On August 14, 2019 Neptune Wellness Solutions Inc. ("Neptune" or the "Corporation") (NASDAQ: NEPT) (TSX: NEPT), reported its financial and operating results for the three-month period ended June 30, 2019. All amounts are in Canadian dollars except specified otherwise (Press release, Neptune Technologies et Bioressources inc, AUG 14, 2019, View Source [SID1234538752]).

Schedule your 30 min Free 1stOncology Demo!
Discover why more than 1,500 members use 1stOncology™ to excel in:

Early/Late Stage Pipeline Development - Target Scouting - Clinical Biomarkers - Indication Selection & Expansion - BD&L Contacts - Conference Reports - Combinatorial Drug Settings - Companion Diagnostics - Drug Repositioning - First-in-class Analysis - Competitive Analysis - Deals & Licensing

                  Schedule Your 30 min Free Demo!

Corporate Highlights:

On June 7, 2019, Neptune announced a three-year contract with Tilray Inc. for the extraction of cannabinoids from cannabis and hemp biomass. Tilray has committed to provide minimum biomass volumes of 125,000 kg over a three-year period.
On June 12, 2019, Neptune announced a three-year contract with The Green Organic Dutchman (TGOD) for a minimum of 230,000 kg of cannabis and hemp biomass. Neptune will provide extraction services as well as turnkey formulation, manufacturing and packaging solutions to TGOD covering a range of finished products.
On June 17, 2019, Neptune’s wholly owned subsidiary, 9354-7537 Québec Inc., received license amendments covering additional rooms where Neptune will perform encapsulation and cold ethanol extraction which will increase Neptune’s extraction capacity from 30,000 kg to 200,000 kg of biomass annually.
On July 8, 2019, Michael Cammarata, a successful entrepreneur and innovator in the wellness industry, was appointed as Chief Executive Officer and Member of the Board of Directors of Neptune. Jim Hamilton stepped down from his role as CEO and Director but remains an advisor to the Board.
On July 18, 2019, Neptune announced a successful private placement of US$41 million of which US$12 million has been used to fund the initial cash consideration for the acquisition of the assets of SugarLeaf Labs.
Michael Cammarata, CEO of Neptune stated, "Since joining Neptune, I have been listening to key stakeholders and evaluating the company its strategy and vision. I have been impressed by our significant IP that can applied to the fast-paced cannabis industry. Our extraction expertise can set us apart as we ramp up production of both raw material and finished products. I have recently implemented initiatives to address the near-term operational and capacity constraints that have impacted the growth of our cannabis extraction services, as well as put several building blocks in place to support that growth, including private placement funding and boosting production at the Sherbrooke facility. We expect to see positive impacts from these actions beginning in the second quarter."

"We expect that our new contracts with Tilray and TGOD will offer strong and consistent revenue over the next three years. The health and wellness market provides a significant opportunity in which cannabis and hemp extracts will play an important role in fulfilling customers’ needs for improved quality of life. Neptune Wellness is well positioned to benefit from this large global market opportunity, and we will continue to raise the bar when it comes to transparency, quality and industry standards," continued Mr. Cammarata.

"Mario Paradis, VP & CFO, has decided to leave Neptune. We are very grateful for all of Mario’s hard work during his time at the company. We have begun a search for a new CFO and Mario will remain CFO of Neptune to help with the transition. We are poised for strong growth and I have no doubt we’ll find the right talent to help us achieve that growth."

Financial Results

Total revenues reached $4.4 million for the three-month ended June 30, 2019, down versus last year’s revenues of $5.2 million. The majority of the revenues during the quarter were generated in the Nutraceutical segment. The decline in total revenues is explained by the timing of contracts in the Nutraceutical segment. Commercial production of cannabis extracts during the quarter was impacted by constrained operations and extraction capacity.

Neptune reported a net loss of $6.5 million for the three-month ended June 30, 2019, an increase compared to a net loss of $4.1 million last year.

For the three-month ended June 30, 2019, Adjusted EBITDA1 was a loss of $3.6 million compared with a loss of $2.3 million last year. The increased Adjusted EBITDA1 loss is due to investments made to support the growing cannabis operations.

