Neptune Wellness Solutions Inc (NEPT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Neptune Technologies & Bioressources second-quarter fiscal year 2015 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to John Ripplinger, Director of Investor Relations. Sir, you may begin.

Well, thanks, operator, and good morning, everybody, and thanks for joining us today.

As mentioned, the purpose of today's call is to review our results for the second quarter ended August 31, 2014. Joining me on today's call are Mr. Andre Godin, Interim President and Chief Executive Officer; Pierre Lemieux, Chief Operating Officer of Acasti; and Pierre Fitzgibbon, Chairman of the Board of Neptune and Board member of Acasti.

Pierre Fitzgibbon will start off with a discussion of some of the Company's important issues and a strategic initiatives update. Andre will then review Neptune's operational financial highlights, followed by Pierre Lemieux who will discuss Acasti's recently completed clinical trials. We will then open up the lines for questions.

Before we begin, I want to remind you that today's remarks contain forward-looking information that represent 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 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. Details on these risks and assumptions are in our filings with the Canadian securities commissions and with the SEC.

With that, I'll turn the call over to Pierre Fitzgibbon.

Thank you, John, and good morning, everyone. Your newly formed Board of Directors has been very active since its inception in late June, and you are working very closely with the management team's (spoken in French) of value creation. This, of course, includes the development and implementation of growth initiatives.

Let me start by addressing our CEO search, by far the most important decision this Board will be taking this year. As previously indicated, a top-tier executive search firm has been engaged, and through a Board committee comprised of myself and three other members, we have spent some quality time meeting outside candidates and our internal candidate, Andre Godin.

It was important to align the search with the skill sets required to deliver on our renewed strategy, a subject I will cover next. Based on the consensual value creation approach at the Board level, we are now in a position to finalize our search process and select the best person to lead this Company going forward, and I am hopeful that we'll be in a position to make an announcement by the end of November at the latest.

In the meantime, I would once again like to reassure our shareholders that the Neptune group is in good hands as some directors are pretty much hands on, supporting Andre and his team with both operational issues and the development and now execution of our value creation initiatives.

While Andre will cover the operating and financial highlights later, let me address some of the key elements of our quarterly results. After an extensive review of our balance sheet elements, we have decided to provide in full for uncertain recovery in our receivables and inventory. This includes a reserve for large foreign distributor receivables currently in dispute. Although we are legally proceeding to collect what is owed to us, we decided to fully provision this receivable, arising from sales going back to prior years.

Equally, we provided for all impaired inventory of raw material in full arising from almost two years of inactivity as a plant.

Additionally, as we weren't producing at capacity as expected, we actually incur some unabsorbed fixed costs as the accounting rules don't allow these costs to be capitalized as such practices prevailed in the past. Together, these three nonrecurring items are totaling CAD6 million for the quarter, an important contributor of our loss.

This decision was taken at the Board level to recognize these charges in full and then allow having a clean balance sheet support the full ramp-up expected in the next quarter. This, as you can understand, resulted in pressure for the quarter, but we now expect cleaner and stronger performance going forward.

It is worth noting that no impairment charges are required from our long-term assets.

As disclosed in our MD&A, we are experiencing a small delay in our ramp-up schedule. Frankly, although we are being paying great attention to the root cause of this delay in making sure remedies are implemented, this is not atypical for any ramp-up in the manufacturing industry and shouldn't be of great concern, especially as we're confident to complete the ramp-up soon.

A key ingredient for our success is our customer support. The sales and marketing team has done very well given our circumstances, and I'm happy to report that we have firm orders for manufactured krill oil, a testimony of our comparative advantage in terms of quality and innovation. Andre will provide more depth in this area later.

We're also fortunate to be in an industry who is reciprocal and a subsegment of the industry being the krill oil where we can enjoy solid organic growths by our accounts and experts of you going forward. Stated differently, we are enjoying a nice industry tailwind.

