Categories Earnings Call Transcripts, Health Care

Neptune Wellness Solutions Inc  (NASDAQ: NEPT) Q4 2020 Earnings Call Transcript

NEPT Earnings Call - Final Transcript

Neptune Wellness Solutions Inc  (NEPT) Q4 2020 earnings call dated June 10, 2020

Corporate Participants:

Scott Van Winkle — Investor Relations, ICR

Michael Cammarata — President and Chief Executive Officer

Toni Rinow — Chief Financial Officer

Analysts:

Douglas Loe — Echelon Wealth Partners Inc. — Analyst

John Chu — Desjardins Capital Markets — Analyst

Gerald Pascarelli — Cowen — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Neptune Wellness Fourth Quarter Earnings Call.

[Operator Instructions]

I would now hand the conference over to your speaker today, Scott Van Winkle. Thank you. Please go ahead.

Scott Van Winkle — Investor Relations, ICR

Thank you, operator. Good morning everyone and thank you for joining us today.

Earlier today, we issued a press release announcing our results for the fourth quarter and full-year fiscal 2020. We also issued our management’s discussion and analysis, and consolidated financial statements. These documents have been filed with the Canadian securities and regulatory authorities of the US securities commission, and are available on the company’s corporate website.

Before we begin, I’d like to remind you that all amounts discussed today are 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 statement except as may be required by Canadian and US securities laws. A number of assumptions were made by us preparing these forward-looking statements, which are subject to risks. Results may differ materially from what is projected, and details on these risks and assumptions can be found in our filings on SEDAR and with the Securities and Exchange Commission.

Joining me on the call today, we have Michael Cammarata, our President and Chief Executive Officer and Dr. Toni Rinow, Chief Financial Officer. Michael will begin by providing an operational update, and Toni will follow with a review of our fourth quarter and fiscal 2020 financial results.

Let me turn it over to Michael. Michael?

Michael Cammarata — President and Chief Executive Officer

Thank you, Scott, and good afternoon, everyone.

Since I joined Neptune Wellness, I’ve been committed to doing things the right way to unlock the company’s full potential. That means we’ve had to challenge everything within this company while rebuilding our foundation and looking towards the future. Because of the hard work of people across the organization, we are seeing results. We are a completely different company than we were only one year ago. We have leaned into our health and wellness routes, and we are no longer just an extraction company. We have a new structure, new brand and a world-class leadership team.

In the US, we are moving towards a brand strategy that lowers cost and effectively meets the needs of the market. In Canada, we will soon launch our first cannabis brand. We anticipate accelerated revenue growth in the first quarter of the fiscal year 2021 and beyond. We expect that our 2021 Q1 results will show significant revenue growth of approximately 300% to 400% over the same quarter last year. A significant achievement given the ongoing industry challenges and the impacts of the current COVID-19 pandemic, an unprecedented crisis that our team has met with persistence and agility, developing new product lines and evolving to meet the needs of our customers.

Growth has been driven by the expansion of our health and wellness solutions, and by significant growth in our cannabis business, which continues to gain momentum in the first quarter of fiscal 2021. We have new capacity becoming operational, new business wins, momentum across our consumer brand and innovations in our health and wellness segments. While our one-time cost associated with our Phase II investment in our cannabis business negatively impacted profitability in the fourth quarter and the full year, we have established a strong platform to drive profitability and it set us apart from our competitors. Additionally, we have invested to develop new brands and launch new products in our Consumer Brands division. From the beginning, I’ve been steadfast in my view that hemp and cannabis are part of a broader consumer trend that sees consumers moving towards plant-based products in the household with applications for home care, personal care and beauty.

Moving forward, we are focusing on a model that keeps our overhead low while allowing us to be agile and responsive to the market without using a lot of capital. As part of our company’s transformation, we have recently restructured the company into six business units with a sales force that is aligned to each business unit, helping our teams to work faster, be more responsive and capture the increased value across the markets that we serve. We are already seeing strong growth potential for each division. The new business units are Consumer Brands, Cannabis and Hemp, Turnkey Solutions, Health and Wellness Innovations, Neptune Ventures, and Neptune Royalties.

