Motley Fool: 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

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 ParadisChief 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.

Wal-Mart.com USA, LLC

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 HamiltonPresident and Chief Executive Officer

Wal-Mart.com USA, LLC

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 MoretzChairman

Thank you.

Jim HamiltonPresident 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.




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 ParadisChief 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.

Microsoft APAC

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 HamiltonPresident 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.

Remember we’ve said this facility is constructed, it’s built, it is run, it is extracted materials before, but we’re choosing to turn on an elemental section of it, and we’re doing so for reasons of speed and for investment. We think it is a natural and a wise first step in terms of the capacity expansion and that investment will be approximately $4 million and will be largely for security in those rooms combined with some material, handling and equipment, et cetera, to allow for the nature handling of this product.

Now our goal is that, we’ll have this constructed and completed in the latter half of this year and we’ll be working with Health Canada to get the amendments approved accordingly in a good side. So, this will be a six-fold increase in our capacity in Canada, and we’re very, very excited by the capabilities, and the — I would say, the quality and the cost profile that that capacity will allow us to deliver in future.

Page 10, it’s not just about extraction as I mentioned earlier, it is also about the value added delivery forms. And for those who are following, there’s a picture of the two-piece hardshell capsule equipment that has been installed. And I think important to touch on some of the commercial agreements that we’ve recently signed include a large element of loading of capacity onto these equipment. We will be expanding our packaging capability as well as other delivery forms capabilities in our site, and we have approved today with the board an additional investment of CAD7 million, and construction will begin again with an expectation, we’ll have that completed in the coming months of this year.

Page 11, and I thought we would include this because it’s interesting, cold storage capacity. This is a picture of cold storage rooms that we used in our facility when we were extracting omega-3s, and one of the big problems with this industry today is just capacity to handle materials, and it becomes especially important as the volumes are going up, as demand for extracted marijuana and hemp begin. And we’ll also be investing to expand our storage into this area, and there’ll be additional investments, minor investments here rather, mostly around just security.

So, I was just chatting with Martin, I think, you know the example is for those who may not be familiar in this industry and in Canada literally they were bulks with like you would see in a bank is how these materials would be beheld legislation sensible in a bit over a short period of time. But many companies that were engaging with material handling constraints in terms of where they can handle material. So that’s a value added capability that we can offer.

Just moving on to outlook in Page 13, let’s just talk about some of the commercial agreements that we published, added contract volumes minimum of about 360 metric tons over the next three years, and much of this that we’ll be extracting will be put into consumer-ready value-added delivery forms, and there’s a ton of engagement happening with our technical teams and including our technical and IT partners such as Lonza to develop and then formulate these products, and quite a bit of sharing of information and technologies, and going further in terms of vape pens and other such products as topicals.

I would be remiss, Page 14, if we didn’t speak to. I’m looking at our North Carolina resident and Chairman, John Moretz, talk about the great things in North Carolina, and that’s SugarLeaf Labs. I was there about two weeks ago touring the facility with the Founder and Principal, Pete Galloway, and team is just doing great work. Remember again, as I said for 1,500,000 kilos of extraction capability, we really love their access and the relationships with the growing and farm community in the tobacco belt. And not only the gear, but also the quality of all the capabilities of the organization.

And again as we said before the dynamics of what is happening in the Consumer Products natural health industry in the United States with CBD is just off the charge. We’re so excited to be there at the ground floor. As we mentioned, this would be an 18 — value of CAD18 million initial purchase price, which would represent about CAD12 million in cash and CAD6 million in share, and then earn-outs multiples as we go forward.

And Mario, the average of that earn-out, if all is achieved over the next three years would be honored about five times multiple. And we are working to close that as we speak, and we’ll get in a little more detail on that in a moment, sometime between now and later July.

Let me just add, we had the privilege of having Pete Galloway visit us here for a board meeting this week, and it was just incredible to see the engagement of our team and Pete and all his experience with extraction. And I think he met some like-minded kin, if you will, in the extraction and cannabis again, and John, I think he made a tremendous conversation today this morning at the Board and we’re excited by what we see.