This leads me to my next topic, which is the announcement we made this morning of our intent to file today a normal course issuer bid, NCIB, or what is commonly referred to as a share buyback program. After careful assessment of our cash reserve and the requirement to become cash flow positive, we have concluded at the Board level that the best uses of some of our excess cash would be to invest in Neptune stock as the return we expect is greater than any other use we can make right now. We believe that such purchases are in the best interest of Neptune and that it constitutes an attractive investment opportunity and desirable use of Neptune's funds that will enhance the value of our remaining shares.

Henceforth, we intend to act when we will receive the approbation from the required regulatory body.

The first phase of the program will allow us to repurchase up to 1.5 million shares, and we have the flexibility to do multiple phase up to an annual maximum permitted of 10% of our public float. No need to expand on this point, other than stating that the Board of Directors is concerned about stock price and will act to protect it.

Lastly but not the least, let me address where we are with our strategic initiatives. Since August, the Board and management have engaged in discussing our strategic direction initiatives. At the recent two-day Board meeting, we had developed with management some value creation initiatives on which management will now be executing. A detailed roadmap is now being developed for all these initiatives and will be a topic of an investor presentation later in this calendar year when our CEO is confirmed. However, in advance of this, let me provide you with some highlights.

Neptune has to transition to become the value-added supplier. This will entail looking at new biomass, new formulations, and new delivery systems all in the marine oil supplements segment of our industry. Neptune was the creator of krill oil, a supplement, and has some core competencies in innovation and development. Now that our manufacturing plant is getting ramped up, we need to go back to our roots.

Neptune is also uniquely positioned as a science-based concern and henceforth should further capitalize on Acasti's extensive and conclusive research. The nutraceutical industry has now crossed the line where all claims require signed support and substantiation. Neptune is uniquely positioned with a controlled subsidiary soon embarking in the Phase 3 clinical trial of the drug formulation. We need to better tailor secrets.

Our go-to-market strategy will focus specifically and differently on each consumer segment in the market. In the direct to consumer market, we will become an actor and will proceed with the launch in Canada in 2015. Numerous steps are required and are being planned. Equipped with that experience, we will move in other countries thereafter.

In the food, drug and mass markets, we will seek partnership in private labels, which will include addressing big-box, drugstores, and specialized grocers. We won't develop our brand in these markets given the resources required. However, our science support should attract attention and support.

In the health food store market, we will seek placements in the large specialized chain where staff and customers are more aware of the benefit of oil in supplements. And lastly, we will develop more concentrated formulas such as Onemia in the practitioner markets where the foundation of the industry is. Working with key opinion leaders will be central to this approach.

Fourthly, we will focus in enhancing our supply chain to be closer to the source of biomass and will endeavor to look at securing better in the higher quality raw materials, a source of cost savings through better yield at the plants. Various partnership forms will be evaluated.

And lastly, optimizing our share group facility to increase throughput from the 150-metric ton original design to a 300-metric ton volume with limited CapEx. This will be necessary to get optimal EBITDA margin in the 20% range. Those five value creation drivers will develop in specific initiatives to be led by key executives whom will be accountable to the Board on a regular basis and will become the foundation of our 2015 and beyond corporate objectives under which our annual and long-term incentive programs will be built. We will be addressing these value creation drivers more specifically in the quarters to come.

In closing, I truly understand the shareholder's frustration as we see our stock price performance. But let me assure you that our goal is to reaffirm our leadership as a premier krill oil manufacturer while delivering predictable, consistent, and profitable growth. The Board and management are fully aligned on that task.

With that, I will turn over the call to Andre Godin.

Thank you, Pierre. We are at the halfway mark in our fiscal year, and I am pleased to say that, despite some obvious challenges, we continue to successfully implement our growth initiatives with the Company achieving a number of important milestones in the quarter and year to date.

Operationally, Neptune continues to ramp up production, and in September, we successfully reached an annualized capacity of 100 metric tons. We're now in our final ramp-up phase and expect to reach our objective of 150-metric tons annually at the latest by the end of November.

Ramp-up delays have mainly been attributed to some mechanical and personal training issues. Having said that, we are grateful to have now on board our new plant manager, [Matthew Subgot]. He is a strong leader with significant industry experience and a successful track record. Despite obvious obstacles in opening a new plant, he has played a central role in overcoming these challenges. As well, he is an important part of the team looking at increasing efficiencies and optimization processes at the plant to increase capacity above the current 150-metric ton target.