Consumer Brands includes our Forest Remedies and Ocean Remedies brands. We have launched the brands during the fourth quarter through both retail and e-commerce channels, and have continued to expand our product lines. We have also announced a partnership with Dr. Jane Goodall to co-create products that are good for the consumers and benefit that Jane Goodall Foundation. We expect these products to be available later this year.

Cannabis and Hemp division includes our extraction operations in both Canada and the US. We remain well positioned in these fast growing markets. Phase II Sherbrooke recently becoming operational has given us the opportunity to rapidly expand our Canadian operations with a significant cost and quality advantage. These capabilities are evident with our recent announcement of a CAD16.5 million extraction client win to be serviced from our Sherbrooke plant.

Our Turnkey Solutions division is built upon our Biodroga business and an important asset that can drive shareholder value. Our product development and supply chain capabilities and relationships allow us to rapidly provide end-to-end consumer solutions that are well respected in the health and wellness industry.

Health and Wellness Innovations division is where we have and will continue to rapidly respond to the evolving consumer trends. Our hand sanitizers and Neptune Air thermometers are two of the first significant innovations in this business unit. We will continue to develop additional health and wellness products. We will work with a low-cost supply chain infrastructure to rapidly scale up and down based on demand.

Our Neptune Ventures is a platform for significant future opportunities through strategic investments and providing an incubator for emerging technologies, brands and other innovations. Neptune Ventures is an important contributor to our long-term growth and shareholder value creation.

Finally, our Neptune Royalties business unit is focused on growing and capitalizing on our intellectual property and licensing opportunities. We have significant intellectual property and capabilities across our whole organization that can provide a high-margin high-value return to our shareholders through the Neptune Royalties unit.

With this reorganization, we have positioned Neptune to accelerate growth and capture significantly larger share of the health and wellness market. As I mentioned earlier, we have made significant additions to our leadership teams, sales organizations over the last several months and enhanced our Board. We are attracting candidates with significant experience and proven track records across the consumer products industry, who see our value and want to be part of our team. We have added proven leadership to our C-suite with strong additions across our operations, sales and finance functions, and continue to have a pipeline of new talent to support our growth.

Over the last several months, we have introduced David Mayers as our Chief Operating Officer. David is the former Chief Operating Officer of MediPharm Labs. He has quickly become an integral part of our executive leadership team and has been instrumental in the commercialization of our Sherbrooke expansion. His experience will help us optimize our Cannabis and Hemp divisions, an area of our businesses with strong growth potential.

In April, Dr. Toni Rinow joined us as Chief Financial Officer. It is my pleasure to introduce Toni to you today, and I will turn the call over to her in a few moments. Toni has hit the ground running making changes and leveraging her significant experience in operations and finance to the Neptune team. Toni has made an immediate impact on every aspect of Neptune’s operations. Her technology background will be an asset for our future.

In addition to David and Toni, we’ve added Scott Antony as a Senior Vice President of our US Retail Sales. Scott came to us from Unilever, adding significant consumer product sales experience. Russell Jay joined us as VP of Sales, bringing additional food, drug and mass sales leadership. And just last week, we announced that Robert DiPede joined Neptune as Senior Vice President of our Health and Wellness Innovations division. He joined our team from Walmart, where he was the Director of Territory & Global Export Sales. We are successfully building an experienced team of leaders that are making an immediate impact on our growth. These new hires reflect a significant enhancement to modernize our teams with talent having professional experience at companies such as Unilever, Colgate-Palmolive, Hanes and SmartyPants Vitamins, to name a few.

Regarding our B2B business, we’ve addressed operational challenges in our extraction business and Phase II in Sherbrooke is now producing products for multiple customers. We are also close to have further enhancement of Phase II, but have continued testing of our cold ethanol technology that is expected to further cement our productivity and cost leadership in the growing cannabis extraction market.

We rapidly built the Consumer Brands business with the launch of Forest Remedies and Ocean Remedies including the expansion of retail distribution. We are also leveraging our Turnkey Solutions and our CPG talent to rapidly deploy Health and Wellness Innovations. Product opportunities are highly efficient with structures that allow us to ramp up and down, with supply chain capabilities quickly to maximize profit and are already contributing to significant revenue in the first quarter. We have built strategic partnerships, expanding our product development, supply chain, sales and marketing capabilities to the organization including partnering with IFF International Flavors & Fragrances, American Media and Dr. Jane Goodall. We have built a platform that will continue to build, drive and accelerate growth and shareholder value.