Cash and cash equivalents were $5.4 million as of June 30, 2019. On a pro-forma basis, including the net proceeds from the private placement completed on July 18, and the initial cash consideration paid to acquire SugarLeaf, Neptune’s cash and cash equivalent would have been $39 million as at June 30, 2019.

Completion of the SugarLeaf acquisition

On July 24, 2019, Neptune announced the closing of the acquisition of the assets of U.S.-based hemp processor SugarLeaf Labs and Forest Remedies LLC (collectively, "SugarLeaf"). The initial consideration paid at closing consisted of US$18 million or US$12 million in cash and US$6 million in common shares. By achieving certain annual adjusted EBITDA and other performance targets, an additional consideration of up to US$132 million would be paid over each of the next three years as a combination of cash and shares for a maximum aggregate purchase price of up to US$150 million, reflecting a valuation multiple below 5x EBITDA.

The extraction capacity of SugarLeaf is expected to reach an annual run rate of 1,500,000 kg of biomass by the end of 2019 with opportunities to further expand capacity. The company is using a cutting-edge cold ethanol processing technology producing high-quality broad-spectrum extracts and refined full spectrum extracts. SugarLeaf has established strategic and well diversified sourcing, with multiple local and large regional hemp farmer partners, ensuring traceability of finished product directly back to the farms. The acquisition of SugarLeaf, combined with Neptune creates a leading North American extraction platform with significant capacity available to serve customers in both Canada and the United States. The acquisition also offers an opportunity to participate in both B2B and B2C hemp-derived CBD markets in the United States.

Launch of Neptune Ventures

Today, Neptune Wellness also announces the creation of Neptune Ventures, a strategic investment arm and technology incubator which is expected to stimulate innovation and partnerships in the cannabis and wellness industry. Neptune Ventures will support Neptune’s growth into the consumer market with investments in Forest Remedies, SugarLeaf’s consumer brand which includes hemp-derived CBD balms and oils.

"We are excited to launch Neptune Ventures, which will allow us to invest alongside our customers in innovative new products and technology to offer additional value to our customers and shareholders," said Mr. Cammarata. "Our venture arm will be an opportunity to get us closer to our customers by developing new intellectual property, innovations and creative solutions."

Outlook

In Canada, near-term capacity constraints are expected to be resolved in September with the commissioning of ethanol extraction equipment, which should increase Neptune’s capacity from current levels of 30,000 kg of biomass to 200,000 kg of biomass processed annually. Furthermore, Phase IIIA expansion is progressing as planned with completion expected before the end of calendar 2019 with Health Canada licensing expected thereafter. With the Phase IIIA expansion, Neptune expects to have the industry’s lowest extraction costs, translating into potentially healthy margin.

In the United States, the capacity of our SugarLeaf plant is expected to reach 1,500,000 kg by the end of December, providing Neptune with substantial capacity to supply our B2B customers with hemp extracts ingredients and finished products. SugarLeaf is expected to contribute to Neptune’s revenue growth starting in the second quarter of fiscal 2020.

Our Nutraceutical division has recently seen an increase in demand for hemp-derived CBD sourcing and formulations which could stimulate sales in the second half of fiscal 2020.

"Once the expansion phases are complete, we expect Neptune’s two extraction facilities to have impressive earnings potential. Given that we only recently acquired SugarLeaf and are still in the process of integrating those operations, we estimate that, based on a conservative capacity utilization scenario of 50%, our two facilities could support in excess of $450 million in annual revenues. In addition, our highly automated operations are expected to translate into low production costs benefiting margins, which have the potential to exceed 40% at the EBITDA level. With a focus on bringing the highest quality products to market sustainably, we believe these developments can help us achieve and surpass these scenarios. There can, of course, be no assurance that the integration of SugarLeaf will be successfully implemented, that our utilization capacity will achieve anticipated levels, or that operational costs and margins will benefit from these developments to the extent anticipated at this time." concluded Mr. Cammarata.