that we have a year of branded sales under our belt, we are recognizing cannabis revenues upon shipment of product with an appropriate reserve for returns. This is in line with industry reporting standards and in management's view, better reflects underlying revenue trends.

Since launching our branded cannabis products, our returns have been nominal. Sprout Organics, our organic baby food brand generated revenue of $8.7 million, stable from the prior quarter of $8.9 million with the current quarter traditionally slow for seasonal reasons and impacted by timing of shipments and continuing supply chain challenges. Our nutraceuticals brands also showed stable revenues of $4.9 million in the current quarter versus $5.1 million in the prior quarter as we continue to manage supply chain challenges. To help frame the progress of our transition to CPG.

For the quarter, Neptune achieved gross profit of $2.0 million compared to negative gross profit of $10 million in the comparable year ago period. Our reported gross margin was 11.1% versus negative 300% in the year ago period. This was the first quarter of positive gross margin we have reported since our transition to a branded CPG company. The improvement in gross profit and gross margin year over year was primarily due to the scaling of our cannabis operations.

We are focused on maintaining and growing our margins and expect to continue reporting improvements as we scale our business further and experience the benefits of programs we have put in place or are implementing. We are also working hard to mitigate supply chain challenges and the ongoing complications related to the pandemic. SG&A expenses, net of subsidies for the quarter were $23 million, a decrease of $8.6 million compared to the same period of the prior year. The SG&A decrease was primarily driven by the reduction in several nonrecurring items.

In Q3, we reduced or eliminated expenses as part of our strategic review and continue to maintain close scrutiny over ongoing expense levels. The impact of our efforts will benefit in Neptune in the coming quarters. Net loss attributable to Neptune for the quarter was $21 million, which decreased versus a net loss of $74.9 million in the comparable year ago period. The decrease in net loss was mainly attributable to improved gross margins, lower SG&A, a positive revaluation of our warrant liability and favorable currency exchange rates.

Adjusted EBITDA loss during the quarter was $9.8 million, an improvement of $2.7 million versus our adjusted EBITDA loss of $12.5 million in the comparable year ago period. The improvement in adjusted EBITDA is mainly attributable to a decrease in net losses described earlier. Moving to our balance sheet. We ended the quarter with $16.6 million in cash on hand.

To support the execution of our growth opportunities and supplement our existing cash position, management is exploring various financing options, including debt. It is our belief that we will agree to terms with lenders or a lender that will result in cash proceeds of $20 million to $25 million to the company by the end of the fiscal year. While we are presently having positive discussions with multiple lenders, there can be no assurance these discussions will lead to an agreement. Management is carefully evaluating the terms of such financing options and will only pursue options that are in the best interest of shareholders.

Looking ahead, we expect cash burn to continue to decelerate as revenue growth accelerates and margins continue to improve. We continue to expect ongoing sequential improvement in revenue and gross margins, driven primarily by Sprout Organics via the CoComelon launch and Walmart agreement along with revenue gains and profitability improvements in cannabis. While it is still early, we have received positive feedback on the launch of our vapes and pre-rolls, and expect these categories to drive year-over-year increases in the coming quarters. For modeling purposes, I would note one point for fiscal Q4 in cannabis.

Our capsule supplier could not deliver our requested allotment during January, resulting in a temporary disruption of our sales in that category. We have since mitigated the issue and expect a return to normalized sales trends in the category by the end of Q4. The impact to sales, however, is likely to result in Q4 cannabis revenues below our Q3 levels. Despite this impact for the company overall, we expect revenue to be flat to slightly up sequentially during Q4, driven by revenue gains in Sprout.

We also expect to return to sequential growth for cannabis in the first fiscal quarter of 2023. One final note, we have requested a six-month extension to regain compliance with the minimum bid pricing according to the NASDAQ Listing Rule 5810 (c)(3)(A). We will keep shareholders apprised. I will now turn the call back to Michael.

Michael Cammarata -- Chief Executive Officer

Thank you, Randy. I would like to take a step back and reiterate our renewed focus on coming out of the strategic review last quarter. We have great brands that deliver innovative products with an emphasis on sustainability. In addition, we have a better for you focus throughout the organization and across every product launch.

Our goal is to continue to scale our food and beverage, cannabis and personal care and beauty brands, ultimately transforming the everyday for a healthier tomorrow for generations of consumers that come, both Sprout Foods and our cannabis brands, we have rapidly expanded distribution in the retailers that accounted for a majority of their respective markets. At the same time, we have expanded our product lines to offer consumers a full suite of products. In personal care and beauty, we have been supplying the supplement market for years and now seeing the initial benefits of scaling innovation and building brand awareness through Biodroga. As we scale these brands in the short and midterm, we are also ensuring the long-term durability of our brands through an IP strategy that involves protecting our unique extraction process and claims of our MaxSimil technology.