Lastly, I want to reiterate that Neptune has successfully become an integrated health and wellness platform that includes strong positioning in cannabis and hemp, fully leveraging its production and development capabilities to respond to consumers’ needs. We have built the team, the strategic partnerships and have the production capabilities to drive long-term growth. We have built the culture to be nimble, fast and aggressive that will provide for rapid go-to-market solutions, while driving both our B2B and our B2C business opportunities. We are building brands. We are innovating for the future. We are delivering value to all of our business partners. It is an exciting time at Neptune, and the whole organization is energized to deliver.

Also Read:  Intuit Corp. (INTU) Q2 2020 Earnings Call Transcript 

I will now turn it over to Toni for a detailed review of our fourth quarter results.

Toni Rinow — Chief Financial Officer

Thank you, Michael, and good afternoon, everyone.

It is my pleasure to join you today. I joined Neptune two months ago, and have been excited about all of the activities happening across the company, our tremendous opportunity and the team that has been built over the last year. Neptune has a respected history in the health and wellness industry. It has always led with quality products, innovation and thought leadership. Over the last many years, the company has broadened its exposure to the cannabis sector, and we are now further broadening our exposure across that sector. I’m excited to partner with such strong leaders and build a leading company in this space.

The company is progressing at a rapid pace and all of our team is fully engaged to building out an industry-leading platform. I’m truly energized by the pace of the progress, the quality of the team and the foundation in play at Neptune. I look forward to speaking with our investors about the developments that are and will continue to occur at Neptune.

Turning to our recent results and current trends, let me provide some financial highlights. Total revenue for the three-month period ended March 31, 2020, increased 68% to CAD9.5 million compared to CAD5.7 million in the prior year. On a sequential basis, compared to the third quarter of fiscal 2020, revenue increased 4%. Revenues from the cannabis segment increased sequentially by 42% to CAD4 million, up from CAD2.8 million in the third quarter ended December 31, 2019. In the prior year, cannabis revenue was de minimis, given the early stage our market entry. This significant development year-over-year reflects both the acquisition of SugarLeaf during fiscal 2020 and the continued development of Neptune’s cannabis operations across North America.

At the end of the fourth quarter, Phase II of our Sherbrooke facility became operational, allowing us to expand our cannabis operations to 200,000 kilograms and support additional revenue from both existing and new extraction customers. In May, we announced a new CAD16.5 million extraction partnership utilizing this expanded capacity. Revenues from the nutraceutical segment for the three-month period ended March 31, 2020, amounted to CAD5.5 million compared to CAD5.7 million in the prior-year period.

As we enter the first quarter of 2021 and look ahead for our revenue development across our segments, we anticipate significant growth across our health and wellness platform, reflecting recent innovations, new categories and utilizing our significantly expanded sales team and distribution capabilities. We are focused on driving profitability utilizing our existing manufacturing footprint and identifying incremental asset life business opportunities that leverage our significant product development and supply chain capabilities. These efforts have already resulted in several new products and distribution wins across our health and wellness platform. As a result, we expect to drive accelerated sales growth without any significant incremental capital investments favorably impacting margins and revenue. This accelerated growth is evident in our first quarter fiscal 2021 guidance.

Net loss for the three-month period ended March 31, 2020, amounted to CAD39.2 million, compared to a net loss of CAD12.4 million for the three-month period ended March 31, 2019. The net loss reflects non-cash impacts including non-cash impairment of goodwill and non-cash change in fair value of contingent considerations during the fourth quarter and an increase in non-cash marketing expenses during the fourth quarter, as well as an increased start-up expenses in the cannabis segment compared to the prior year.

Adjusted EBITDA loss was CAD25.4 million for the three-month period ended March 31, 2020, compared to a loss of CAD2.7 million in the prior-year period. The decrease in adjusted EBITDA is mainly attributable to significant investments in the cannabis segment in anticipation of increased sales volume, as well as an increase in corporate expenses to build the organization to support our expanded market and business development, and an increase in non-cash marketing expense associated with our American Media partnership.