Page 15, just a roadmap to added capacity. And one of our frustrations is that we have communicated before to this round and as well as presentations we’ve had the privilege to be invited to with BMO and GMP and others is that we have regulatory constraints that are limiting our capabilities. Now this is a near-term constraint, a regulatory constraint, and as we’ve said before, we have capacity that is installed technically there, ready to go. We have to go, but we do need the permission of Health Canada to turn that on. Moreover, we have people in and trained and ready to go, but we also need security approvals and the clearances for them. So, we are regulatory constrained in our facility today.

Now this is not a long-term issue. This is a very short-term issue. But it’s one that we faced and the industry has faced. But maybe I could just pause here for a moment, speak to a little bit of what we’re seeing with the dynamic of the Health Canada regulatory approach. I think it’s important and there’s been different reports on this, one recently we saw from Cowen, give or take 50% of the Canadian market is out of stock, underserved and we see that either through SKU, vacancies if you will on the store shelves or stores are actually just closing because they have no inventory today.

Now Health Canada’s responsibility and then ambition to fully fulfill the legal channel demand, and I think they’re recognizing that there has been some dilemmas and some problems, and we’ve seen this in a couple of ways. And we had the privilege of senior level meeting recently here in Montreal, and had a discussion with them in two ways. One is, for those who have been following, this has been a decision by Health Canada to not entertain, if you will, new applicants as freely as they once did, and only once new capacity is constructed and built and ready to go will they commit resources to review it as we understand.

Number two, is they’re taking a risk adjusted approach to how they review amendments. And I think that is great news for us and that’s what we understood from our conversation. Companies that have a history of performing well with the regulatory authorities as we have, companies that have performed well in the Health Canada audit as we did a short couple of weeks ago, companies that submit their dossiers in a very complete and articulate way are favored.

And I would say we score well on all those at least that’s what Health Canada told us, and we feel confident that Health Canada is putting the moves in place to prioritize people and companies such as ourselves and that we will see these constraints removed shortly. But to be continued, will that be weeks, will that be more than weeks, we’ll see to be continued. But that is going to be one of our biggest drivers for our revenue acceleration in the near-term demand, it is not our problem. Inventories are in the house. The capabilities are there. The commercial contracts are in place, and I think with the regulatory constraints removed, we’ll see a very interesting acceleration of this business.

And I’d like to reiterate Mario’s comment that we also foresee a year with a very interesting and positive enviable position, and we are going to see a significant sales ramp up in the coming periods going forward. We have not spoken about the value added SugarLeaf here today, but clearly once that transaction is closed, we’ll be able to get more insights in terms of how that will contribute to the business. Moreover, I think once we get these regulatory constraints cleared up, we’ll be in a better position to give further clarity on the visibility on that ramp.

So, I think that would conclude our formal remarks, and at this stage we would welcome questions and comments.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Ryan Macdonell with GMP Securities. Please go ahead. Your line is open.

Ryan MacdonellGMP Securities — Analyst

Yes, hi, guys. Good evening. So, maybe just to start off, I had noticed previously you had given guidance or an outlook for processed volumes, but I didn’t see in your deck this morning. Are you able to update that for us?

Jim HamiltonPresident and Chief Executive Officer

Yes, I mean, I think I know, Ryan, the chart to which you refer. And I think if you were to graph that chart once again you would see a maximum bar in year two, in year three, and you would see probably a half bar of maximum this fiscal year, driven by the constraints that we would face from a regulatory standpoint at this point in time. If the regulatory things can clear more quickly, and clearly if our Phase 3A comes online sooner, that bar may look differently. But if I was to graph that bar today, it would probably be something around one half and then full and full.

Ryan MacdonellGMP Securities — Analyst

Okay. Okay. Thank you. And then maybe sticking with revenue per second, can you kind of give us a bit more color potentially across the kind of rough split that you guys expect we could maybe see between tolling revenue and white labelling revenue in fiscal ’20 and fiscal ’21?