Another important pillar from our strategic review is the commitment to profitability. We have identified areas within the organization and brands that could be restructured to decrease operating costs and improve margins. We quickly began implementing these initiatives to put us on a path to profitability. We continue to take steps toward profitability and to further control our costs.

For example, we have recently announced that we have expanded our in-house legal capabilities to decrease the need for third-party legal counsel and reduce our overall corporate spend. Importantly, these cost saving decisions do not interfere with the growth potential of our core brands, which is central to our path to profitability as we achieve economies of scale. I would like to conclude by saying that I am extremely proud of the progress we've made as an organization, which is ultimately driven by the collective efforts of our incredible employees and I am excited for Neptune's future. I also want to thank our shareholders and partners for their trust and confidence in Neptune.

Operator, you may now open the line for questions.

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] We will now take our first question from Aaron Grey from Alliance Global Partners. Please go ahead.

Aaron Grey -- Alliance Global Partners -- Analyst

Hi, good morning, and thank you for the questions. So first one for me, I see CoComelon on Amazon with a couple of SKUs. Talking about the expansion, 900 stores going into Walmart. I just wanted to get some further color in terms of where you stand right now in terms of the inventory and kind of ramping that up in terms of the loading for that? And then can you provide just maybe incremental color in terms of when we expect to kind of see that into Walmart.

I know you're going to announce some things next week, but just help us think about the ramp-up of CoComelon and Sprout into Walmart. Thanks.

Michael Cammarata -- Chief Executive Officer

Yeah. So I'll take that, this is Michael. We prioritized Walmart as an initial retail launch. And then Amazon, you'll start seeing additional SKUs roll out in some cases, weekly over the coming months and ramp up.

As far as the supply, we have definitely made changes to prioritize our partnership with a couple of talents. So we do have supply to continue to keep that in stock and to be able to support additional growth. We've also rolled out some of the initiatives that will be coming out with CoComelon and their team, including being added to their brand store on Amazon and other social media channels, which will give us a really good edge for the launch. And we'll be talking more about that in the coming weeks.

Aaron Grey -- Alliance Global Partners -- Analyst

OK. Great. Thank you. And then turning to Canada.

So I appreciate how the capsules might because it will slow down for fiscal 4Q, but saw some good growth in 3Q. I just want to talk a little bit more about your initiatives in the vape segment, right? So a lot of people are talking about continued pricing pressure and that's being seen more so in vape than flower products. So from your perspective, how do see that impact your initiative to kind of increased exposure within vape and Canadian cannabis. Thanks.

Michael Cammarata -- Chief Executive Officer

Yeah. So we're very uniquely positioned with our patented extractor that allows us to skip a lot of processes. So our cost for extraction is extremely low. So even if there is hardware fluctuations in the actual vape product on the hardware side, we will have a very healthy margin and we'll be able to benefit from that.

So it works in our favor with vapes as we have extremely high profit margin on that.

Aaron Grey -- Alliance Global Partners -- Analyst

OK, great. Thanks. And last one for me, maybe for Randy here. Just curious in terms of the underlying SG&A, right? So sales and gross profit both improved sequentially and yet adjusted EBITDA, which strips out the severance and the D&O went down, so that implies a tick up in SG&A even when you exclude those severance and D&O items.

So just wanted to get some further color in terms of the increase in the underlying SG&A in the quarter, especially in lieu of the cost saving initiatives that you have? Thanks.

Randy Weaver -- Interim Chief Financial Officer

I would refer back to what Michael said earlier. There were some excess professional costs in the quarter that were holdovers from the prior quarters. So we continue to incur those, and we've made changes now by bringing a lot of the legal work in-house. So we would expect those SG&A costs to continue to or to begin to come down in this quarter and future quarters.

Aaron Grey -- Alliance Global Partners -- Analyst

OK, great. Thanks, and I'll jump back in the queue.

Operator

[Operator instructions] There appear to be no further questions at this time. This concludes today's call. [Operator signoff]

Duration: 26 minutes

Call participants:

Morry Brown -- Investor Relations

Michael Cammarata -- Chief Executive Officer

Randy Weaver -- Interim Chief Financial Officer

Aaron Grey -- Alliance Global Partners -- Analyst

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