Cash and cash equivalents were CAD16.6 million as of March 31, 2020. And during the fourth quarter, the company raised gross proceeds of CAD7.1 million through utilization of its aftermarket program and continues to have significant capacity for additional capital to support its growth objectives. As we look forward to the first quarter of fiscal 2021, we remain confident in our guidance for revenue of CAD18 million to CAD22 million, reflecting a 300% to 400% year-over-year increase. The anticipated growth reflects strong growth across our health and wellness platform including new partnerships, new product categories, our enhanced leadership and sales teams, successful implementation of our Phase II operations in Sherbrooke. Increased utilization of our assets and the rapid and successful expansion we have seen into new product categories is expected to improve profitability.

I look forward to discussing our continued success in building out the Neptune platform. I will now turn the call over to the operator to open the line for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions]

Your first question comes from Doug Loe from Echelon Wealth Partners. Please go ahead.

Douglas Loe — Echelon Wealth Partners Inc. — Analyst

Yeah, thanks very much, operator, and good afternoon, all. Thanks very much for the overview there, Toni. Nice to have you aboard at Neptune, and thanks for participating in our conference last month. Really appreciate it. Wanted to start with — you mentioned in your press release, obviously your relationship with IFF. Michael or Toni, just wondered if you might want to flesh out just what your longer-term strategic expectations might be with IFF, and whether or not you had any other potential alliances with any of the other global specialty chemical companies that could be establishing their own footprint in the cannabis space?

Michael Cammarata — President and Chief Executive Officer

Yeah, of course. Thanks. IFF has actually been a very strategic partner in a couple of different ways. It gives us access to their vast IP pool of over 12,000 IPs and patents that we can access. It’s given us access to over 35,000 customers that they work with around the world. It’s also enhanced our capabilities in extraction because IFF has been doing extraction for decades. And then on top of that, it has helped us improve in go-to-market speed. So quite recently, we actually had a large retailer come in play with us and needed a turnaround on a product within a matter of days and IFF was able to give us the mound of sand [Phonetic] that we needed and work with us to accomplish that.

So IFF has been a strategic partner on our brands and helping us build the infrastructure, but also we’ve been able to tap into a vast variety of IP and knowledge and their expertise, and really be a synergistic partnership. And I think that’s also playing a growth factor for our Biodroga — or Turnkey Solutions business, but also our Consumer Brands as well. So, I think they’ve been a strategic partner on multiple levels, and we continue to work with them. And it’s actually allowed us to be able to go to market even faster than we anticipated in certain areas.

Douglas Loe — Echelon Wealth Partners Inc. — Analyst

Yeah. That’s helpful. Thanks, Michael. Maybe shifting gears to SugarLeaf. We have pretty strong visibility on how your capacity utilization is going to unfold at Sherbrooke, little less in SugarLeaf, and of course you took the write-down in recent quarters that we’re all aware of. Like if any — any sort of granularity you want to provide, either on the regulatory macro environment or near-term production cycles on hemp oil extraction that you might be able to give us some color on with regard to SugarLeaf? Just, it’s been a little bit challenging to figure how to model SugarLeaf, a little bit easier with the Sherbrooke. So any guidance there would be helpful.

Michael Cammarata — President and Chief Executive Officer

Yeah. So obviously, SugarLeaf came from original of an acquisitions and we’re in the process of doing the integrations and mapping it out. We did see in the US that hemp actually had a different price point and it actually had a compression of 60%-plus on the hemp pricing. But what’s been really unique about Neptune’s model is when all the cannabis companies we’re focusing on what I’d call like devices, smoking, drinking and eating, we took a holistic view of the whole household for the consumer. How does hemp play a role in products such as deodorant, which it can add a moisturizing effect. Our different cannabinoids that could — that can add an anti-fungal and antibacterial properties, how do they play into the cleaning products that people use on a daily basis.

And those models and those industries are actually much greater we believe for the potential, because some of those categories have been around at retail for a lot longer than as — than the marijuana categories have in the States, and obviously there’s a lot of restrictions. So when it looks at the model, so looking at the hemp providers and — that are selling into like to state-owned in the CBD and hemp, because we cannot touch cannabis in the States, because we’re NASDAQ-listed, it’s kind of a limited. So what we’ve done is look at the model on how we can expand into the personal care, home care areas.