Mario ParadisChief Financial Officer

Yes, Ryan, it’s Mario. So, I think the white label revenue is — will represent probably less than, I would say, less than 15% of total revenues. So, as you know, we are charging its services and I’m talking here about the kind of tolling business model. So, where we don’t buy the materials and so the materials are providing by our customer, and the — if you look at the service that we’re going to charge, the fee versus the white label and the delivery form services, that’s probably a range of 85-15.

Ryan MacdonellGMP Securities — Analyst

Okay, thank you. And just to clarify, is that for fiscal ’20? And is that out of total cannabis revenue or not including nutraceutical revenue?

Mario ParadisChief Financial Officer

Yes. So, no, it’s excluding nutraceutical revenues, and for this delivery form again, we are — the limiting factor is the amendments because we are awaiting the expansion amendments and we will have to file another set of amendments for this delivery form. So, we foresee potentially these white label and delivery form in the last quarter of the year.

Ryan MacdonellGMP Securities — Analyst

Okay, thank you. And maybe turning a little bit to the U.S. for a second, speaking about fiscal ’21, looking out a bit, can you give us maybe some color on what the revenue split geographically might look on the cannabis and hemp side between the U.S. and Canada?

Jim HamiltonPresident and Chief Executive Officer

I think it would be, Ryan, let’s say, it’s a great question. I think that’s probably a better question post closure on the acquisition for us to comment on that. But I’d like to say that we are active in, call it, the hemp CBD market as we speak now in the natural products industry as we’ve mentioned before, but we have orders in house that we’re processing through our nutrition team as we speak. And for those who may have been on this call this is old news, but I am just amazed at what I’ve seen that here’s a product category that is now larger than vitamin E and on track to be much larger than omega-3. It is the topic of conversation and I think every major consumer products company has some kind of project under way right now. It’s really an exciting time on the hemp CBD market and the States.

Ryan MacdonellGMP Securities — Analyst

Got it. Thank you for the color there. And maybe pivoting a little bit to talking a bit more though white labeling, thank you for giving the outlook for CapEx. It was very helpful. I just wondering this the CAD7 million of CapEx for formulation, manufacturing, et cetera. I’m wondering how much of your intended capacity for these product categories does that encompass? And does it encompass all product categories that you expect to be involved in from a white labeling perspective?

Jim HamiltonPresident and Chief Executive Officer

Well, Ryan, I think for the space in the site that we’ve identified, and what we’ll be doing, I would say, would be on the high value kind of the forms if you will. So formulated two piece capsules, it would be the cartridges for vapes and other such sort of high value tinctures, other values there. We actually had the conversation about sort of larger application forms. When I say larger, more bulky forms, and that could take the form of maybe more consumable kind of products. And we have room on the site footprint, if you will to do that, but that will take probably more construction. Right now, we’re going to utilize what we have with the highest value margin added products that we can identify.

Ryan MacdonellGMP Securities — Analyst

Okay. Can you expand a little bit maybe on which product categories specifically you’re referring to?

Jim HamiltonPresident and Chief Executive Officer

Yes, we like, Ryan, specifically, the two-piece hardshell a lot, and some who are maybe marijuana obsessed, they may find that a little bit surprising. We’re big believers in formulated products especially broad spectrum including an element of hemp CBD. And we say that because these are typically products taken chronically not sort of on an occasion basis, a social occasion basis, but chronically for things like information, sleep, anxiety what have you. So — and we are very encouraged if you will by the data we’re seeing in terms of the stability of this product, and the ability to, and I think this is early I want to be a little bit careful with this statement, but the ability to — for this vehicle to retain the volatiles, the terpenes which there is some growing evidence to suggest these could be a powerful component in terms of the whole health profile.

So, we like capsules a lot. We think vapes and vape cartridges, clearly if you look at the U.S. model are a large part of this business that will be part of it. And I would say, there’s also some interesting novel unique delivery forms that one of our partner customers would like to support with, and we’ll be collaborating with them to jointly install and engineer some equipment for those specific applications. So those would be examples, Ryan.

Ryan MacdonellGMP Securities — Analyst

Okay, interesting. And just on the CapEx requirements, is the CAD7 million going to be enough to fund all the capacity needs you foresee for these white label product services?

