Revenues increase 41% sequentially over Q2 results

LAVAL, QC , Feb. 13, 2020 /CNW Telbec/ - Neptune Wellness Solutions Inc. ("Neptune" or the "Corporation") (NEPT) (NEPT), today announced its financial and operating results for the three-month period ended December 31, 2019 . All amounts are in thousands of Canadian dollars except if specified otherwise.

Third Quarter Financial and Corporate Highlights:

Subsequent to Quarter-end

Commenting on the results, Michael Cammarata , CEO of Neptune, said: "Since I joined the company six months ago, we've had to reassess all facets of our business plans. It quickly became apparent that there were several operational challenges that needed to be addressed immediately. With changes and enhancements to our management team, business plans, production lines and customer relationships, we've rapidly become more than an extraction and white label company. We continue to progress in our vision to become a leading player in B2B and B2C cannabis and hemp markets. Our revenue growth of 41% sequentially is a solid testament to this, considering the current cannabis and hemp environment. While our profitability this quarter was short of our expectations due to the slower than expected ramp-up of our Phase II cold ethanol production process and industry factors beyond our control, we are setting up our long-term success by expanding our channel strategy with increased focus on end clients, in Canada and the US.

The US launch today of our Forest Remedies® and Ocean Remedies™ products is a significant step forward in expanding our footprint and brand equity and will be followed by a similar launch in Canada , once approved by health authorities. The Forest Remedies hemp-derived wellness products include ingestibles in soft gel and extract forms, topical balms, massage oils and a pet soother. We are also launching an essential oil and aromatherapy line that we developed in collaboration with our partner, International Flavors & Fragrances. I am confident that our consumer product distribution and pricing strategy puts us in a strong competitive position and over the next few months, we will be pushing this message strongly through a full-scale marketing and public relations campaign with our strategic partner, American Media. I also believe our consumer business has the potential to be one of the most profitable segments of Neptune's future business.

Despite a slightly slower than anticipated ramp-up on the production side and changes to planned capacity expansion, we are building the foundation for this Company for many years to come. I am excited about the future prospects, in particular the launch and significant potential of our consumer brands."

Financial Results

Total revenues reached $9,175 for the three-month period ended December 31, 2019 , up 40% versus last year's revenues of $6,538 . The revenue increase mainly comes from the cannabis segment, which had no revenues last year. For the three-month period ended December 31, 2019 , revenues from Neptune's nutraceutical segment remained mostly stable compared with the prior year.

Neptune reported a net income of $5,603 for the three-month period ended December 31, 2019 , compared to a net loss of $3,658 last year. The transition from net loss to net income is due to a gain of $64,509 related to a reduction in the fair value of the contingent consideration related to the acquisition of SugarLeaf. This gain was partially offset by an impairment of goodwill of $44,096 related to SugarLeaf. In addition, Neptune incurred an increase in non-cash expenses related to stock-based compensation expense, depreciation and amortization combined with a lower Adjusted EBITDA1.

Story continues

For the three-month period ended December 31, 2019 , Adjusted EBITDA1 was a loss of $7,054 compared with a loss of $1,923 last year. The increased Adjusted EBITDA1 loss is due to investments made in the cannabis segment to grow the workforce in anticipation of increased sales volume as well as an increase in salaries and benefits at the corporate level. The increase can also be explained by an increase in legal fees, non-cash expense for marketing and co-development services rendered in exchange of warrants and additional SG&A coming from SugarLeaf.

Cash, cash equivalents and short-term investment were $20,819 as of December 31, 2019 . On November 6, 2019, Neptune closed a revolving line of credit with a large Canadian financial institution for an amount of $5 million to support the nutraceutical segment.

_______________________ 1 See "Caution Regarding Non-IFRS Financial Measures" and "Reconciliation of Segment income (loss) before corporate expenses to Adjusted Segment EBITDA and net loss to Adjusted EBITDA" which follow.

Official launch of the Forest Remedies® and Ocean Remedies™ brands

Starting today, consumers will be able to purchase Forest Remedies® products directly from new website (www.forestremedies.com,). Leveraging the Company's extraction knowhow and management's branding expertise, Neptune is launching 11 SKUs of hemp extracts, including six ingestible oils, two soothing balms, one soft gel bottle, a massage oil and a pet soother. Forest Remedies' products have been carefully crafted using Neptune's hemp extracts which are produced with our proprietary extraction process and tested for purity at third-party laboratories.