And that’s something that we’re retooling and we’ll be coming back with more detail on, with the SugarLeaf asset, and it positions us obviously with a large capacity in the US, which we ultimately believe that there’ll be more demand for cannabis and hemp in personal care items such as like toothpaste, soaps and such, and household cleaning products like even from hand sanitizers all the way down into disinfecting wipes. And we believe that that will give us the growth opportunity in the States that will actually be a very good factor for SugarLeaf.

Douglas Loe — Echelon Wealth Partners Inc. — Analyst

Interesting. Thank you. And then just one last housekeeping question. We’ve certainly seen evidence that bulk ethanol has sort of increased in price in recent months and presumably in no small measure to demand for hand sanitizers for which you’re a material player. Just sort of wondered how escalating prices of bulk chemicals might be impacting your gross margin, not just in hand sanitizers, but perhaps in your cannabis oil extraction is based on cold ethanol extraction going forward. I’ll leave it there. Thanks.

Also Read:  Travelers Companies Inc (NYSE: TRV) Q4 2019 Earnings Call Transcript

Michael Cammarata — President and Chief Executive Officer

Yeah. And I think that that’s a very unique thing even go into our Sherbrooke plant, like how we’re energy more efficient, how we — how we’re efficient on our usage of it and being able to recycle and reuse, it lowers the amount of pressure on demand on pricing points. We obviously do because [Phonetic] the previous plant had huge storage units to be able to — we will store a lot of extra ingredients and such that allowed us to be able to not be so price sensitive to the market when it comes to those things. And we’re also a big purchaser of that for the hand sanitizers and those type of markets, but I think that that really says the tribute to what I like Phase II. It’s — what I’d like to say is like our Phase II is like the Tesla in the car industry compared to batteries that may be on horse-and-buggy, because we’re going to be able to really cost save money for our customers. And I think that’s going to be evident in Q1 that we’re able to handle a lot more capacity at a more affordable rate and have a higher quality output. And then we’re already starting to see that with our customers — in the recent wins that we’re having with customers and we expect that to continue.

Douglas Loe — Echelon Wealth Partners Inc. — Analyst

Thanks, Michael.

Operator

Your next question comes from John Chu from Desjardins Capital Markets.

John Chu — Desjardins Capital Markets — Analyst

Hi, good afternoon. First, I wanted to touch on, just the SG&A. That went up quite a bit in the quarter, quarter-over-quarter. I know you’re growing the business. You’ve got six different business line now that you’re going to be staffing up, it looks like. So maybe just give me a sense on how that run rate might look going forward now. Is it a pretty well set in terms of where you need to be, or can that still creep higher in the coming quarters?

Michael Cammarata — President and Chief Executive Officer

Yeah. So I think that we –. I’m glad to comment, and Toni can add additional. But, I think what we’ve done very uniquely — and Q4 is the start of that transition, is lowering the capex needs after the one-time costs. But when you look at our actual model that we’re building here, we’re trying to build a very efficient company that has a lower cost infrastructure, that can scale up and down on demand. So yes, we have these different divisions that are going to be our speed boats and then really quick to market and be able to adapt, but we’ve also done and we will continue to improve our cost infrastructure.

So that way, our burn rate like — like for instance, in Q4, a lot of that is non-cash cost, and that’s mainly because of the American Media deal where we used a lot of different media as we’re starting to do the plannings and launching the brands, which we had to account for. So we’re looking to build that model. And I think this is — a point to look at is, we look at our peers and we look at where we’re trying to be and our focus is really on getting our costs and the burn rates as low as possible, and really invest in talent and growth to really unlock that hybrid growth mode and really be able to stay there while not increasing our costs substantially. So I don’t know if that answered your question.

Toni Rinow — Chief Financial Officer

And Michael, if you — if I could add here, and for John on the specifics. So John, for the three-month period you saw in our SG&A of CAD21.4 million and that SG&A that includes non-cash expense on the warrants for the AMI partnership and Michael could talk a little bit more about AMI, but the amount that this includes CAD17.4 million on that CAD21 million. So that the two SG&A expense would be only somewhat around CAD3.9 million. So that was — thank you very much for that question. And that is the response to that.

What we are going to do forward, John, is probably we’ll separate this out and we’ll report SG&A independent of the AMI non-cash warrant expense in order to make that a more clear and crystallize out what are the true SG&A expense. So that would be that explanation. And I could give back to Michael and talk maybe a little bit more about the AMI collaboration.