Jim HamiltonPresident and Chief Executive Officer

I would say for what we’ve identified and what we’re doing today, Ryan, we don’t — and I don’t mean to suggest this. We don’t have a beverage project where we’re going to build onto the plant and install a lot of beverage equipment, that’s not in scope right now. But for the applications that we’re looking to deliver in terms of a unique and value added formulated products, largely for wellness, this would be adequate investment for us at that point in time. And we also like the step approach to growing into the 6,000 metric ton capacity. We think this is for speed reasons. And for the payback and value add, it’s an exceptional value. John was — even John Moretz is smiling when he looked at the payback on that one. We like that a lot, Ryan. We’re very encouraged by both of these projects.

Ryan MacdonellGMP Securities — Analyst

Excellent, cool. Thanks for the color there. Maybe just one more from me again kind of on future products. I’m curious to hear your comments on, in your discussions with clients, be it LPs or otherwise, what are some products that you’ve been hearing lots of inter — product categories and you’ve been hearing lots of interest from — for white labeling services.

Jim HamiltonPresident and Chief Executive Officer

Yes, it’s a good question, and Martin may want to pipe it on this one. But I would say, we’re seeing a lot of interest in topicals, and I would say, we’re also — it’s an application form that we’re looking at. Ryan, I’d like to build on that a little bit, where we see a lot of topical interests especially in the United States, because it’s sort of safe gateway into the hemp CBD business, and the major multinationals are probably more comfortable establishing a product line with that initially, and then broadening that out.

I think what we’ll see in the United States is that as a first move and followed up rapidly with a formulated product, probably capsules again, where it’s in combination with, for example, omega-3 or melatonin, and now use the structure function claims that they can get on the nutrition product along with hemp/CBD. And as the regulatory frames become more clear, there’s more comfort with the majors. I think that’s probably step-wise, but topicals are big on everyone’s mind right now.

Ryan MacdonellGMP Securities — Analyst

Okay. Thank you. That’s all for me.

Jim HamiltonPresident and Chief Executive Officer

Ryan, that was great. Thank you for calling in. Appreciate it.

Operator

Your next question will come from the line of Doug Loe of Echelon Wealth Partners. Please go ahead. Your line is open.

Siew Ching YeoEchelon Wealth Partners — Analyst

Hi. This is actually Siew (ph) calling on behalf of Doug. Just two quick updates. Two quick questions from me, sorry. The first one, just looking for any further updates that you might have on your Lonza partnership. And the second being just a clarification on the timelines to the projects that you outlined in your CAD7 million in CapEx investment that was on Slide 10 like when do you sort of see that being completed by? And that’s it for me. Thanks.

Jim HamiltonPresident and Chief Executive Officer

Well, if I understand the question, first of all, I would say that the customer relationships that we announced in the last days to Cree (ph) include a major portion of our capsule capabilities that we’re collaborating with Lonza on, that’s in Canada. I would say part of our collaboration and motivation with working with again just a little bit back on Lonza there, Basel Switzerland-based API drug delivery form active ingredient company. And clearly we wanted to start in Canada, but I think there is an ambition to explore possibilities beyond Canada. But this is a great place to start, and we’re very, very pleased with the progress in collaboration with Lonza.

Both investments, if I understood the question, will be starting. The engineering is complete, the project plans have been put in place. We have the board green light today and they will begin, and the capacity expansion remember this is already built and exists. It’s mostly around security. And as people know and it was since called before we basically like to put cameras up in every corner, so there is no space unmonitored. Doors have to be secured and we’ll also have to put in some handling. But fundamentally, I would call them not significant construction, but rather adaptations of existing infrastructure, and that could be probably characterized in the course of months, and then the following year. So that’s why we say the latter half of the year.

I think on the application forms, we also have the room built. The utilities are there but what we have to do is make it a clean and former style GMP environment, and that will take us probably a similar timeline. So both we think have the potential to be ready this fall. The licensing, of course, is the unknown. But we do believe licensing will be a faster process in future as we move forward.

Did that answer the question?

Siew Ching YeoEchelon Wealth Partners — Analyst

Yeah, it does. Thanks a bunch, Jim.