In collaboration with IFF, Neptune is also launching six essential oils SKUs, which will be commercialized under the Forest Remedies brand. Essential oils will be commercialized as single oils including fragrances such as lemon, sweet orange, bergamot, peppermint, and eucalyptus amongst others. Neptune aims to redefine the essential oil experience and provide consumers high-quality, natural, traceable, sustainable ingredients from responsible producers around the world.

In a few days, Ocean Remedies™ products will be available directly on a new website www.oceanremedies.com. Ocean Remedies™ is the brand under which the Company's omega-3 products will be commercialized. The omega-3 fatty acids in the Ocean Remedies krill oil have been demonstrated to be 2.5 times better absorbed than fish oil1. Ocean Remedies™ krill oil offers high EPA, DHA, phospholipid levels and astaxanthin, a natural antioxidant. Ocean Remedies has been certified by Friend of the Sea for sustainable krill harvesting. Neptune is in active discussions with food, drug and mass retailers in the United States to commercialize the Forest Remedies products. Neptune has already received a purchase order from one of the largest food and drug retailers in the United States , for an initial test launch of Forest Remedies soothing balms across 100 stores. A national roll-out could follow in the coming months.

_______________________ 1 Clinical Study Report. NO. BTS 275/07, Feb. 16, 2009. Esslingen, Germany.

Product innovation

In the past quarter Neptune leveraged years of experience in formulating white label products for the wellness industry, to expand its list of cannabis or hemp products for our brand, Forest Remedies and for white label clients. Neptune is now able to offer core products, such as balms, tinctures and gel caps but also innovative products like full lines of cosmetics, CBD infused breath strips, gummies, transdermal patches and dissolvable powders.

Neptune recently completed a second pharmacokinetic study on Ocean Remedies confirming a greater than two-fold increase in absorption of omega-3s. The results of our second omega-3 index study should be out shortly. Our first study showed a two-fold increase in marker of cardiovascular risk. These confirmatory studies should support our product introduction with retailers.

OUTLOOK

Canadian cannabis extraction

The commissioning of Neptune's ethanol extraction equipment (Phase II) is ongoing, which has limited our throughput during the month of January. We recently completed a successful test extraction and we are now commissioning other aspects of the system. The equipment will be running at room temperature until the new coolant is installed in the coming months. Running our extraction equipment at room temperature requires an additional winterization step, lengthening slightly the process to produce distillates.

Delays in the roll-out of cannabis stores in Canada has had a negative impact on the demand for our cannabis extraction services in Canada . As such, Neptune's current extraction capacity for calendar 2020 (Phase I & II) is not fully committed for its Sherbrooke facility. Neptune expects to broaden its customer base, which should improve the Company's capacity utilization. In addition, upon receipt of its license amendment to sell cannabis products to cannabis distributors and retailers, Neptune expects to use some of its extraction capacity to produce extracts destined to be utilized in products sold under the Company's own brands.

Following a market review and demand analysis, Neptune identified underserved segments of the Cannabis 2.0 products in Canada . There is currently limited availability of cannabis concentrates on the market and Neptune intends to fill that void by expanding its production capabilities to produce these cannabis derivatives and other niche product forms. Neptune is exploring the potential to diversify its extraction capabilities to include solvent-less and hydrocarbon extraction methods, which are well suited to produce high quality cannabis concentrates.

As a result of the realignment of Neptune's Canadian extraction capabilities, the retrofit of the Company's large legacy extraction equipment destined for the Phase IIIa expansion has been put on hold. Neptune is still proceeding with the licensing of these rooms with Health Canada but the large extraction equipment won't be commissioned in the near-term. At our Sherbrooke facility, the expansion of Neptune's packaging and warehousing capabilities is tracking as planned. Neptune expects to request an amendment to include these packaging and warehousing areas under the Company's license granted by Health Canada, in the near future. Licensing these additional areas is expected to significantly increase Neptune's capabilities to provide turnkey solutions to its customers such as formulation, purification, blending, manufacturing and packaging services. Neptune will also seek to add significant warehouse space, which can be kept at sub-zero temperatures and which should improve logistics to store cannabis biomass and finished products.