Michael Cammarata — President and Chief Executive Officer

Yeah. I want to add that AMI has been instrumental on two parts. One was the ability to be able to reach a certain consumer and to be able to access media, because when you’re launching a brand in the States particular, there’s only a handful of platforms that really allow you to the market hemp brands. So AMI on the branding initiative and magazine initiative allowed us to go to market quicker and to be able to really get the knowledge and information to the consumer. But on another side that I really want to talk about and it’s something that we’ll be talking more about in the coming quarters, is that the distribution.

So every — for AMI American Media, for everywhere you see a Us Weekly magazines, an In Touch magazine and all of their other properties, they actually own those stands and they are in high value position parts of the stores and traveling areas. So for instance, our initial partnership with Albertsons through with AMI support is to do like a test and learn. So we’re really putting products at the checkout counters in Albertsons stores where we test different packaging, different price points and different sizes. To be able to do this rapid deployment model and go-to-market strategy, we partnered with AMI on the distribution part as well because it allows us to be able to go everywhere there is an Us Weekly and In Touch magazine and be able to merchant those stores, and that’s something that’s very rare to do.

And they have 75,000 locations with over 2.9 million point of distributions. So multiple distribution inside different grocery stores. So as COVID is lifting and we’ve gotten the data back from our initial tests and what’s packaging we like and what works, we’ll be starting to work more and more with AMI American Media and more of the distribution part in addition to the advertising part. And I think that that’s something that gets our brands access to real estate in high volume retailers that a lot of our competitors are struggling to be within vape shops or stuff like that in hemp and CBD.

So our focus is really to make sure that we match distribution with quality retailers that have high credit ratings, in areas that are highly visible to the consumers and areas that they trust. So imagine walking into like Albertsons, you have the magazine, which has a product on the cover, and next to it on the magazine stand, you also see our product. So, those are things that we’re starting to unlock as we move to be more aggressive into the US state on distribution.

John Chu — Desjardins Capital Markets — Analyst

Okay, that’s helpful. So you also mentioned your first cannabis brand launch. Can you give us more details, maybe timing, products, distribution, is it Canada/US [Indecipherable] Canada cannabis and then what kind of provincial agreements you’ve got set up for that distribution?

Michael Cammarata — President and Chief Executive Officer

Yeah. So our first cannabis brand is obviously going to be in Canada. We are very uniquely positioned in Quebec and have great relationships with a lot of retailers and the government that we’ve been working with and other strategic partners that we’ll be announcing. But we are just — pending our sales license we expect any moment and the brands, we’re going to be launching one brand and we will have more detail coming very shortly on it, and then certainly additional brands as well.

So we have looked at the market and wanted to see where we could really benefit as far as the consumer, because one of the things that we noticed by watching the Canadian market on play is that the consumers want it to be products that were affordable and accessible, and also have innovations. And with Cannabis 2.0 coming online, that was able to unlock a lot of our unique capabilities that will set us apart because that we’ve been developing for the whole household and looking at all the different uses, we were able to take that knowledge and apply it to the cannabis industry, whether it be MaxSimil, which is something that we’ll talk also more about, which is our unique IP, which is patented, which has over three clinical studies on, which is essentially like an enzyme that bypasses the digestive system.

So for instance we want to look at how we can make an edible safer in addition to having a good strand and unique delivery mechanism. So with MaxSimil essentially what happens is we can — we offer the consumer an edible that is a near-term onset without having a delayed onset. So basically, if somebody has too many gummies, you don’t have that issue with our product lines, because with the MaxSimil combination and using that technology and that’s just one example of an IP obviously with IFF and lots of others, we have created a database and we’ve started working on how we’re not only going to be a unique cannabis brand that is going to be affordable and accessible to the consumer, but it’s not just going to be another gummy. It’s going to be safer.

So we want to make sure that when a person has our product that it’s an instant onset, not a delayed onset. And that’s just one example on the consumption side. But we view — and I want to focus on two price points. One was the high-end niche products, which we will be talking a little bit more about and then on a day-to-day high volume run rates, because what we noticed as I — in the beginning is that we saw data that consumers were used to playing it on the black market, some-50% higher than what they were paying — excuse me, 50% lower than what they were paying in stores. So we want to make sure that we make it affordable to the consumer and accessible to the consumer.