Jim HamiltonPresident and Chief Executive Officer

Okay. Thank you.

Siew Ching YeoEchelon Wealth Partners — Analyst

Thank you.

Operator

Your next question will come from the line of Chen Lin of Lin Asset Management. Please go ahead. Your line is open.

Chen LinLin Asset Management — Analyst

Yeah, hi. Thank you for taking my questions. First, I want to ask with today’s press release with The Green Organic Dutchman, on their press release they mentioned there is some kind of exclusivity. Can you comment on that? Did they exclude you from sending any other similar deal in Canada?

Jim HamiltonPresident and Chief Executive Officer

We’ll be doing with — first of all, they are a great company and a great team and we’ve really, really enjoyed the engagement with them. They also have installed a very large capability not too far from us here in Montreal, so geographically it is very conducive to the relationship. The number three, I think when you look at The Green — TGOD, let’s just call it, TGOD, they have a very interesting and differentiated approach. I mean, these guys are The Green Organic Dutchmen. They are going organic and this is a segment I’m looking at Martin right now, but this is — I wouldn’t say the majority of the market, but is a clear segment of consumer preference. This is their focus. They will be working with us to help us with getting organic certified in some of our processes and what we have agreed is that, for certain elements of our process-certified organic, we would work with them on an exclusive basis.

Chen LinLin Asset Management — Analyst

Okay. Thank you. That is a very good clarification. And also, when you plan to expand to 1,500 before the end of the year, so you need to — you probably implying earlier you need to Health Canada to come in to do another inspection to get another approval process before this could be online, is that correct?

Jim HamiltonPresident and Chief Executive Officer

Yeah. And I think, as I mentioned earlier, the licensing process in Canada has been probably the ban and the frustration of the industry and I think the good news, as I stated earlier, is two-fold. One is the initial licensing process is a gigantic hurdle, and it can be measured in years, and we’re happy we started our process years ago and achieved that as — a short while ago as January of this year. But we are licensed and we are in this business and we are manufacturing today and that is a great place to be. The amendments, as I mentioned earlier, we anticipate will not be measured in years, will be measured in months and we think these amendments and where Health Canada is going with their prioritization processes are very conducive to where we want to go and more quickly. So we’re encouraged there but I wish I could tell you when that is. So we can’t do that. But I don’t think this will be a topic for our Phase II and capsule production will not be a topic in August but it likely will be a topic in late this year as we look for the amendments to come through on the Phase III.

Commercially, however, it doesn’t slow us down from already engaging with customers in terms of occupying that capacity and I’d like to add that this is an active dialogue as we speak. As I said, before with a line of sight I think there is an interesting demand dynamic in the market right now, and it is a capacity that will serve this industry very, very well.

Chen LinLin Asset Management — Analyst

Okay, great. Thank you. And I believe I would talk to Mario before and then you have gave a guidance with your last year’s deal with Canopy. It’s basically with margin of CAD0.50 to CAD1 per gram on the extraction marijuana side. Do you have any guidance for those two deals you just announced this week, or gave some rough idea what kind of margin, is that similar or higher than last year’s contract?

Jim HamiltonPresident and Chief Executive Officer

So, Mario, do you want to start on?

Mario ParadisChief Financial Officer

Yeah. So, Chen, I think we — I don’t think I ever gave guidance on the CAD0.50. I think gave you probably an example on how to build your financial ball model. That being said, we are not publicly said what would be the total revenue of these two agreements. So, again, we talk about the volume that we agreed with these two new partners. And coming along we will disclose the revenues and again, it will be easier for everybody to see what kind of revenue and margin, and don’t forget that we are not selling products, we’re selling services. So we’re not buying materials. So the gross margin when you compare with other LP that have materials is completely different.

Jim HamiltonPresident and Chief Executive Officer

But Mario, you want to comment in terms of what are our fixed costs of the site, or we’ve share that information before that might be helpful?

Mario ParadisChief Financial Officer

Yeah. So, at full capacity meeting the 200,000 kilogram, this site, the total fixed costs, including variable costs could be in a range of CAD15 million per year.

Chen LinLin Asset Management — Analyst

Okay.