U.S. hemp extraction



The market for hemp extracts in the United States has seen a significant level of volatility in the last twelve months where pricing for hemp derived CBD refined oil has declined by more than 60%. This decrease in bulk hemp extract prices is having a negative impact on the Company's B2B bulk extract sales. Prices for hemp biomass have followed a similar pattern which has put pressure on tolling fees in the United States . Given the nascent nature of the federally legal hemp extract industry the Company has limited visibility on the evolution of future prices. Based on an internal assessment of Neptune's opportunities, business risks and market conditions, we have decided to deemphasize our U.S. tolling activities to increase our focus on bulk oil sales, turnkey solutions, our branded products and consumer product relationships.

We have hosted several visits of high-profile potential clients in the last months, which we believe will translate into additional business going forward to sell bulk extracts. In addition, the extracts used in our Forest Remedies products are produced at our North Carolina facility, potentially improving the capacity utilization of the plant.







About Neptune Wellness Solutions Inc.

Neptune Wellness Solutions specializes in the extraction, purification and formulation of health and wellness products. The Company has in excess of 100 customers across several verticals including nutraceutical, legal cannabis, hemp and CPG. Neptune's wholly owned subsidiary, 9354-7537 Québec Inc., is licensed by Health Canada to process cannabis at its 50,000-square-foot facility located in Sherbrooke, Quebec . The Company also has a 24,000 square-foot facility located in North Carolina to process hemp biomass into extracts. Neptune brings decades of experience in the natural products sector to the legal cannabis industry. Through SugarLeaf, Neptune's wholly owned subsidiary, Neptune also has a U.S.-based hemp extract supply chain, including a 24,000 square-foot cold ethanol processing facility with a processing capacity of 1,500,000 kgs located in the U.S. Southeast region. Leveraging its scientific and technological expertise, the Company sees applications for hemp-derived extracts in the U.S. beyond existing markets and product forms and into personal care and household cleaning products markets. Neptune's activities also include the development and commercialization of turnkey nutrition solutions and patented ingredients such as MaxSimil®, and a variety of marine and seed oils. Its head office is located in Laval , Quebec.

Caution Regarding Non-IFRS Financial Measures

The Corporation uses two adjusted financial measures, Adjusted Segment Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted Segment EBITDA) and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) to assess its operating performance. These non-IFRS financial measures are comprised of adjustments that are derived from the Corporation's financial statements and are presented in a consistent manner. The Corporation uses these measures for the purposes of evaluating its historical and prospective financial performance, as well as its performance relative to competitors. These measures also help the Corporation to plan and forecast for future periods as well as to make operational and strategic decisions. The Corporation believes that providing this information to investors, in addition to IFRS measures, allows them to see the Corporation's results through the eyes of management, and to better understand its historical and future financial performance.

Securities regulations require that companies caution readers that earnings and other measures adjusted to a basis other than IFRS do not have standardized meanings and are unlikely to be comparable to similar measures used by other companies. Accordingly, they should not be considered in isolation. The Corporation uses Adjusted Segment EBITDA and Adjusted EBITDA to measure its performance from one period to the next without the variation caused by certain adjustments that could potentially distort the analysis of trends in our operating performance, and because the Corporation believes it provides meaningful information on the Corporation's financial condition and operating results. Neptune's method for calculating Adjusted Segment EBITDA and Adjusted EBITDA may differ from that used by other corporations.

Neptune obtains its Adjusted Segment EBITDA measurement by adding depreciation and amortization, stock-based compensation and impairment loss on goodwill to segment income (loss) before corporate expenses. Neptune obtains its Adjusted EBITDA measurement by adding to net income (loss), net finance costs, depreciation and amortization and income tax expense and by subtracting income tax recovery and net finance income. Other items such as stock-based compensation, litigation provisions, acquisition costs, change in fair value of contingent consideration, impairment loss on goodwill and severance and related costs that do not impact core operating performance of the Corporation are also added back as they may vary significantly from one period to another. Adjusting for these items does not imply they are non-recurring.

Forward-Looking Statements

Statements in this press release that are not statements of historical or current fact constitute "forward-looking statements" within the meaning of the U.S. securities laws and Canadian securities laws. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of Neptune to be materially different from historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes," "belief," "expects," "intends," "projects," "anticipates," "will," "should," or "plans" to be uncertain and forward-looking. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Forward-looking information in this press release includes, but is not limited to, information or statements about our ability to successfully develop, produce, supply, promote or generate any revenue from the sale of any cannabis-based and hemp-based products in the legal market.