Also Read:  MSCI Inc  (NYSE: MSCI) Q1 2020 Earnings Call Transcript

So on the delivery forms, we have unique ones with 3D emulsion technology that we kind of talked about a little bit in the past quarter. But we also have unique IP and proprietary formulas that are patented, that can apply to this industry that will make products safer and more effective because not only it is safer because it’s immediate onset, it’s three times stronger, so less is more.

So those are just an example of one of the IPs that we’re going to be rolling out to the market.

John Chu — Desjardins Capital Markets — Analyst

Sorry, did you say for Phase II that you’re — its operational, but did you say you are continuing to test the cold ethanol? So is it actually fully ready to go? Or are you still more or less in a testing mode right now?

Michael Cammarata — President and Chief Executive Officer

Well, we actually — we’ve been testing because we’ve also been enhancing. So we are right now at near capacity at Phase II. So we’re finishing a couple of products, we’re trying to find line time to do the switch over to liquid nitrogen, which we are — planned on my books for doing that next month. So between customer batches, we will be switching over to liquid nitrogen and that will allow us to — in that Phase II, to get product quality increased and period increased. It’s like — deliver a distillate form. So essentially our Phase II, as I keep making the joke that it’s the Tesla of the extraction industry and it definitely is something that a lot of people stayed away from going into liquid nitrogen and the unique extractor that we have because of the costs.

But what it ended up doing for us is position us in a very unique position. One, because we’re able to make extraction move faster with a higher purity form and get it near distillate form, which is actually going to allow us to allow the customers to save a lot of money that are using our extraction and we can increase our margins because it’s almost completely automated. And then on top of that, we can take multiple forms of biomass. So typically farmers would have to pay for somebody to go and cut the trim before they can send it to an extractor and other extractors would have to run it multiple times if it wasn’t a certain biomass grade.

With Phase II, we are able to accept multiple grades of biomass and we’re able to process it even if they didn’t, so it saves the farmers money when it comes to it. And that’s a unique thing because what we’re seeing is demand for hemp is skyrocketing and there wasn’t a lot of people that were going to be able to play in the volume in that game. So what we’ve also done — and I don’t know if we talked about this yet, but we have over a three-story storage facility that we can go to below freezing, and so farmers when they have that one-year crop, instead of extracting it and then losing it, we can actually store it so long — for almost indefinitely. So we have the ability to store in I think the largest storage facility in Canada.

So we’re able to store more biomass, we’re able to play in hemp, which is for us, volume increases profitability. So the margins will get better with more volume. So the fact that we’re at near capacity already on Phase II is a good sign, and now it’s before we even rolled out that next phase of Phase II and switching over to liquid nitrogen and also the utilization of our three-story facility to store that can actually go below zero and freeze the product for longer storage. So the reasons why we are focused on hemp and that gave us the edge is because we’ve been — we took that approach to look at what products can be used in the CPG world, the consumer packaged goods world, like the Unilevers, the P&Gs, the Cloroxs. When they start putting hemp into their products, we want to be able to be at standard, we want to be able to process it extremely fast and we want to be able to have large amounts of biomass that we can store for a longer period of time. At the same time, in the supply chain, be able to lower the cost to the consumer at retail even whether it be through a customer or our brand, and at the same time the farmer, because the farmer is having to pay a lot more money and was — for extraction last minute, as well as having to have somebody due the clippings on it.

So by providing the biomass, it gave us a unique position in the market. So there’s a lot of unique things that Phase II is and we’re really excited, and you probably can hear in my voice that I’m excited, because now we get to finally start talking more and more about these.

John Chu — Desjardins Capital Markets — Analyst

Okay, that’s great. I’ll get back in the queue. Thanks.

Operator

Your next question comes from Gerald Pascarelli from Cowen.

Gerald Pascarelli — Cowen — Analyst

Hi, good evening. Thanks very much for taking the questions. So just to go back to the top line, obviously, 1Q revenue growth of what’s going to be 350% at the midpoint is clearly encouraging in particular in this — given this backdrop. But Michael, I guess, as we think about post 1Q, what kind of like line of sight do you have in the sustainability of these revenues? And how should we think about I guess the cadence of revenues on a go-forward basis? Thanks.