Mario ParadisChief Financial Officer

Excluding white label and different type of delivery forms, I’m talking about extraction here.

Chen LinLin Asset Management — Analyst

Okay, great. Thanks. Just last question, in your SugarLeaf acquisition, that’s mainly for hemp, do you foresee any possibility for it to modify some of the equipment to extract marijuana?

Jim HamiltonPresident and Chief Executive Officer

That’s a great question. And the answer — we actually — I think there was a question this morning and the answer was that the characteristics of the plant — well, they’re all in the same family or fundamentally the same. Look, we believe there is, as I mentioned earlier, just a fantastic opportunity for hemp CBD in the United States and it’s evolving as we speak. And we are happy to have a footprint in the United States should marijuana ever become federally legal, it’s something that we think we could adapt our organization and our process to very, very quickly. Of course, we cannot do that until there is a regulatory frame that would permit that.

But we — I personally believe, as I said before, we’re a tweet away from at that, that the majority of Republican voters are in favor. There is north of 30 states that have some kind of legalization. There is a ton of jobs and there is a ton of tax revenues, and I think it will come, it’s a question of when? And when that day comes, we’re going to be very happy as a corporation to have that footprint, that team, those capabilities, that equipment in place to take advantage of it. And that was part of our motivation to look at the situation.

Chen LinLin Asset Management — Analyst

Okay, great. Thank you for taking my question.

Jim HamiltonPresident and Chief Executive Officer

It’s a great pleasure.

Operator

And your next question will come from Chris Damas of BCMI Research. Please go ahead. Your line is open.

Chris DamasBCMI Research — Analyst

Yes, congratulations on those deals. I’m an ex-organic chemist and I was curious. It sounds like you have legacy ethanol extraction equipment in size. Could you comment on flammability risk and how much of that CAD11 million is going into ensure against that kind of hazard since you’re going holus-bolus in ethanol versus supercritical CO2? Thank you.

Jim HamiltonPresident and Chief Executive Officer

Yeah. It’s an interesting question and probably best answered by our manufacturing. Let me just say that, when one is running with ethanol, clearly the security and the safety measures are more. I’ll give you an example, your cameras need to be explosion proof as an example and you need more sensors through the process and the buildings, et cetera. So, it is a — from a technology standpoint, more demanding. We’re pleased that this building has already been constructed and it’s a legacy capability that we can adapt to this business. But it — and you would know this with your ethanol experience, we like it a lot. It is — for example, it takes about 20% of the energy that CO2 does. It — you can do it minutes, would takes hours in CO2. And the purity of the quality of the product can be great. In fact, some of the motivation of our commercial agreements was an element of the sustainability in Green capability that people could use when they’re translating, communicating with their consumers about how their products are ultimately processed. So, we like ethanol a lot. The percent exactly on the question you speak I would have to refer to our production head.

Chris DamasBCMI Research — Analyst

Well, thank you very much. I certainly enjoy seeing that facility.

Jim HamiltonPresident and Chief Executive Officer

Well, there’s a great video online if you want to check it out, it’s about 60 — 90 seconds and it walks through the plant and you’ll get a feel for the technology that is there. And we’re very excited to be turning on an element of that computer process control fully automated operation. I think we haven’t talked about this much but I think there is a tremendous demand profile in — not only for marijuana but hemp in Canada and export markets in future. But we also believe that this already constructed capability is probably the low cost facility in the country, and we think that is a great advantage over the long-term depending on how markets develop. So we’re happy about this from a — clearly an offensive standpoint and we’re very, very reassured by that long-term in terms of his cost profile for future.

Chris DamasBCMI Research — Analyst

And that was $15 million to run the place for 200,000 kilograms of biomass process that comes out the (inaudible) a gram. Is that correct?

Mario ParadisChief Financial Officer

Yeah, that’s correct.

Chris DamasBCMI Research — Analyst

Okay. Great. Thank you, gentlemen.

Jim HamiltonPresident and Chief Executive Officer

Thank you.

Mario ParadisChief Financial Officer

Thank you.

Operator

And your next question will come from Chen Lin of Lin Asset Management. Please go ahead. Your line is open.