The forward-looking statements contained in this press release are expressly qualified in their entirety by this cautionary statement and the "Cautionary Note Regarding Forward-Looking Information" section contained in Neptune's latest Annual Information Form (the "AIF"), which also forms part of Neptune's latest annual report on Form 40-F, and which is available on SEDAR at www.sedar.com, on EDGAR at www.sec.gov/edgar.shtml and on the Investor section of Neptune's website at www.neptunecorp.com. All forward-looking statements in this press release are made as of the date of this press release. Neptune does not undertake to update any such forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in Neptune public securities filings with the Securities and Exchange Commission and the Canadian securities commissions. Additional information about these assumptions and risks and uncertainties is contained in the AIF under "Risk Factors".

Neither NASDAQ nor the Toronto Stock Exchange accepts responsibility for the adequacy or accuracy of this release.

Conference Call Details

Neptune will be holding a conference call on February 13, 2020 , at 8:30 AM (EST) to discuss its third quarter results ended December 31, 2019 .

Date: Thursday, February 13, 2020



Time: 8:30 AM Eastern Standard Time



Call: 1-888-231-8191 (Canada and U.S.)

1-647-427-7450 (International)



Conference ID: 8708188

A replay of the call will be available for replay shortly after the call's completion, until March 13, 2020 . The replay can be accessed online in the Investors section of Neptune's website under Investor Events and Presentations.

Reconciliation of Segment income before corporate expenses to Adjusted Segment EBITDA1 and net income to Adjusted EBITDA1









Three-month period ended December 31, 2019

Nutraceutical Cannabis Corporate Total

$ $ $ $ Total revenues 6,336 2,811 28 9,175 Gross profit 1,867 (1,934) 28 (39)









R&D expenses, net of tax credits and grants (252) (789)

(1,041) SG&A expenses (1,199) (3,264)

(4,463) Impairment loss on goodwill - (44,096)

(44,096) Segment income (loss) from operating activities 416 (50,083) 28 (49,639)









Change in fair value of contingent consideration - 64,509

64,509 Segment income before corporate expenses 416 14,426 28 14,870









Unallocated costs:







Corporate general and administrative expenses



(8,693) (8,693) Net finance costs



(569) (569) Income tax expense



(5) (5) Net income





5,603









Adjusted Segment EBITDA1 reconciliation







Segment income before corporate expenses 416 14,426



Add:







Depreciation and amortization 170 2,261



Impairment loss on goodwill - 44,096



Change in fair value of contingent consideration - (64,509)



Stock-based compensation 121 211



Adjusted Segment EBITDA1 707 (3,515)













Adjusted EBITDA1 reconciliation







Net income





5,603 Add (deduct):







Depreciation and amortization





2,556 Net finance costs





569 Change in fair value of contingent consideration





(64,509) Stock-based compensation





4,503 Litigation provisions





72 Impairment loss on goodwill





44,096 Acquisition costs





51 Income tax expense





5 Adjusted EBITDA1





(7,054)













1 The Adjusted Segment EBITDA and the Adjusted EBITDA are not standard measures endorsed by IFRS requirements.









Reconciliation of Segment income (loss) before corporate expenses to Adjusted Segment EBITDA1 and net loss to Adjusted EBITDA1









Three-month period ended December 31, 2018

Nutraceutical Cannabis Corporate Total

$ $ $ $ Total revenues 6,538 -

6,538 Gross profit 2,228 -

2,228









R&D expenses, net of tax credits and grants (130) (1,647)

(1,777) SG&A expenses (1,203) (497)

(1,700) Segment income (loss) activities before corporate expenses 895 (2,144)

(1,249)









Unallocated costs:







Corporate general and administrative expenses



(2,378) (2,378) Net finance costs



31 31 Income tax expense



(62) (62) Net loss





(3,658)









Adjusted Segment EBITDA1 reconciliation







Segment income (loss) before corporate expenses 895 (2,144)



Add:







Depreciation and amortization 188 561



Stock-based compensation 126 277



Adjusted Segment EBITDA1 1,209 (1,306)













Adjusted EBITDA1 reconciliation







Net loss





(3,658) Add (deduct):