Michael Cammarata — President and Chief Executive Officer

Yeah, I think Q1 really starting to show Phase II. So as our cannabis revenues are starting to increase dramatically with consumers starting to — with the commissioning the Phase II and the ramping up and the consumers starting to use — the customers starting to use it, I think that we’re in a good position because of the diversity of our customer base. Whether our products that we’re making for the hemp for household uses, or different cannabinoids, or distillates that are unique product forms that we’ll be adding [Indecipherable] I think we’re going to be seeing growth from all of our divisions.

And I think that it’s something that really was the turning point for the company with our Q1 and we’re excited that in I think the first time in the history of Neptune that I believe that we actually gave out guidance. And so what it shows here is that we’ve gotten really more transparent from the top, all the way to the floor. Our technologies and our divisions are ramping up and now in execution mode, and we’re well positioned for the current pricing in the markets that we’re going into.

Gerald Pascarelli — Cowen — Analyst

Got it. Very helpful, thank you. Just moving down to gross margin, and maybe this is a question for Toni, but obviously like over the course of last year it was depressed our given your build-out of your cannabis operations. But now in light of all these new growth initiatives, you’re not just an attractive anymore, right, you have branded products, you have a lot of different growth initiatives. I guess like any color that you can provide on maybe what a normalized margin could look like, I think would be helpful. Thank you.

Toni Rinow — Chief Financial Officer

So, we…

Michael Cammarata — President and Chief Executive Officer

Yeah. I’ll Toni go into detail on — or go over that, and then I’ll add some color to it on top of that.

Toni Rinow — Chief Financial Officer

So we haven’t disclosed margins yet, and the most important for us for the moment is really to kind of grab the land and grab to market share. So all of the business segments will be experience very rapid growth. They required some investments for the new sales leadership that you have seen that we announced. But all of these segments are pretty low from capex investment perspective. So we will be running very lean, very agile and these things can be scaled up and down with market demand. So at this point, in terms of guidance on margins, we haven’t provided anything that’s — currently the focus is really on growing the top line and building market share for Neptune in this different business segments.

Gerald Pascarelli — Cowen — Analyst

Got it. Thank you very much. [Speech Overlap]

Michael Cammarata — President and Chief Executive Officer

I think we’re…

Gerald Pascarelli — Cowen — Analyst

Sorry, Michael. I know you were going to follow up.

Michael Cammarata — President and Chief Executive Officer

Yeah. So what I was basically saying is like right now we’re in a unique position that we’re entering that phase of execution and our technologies are coming online, our divisions are highly focused, and we’re going after market share. And obviously there is some — as I talked about earlier, there is fixed cost that don’t change. But we’ve even been able to optimize some of those. So as our volume and as we grab more market share on our cannabis division, particularly Sherbrooke, those margins will grow rapidly. But we haven’t given guidance on that, and we definitely are excited to, A, make sure we get the opportunity that’s before us, and then obviously take it to look at it from a different division point of view, at some point.

Gerald Pascarelli — Cowen — Analyst

Thanks very much.

Operator

And that was our last question. At this time, I will turn the call back over to the presenters.

Toni Rinow — Chief Financial Officer

Scott, do you want to take it away?

Scott Van Winkle — Investor Relations, ICR

We just want to thank everyone for joining, and look forward to connecting with you on our next quarterly call, after first quarter results. Thank you, everyone.

Toni Rinow — Chief Financial Officer

Yeah, we want to thank everyone for making the time. Thank you.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2020, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

MongoDB (MDB) has what it takes to end the losing streak. Here’s why

An innovative product portfolio that is capable of outshining the legacy databases has helped MongoDB (NASDAQ: MDB) stay largely unaffected by the market turmoil so far. Of late, the database

Macy’s (M) confirms Q1 loss; expects gradual sales recovery

Retailer Macy's (NYSE: M) posted mixed results for its first quarter of 2020. While the topline missed the market's estimates, bottom line topped the targets. There were no change in

STZ Earnings: Key quarterly highlights that you need to know from Constellation Brands Q1 financial results

Constellation Brands (NYSE: STZ) today announced its first quarter financial results for the period ended May 31, 2020. First quarter net loss was $177.9 million, or $0.94 per share, compared

Top