Chen LinLin Asset Management — Analyst

Yeah, thank you. I have another question just concerning the margin — profit margin. What is the ongoing rate right now with MediPharm your other competitor, how much they charge for the margin, basically how much they take marijuana extraction and what the spread they’re charging?

Jim HamiltonPresident and Chief Executive Officer

That’s a great question. But you probably have to ask them.

Chen LinLin Asset Management — Analyst

Okay. All right. So what’s — when you’re talking to your customer, what’s like in general the market not — the market going rate with those extractions?

Jim HamiltonPresident and Chief Executive Officer

Yeah. I would — yeah, look, it’s — we don’t really want to comment on that per se, because it’s not really helpful for our business with customers going forward. But I think one can read in various analyst reports, what their expectation is for pricing and it’s probably not a bad estimate in our experience. And I think it’s important to look at those estimates that are published by the experts and maybe compare them to some of the numbers that Mario just shared in terms of what our fixed costs are on our site is and one could probably have a fairly good view on the operation. That would be my advice.

Chen LinLin Asset Management — Analyst

Okay, great. Thank you.

Operator

We have no further questions at this time. Mr. Jim Hamilton, you may begin with your closing remarks.

Jim HamiltonPresident and Chief Executive Officer

Well, yeah, thank you. And — well, first of all, it was great having Martin Landry here. And Martin, we look forward to your engagement with the business. And I welcome all the investors that would like — that call me and call Mario to also feel free to call Martin and Martin will be on the road with us and on his own and talking to people. He’ll also be helping us with, not only his deep, deep network of contacts in the business, but help us shape also the future moves for our business in terms of how we move forward with further relationships, collaborations, acquisitions, et cetera, and it’s just great having somebody with such deep experience on-board.

I’d also like to acknowledge John Moretz, who has been strangely quiet.

John MoretzChairman

I hadn’t had any chance to say anything. All the wonderful news is that you and Mario have been stating, but I just wanted to say, being with Neptune for five years is, first as a shareholder and then on the Board, seen it through a lot of twists and turns as many of you have experienced. Today, I’ve never been more pleased or static to encourage for where the Company is, not only that I’m involved with and not only that I’m invested with that one that I’ve followed through the years. We’re in a position now of — at the brink of just getting started. And the opportunity to what we have is really unparalleled by any company that I’ve ever invested in much less been a part of.

And I’m very pleased to state to all of you shareholders and analysts out there that, just as the quality of our GMP facility is in the scale and the efficiency that that can drive, these results and what’s coming up in the near future for us all, is a result of our management team, the leadership, the dedication and that has been so strengthened through the years and Jim and the team have brought in some additional great power like Martin, Graham and others that have come in to and Patti have come into the Company along with the current staff that we have. And so, as they always say, you got to have the right people on the bus, and we really do that now. And I think all of us have a lot to look forward to, and some unparalleled success is what we’re planning for. And I will thank Jim, you and the team for that.

Jim HamiltonPresident and Chief Executive Officer

Well, John, thank you, who is not only as our Chairman, but one of our largest investors and we appreciate that. So, with all that said, thank you, everybody, for listening. Again, we welcome your questions as we go through the days and the weeks and the months to come. We’ll look forward to talking to everybody formally again in August. And I believe Mario, it’s August 13 that will be — in the mid-August, we’ll do our AGM and we’ll also have the first quarter results and at that time, John I think will have some more visibility on SugarLeaf and other business things.

John MoretzChairman

Absolutely.

Jim HamiltonPresident and Chief Executive Officer

So, thank you, everyone, for listening and thank you for support, and we’ll look forward to talking to you all soon. Bye-bye.

Operator

And this concludes today’s conference call. You may now disconnect.

Duration: 53 minutes

Call participants:

Mario ParadisChief Financial Officer

Jim HamiltonPresident and Chief Executive Officer

John MoretzChairman

Ryan MacdonellGMP Securities — Analyst

Siew Ching YeoEchelon Wealth Partners — Analyst

Chen LinLin Asset Management — Analyst

Chris DamasBCMI Research — Analyst

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