Depreciation and amortization





804 Net finance costs





(31) Stock-based compensation





900 Income tax expense





62 Adjusted EBITDA1





(1,923)























1 The Adjusted Segment EBITDA and the Adjusted EBITDA are not standard measures endorsed by IFRS requirements.





















Reconciliation of Segment income before corporate expenses to Adjusted Segment EBITDA1 and net loss to Adjusted EBITDA1









Nine-month period ended December 31, 2019

Nutraceutical Cannabis Corporate Total

$ $ $ $ Total revenues 15,778 4,069 200 20,047 Gross profit 4,813 (5,755) 200 (742)









R&D expenses, net of tax credits and grants (420) (1,504)

(1,924) SG&A expenses (3,342) (5,340)

(8,682) Impairment loss on goodwill - (44,096)

(44,096) Segment income (loss) from operating activities 1,051 (56,695) 200 (55,444)









Change in fair value of contingent consideration - 60,426

60,426 Segment income before corporate expenses 1,051 3,731 200 4,982









Unallocated costs:







Corporate general and administrative expenses



(26,586) (26,586) Net finance costs



(93) (93) Income tax recovery



73 73 Net loss





(21,624)









Adjusted Segment EBITDA1 reconciliation







Segment income before corporate expenses 1,051 3,731



Add:







Depreciation and amortization 506 4,897



Impairment loss on goodwill - 44,096



Change in fair value of contingent consideration - (60,426)



Stock-based compensation 363 826



Adjusted Segment EBITDA1 1,920 (6,876)













Adjusted EBITDA1 reconciliation







Net loss





(21,624) Add (deduct):







Depreciation and amortization





5,772 Net finance costs





93 Change in fair value of contingent consideration





(60,426) Stock-based compensation





13,239 Litigation provisions





231 Impairment loss on goodwill





44,096 Acquisition costs





2,211 Severance and related costs





1,263 Income tax recovery





(73) Adjusted EBITDA1





(15,218)









Total assets 22,419 160,616 24,508 207,543 Cash, cash equivalents and short-term investment 1,024 454 19,341 20,819 Working capital2 4,070 3,817 15,649 23,536















1 The Adjusted Segment EBITDA and the Adjusted EBITDA are not standard measures endorsed by IFRS requirements. 2 The working capital is presented for information purposes only and represents a measurement of the Corporation's short-term financial health mostly used in financial circles. The working capital is calculated by subtracting current liabilities from current assets. Because there is no standard method endorsed by IFRS, the results may not be comparable to similar measurements presented by other public companies.





Reconciliation of Segment income (loss) before corporate expenses to Adjusted Segment EBITDA1 and net loss to Adjusted EBITDA1









Nine-month period ended December 31, 2018

Nutraceutical Cannabis Corporate Total

$ $ $ $ Total revenues 18,778 -

18,778 Gross profit 6,078 -

6,078









R&D expenses, net of tax credits and grants (316) (4,825)

(5,141) SG&A expenses (3,386) (1,473)

(4,859) Segment income (loss) before corporate expenses 2,376 (6,298)

(3,922)









Unallocated costs:







Corporate general and administrative expenses



(6,561) (6,561) Net finance costs



(171) (171) Income tax expense



(154) (154) Net loss





(10,808)









Adjusted Segment EBITDA1 reconciliation







Segment income (loss) before corporate expenses 2,376 (6,298)



Add:







Depreciation and amortization 562 1,571



Stock-based compensation 369 802



Adjusted Segment EBITDA1 3,307 (3,925)













Adjusted EBITDA1 reconciliation







Net loss





(10,808) Add (deduct):







Depreciation and amortization





2,291 Net finance costs





171 Stock-based compensation





2,785 Income tax expense





154 Adjusted EBITDA1





(5,407)









Total assets 21,097 49,434 22,085 92,616 Cash, cash equivalents and short-term investments 918 - 14,725 15,643 Working capital2 2,069 (1,366) 13,721 14,424













1 The Adjusted Segment EBITDA and the Adjusted EBITDA are not standard measures endorsed by IFRS requirements. 2 The working capital is presented for information purposes only and represents a measurement of the Corporation's short-term financial health mostly used in financial circles. The working capital is calculated by subtracting current liabilities from current assets. Because there is no standard method endorsed by IFRS, the results may not be comparable to similar measurements presented by other public companies.





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