Shipments of Neptune's premium product, NKO, is now underway, and we are also offering customers our third-party oil. Together, this will allow us to enhance revenues by expanding our product portfolio to meet the needs of a diversified customer base. Going forward, we expect sales momentum to continue to build, which should have a positive impact on future quarters.

Assuming the ramp-up goes as currently planned, revenues for the third quarter of the current fiscal year should surpass the CAD4.4 million seen in Q3 last year. Furthermore, by June 2015, we are confident to selling all 150 metric tons coming out of the plant.

Last week Mike Timperio, our Senior Global Sales VP, attended SupplySide West, which is the world's largest expo gathering for ingredient supplier and finished product manufacturers. The show attracts over 1700 companies all in one location. Customer interest in NKO and our new condition-specific formulations, NKO Beat, Flex, and Focus, was solid. We expect the new formulations to be available for sale in our fourth quarter and are hopeful that this will translate into additional sales opportunities.

By offering our customers industry-leading products while developing new offering and further strengthening our intellectual property, we're well-positioned to recapture market share and drive profitable results. We are building a stronger company and are well-positioned for the next phase of growth.

Turning to our subsidiary, Acasti, we recently announced positive results for two clinical trials evaluating our investigational new drug candidate, CaPre. Most importantly, CaPre was shown to be safe, well tolerated, and effective in the treatment of five patients with high triglycerides. With these encouraging results, we are well-positioned to seize the opportunities ahead.

Pierre Lemieux will have more to say on Acasti shortly.

Turning to the financials, I would like to remind you that our results are in Canadian dollars, and today's remarks may contain forward-looking statements. As well, the Cherbourg incident rendered, as you realized, difficult and (inaudible) comparisons between year-over-year results.

As usual, my comments today will focus on quarterly results for our nutraceutical business. Consolidated information can be found in our press release, in Neptune's consolidated financial statements, and related MD&A available on SEDAR, EDGAR, and the Investors section of our website.

Switching to the results, second-quarter nutraceutical revenues were CAD2.6 million, down from CAD5.1 million in the prior year. Revenues for the current quarter were impacted by the decision of many clients to wait for Neptune's manufactured krill oil products, which the Company has now begun shipping.

The adjusted gross margin as a percentage of revenue was 30% for the quarter, up from 12% the prior year. The adjusted margins exclude incremental costs related to the plant ramp-up of CAD2.7 million, as well as one-time charges from the impairment of inventories due to the degradation of raw material totaling CAD2.1 million. We expect plant ramp-up costs to decline going forward, in line with increased production capacity.

The quarterly adjusted EBITDA was negative CAD10 million versus negative CAD4 million in the prior year. The decrease was largely related to the aforesaid ramp-up and inventory charges of CAD4.8 million, plus a one-time CAD1.2 million bad debt charge for one significant customer.

To summarize, I would like to highlight that this quarter's results were negatively impacted by approximately CAD6 million of nonrecurring items. As Pierre Fitzgibbon discussed earlier, there was a decision to recognize all of these costs in the current quarter, so we have a pure balance sheet to support our next quarter's completed ramp-up.

Neptune recorded a quarterly net loss of CAD11.4 million for the nutraceutical segment versus a net loss of CAD1.8 million in the prior year. The higher year-over-year net loss is largely due to the reasons mentioned for the year-over-year decrease in adjusted EBITDA. As well in the prior year, Neptune recorded quarterly insurance recoveries of CAD5 million, while nothing was received in the current quarter.

Switching to some consolidated information, as at August 31, 2014, Neptune had consolidated working capital of CAD55.1 million. Cash and short-term investment totaled CAD44.4 million, of which CAD21.8 million related to Acasti and CAD22.6 million was for Neptune.

Looking at Neptune standalone, the quarterly burn rate was approximately CAD4.5 million in the last quarter and is expected to be approximately CAD5 million until we get to cash flow positive.

I will turn the call over to Pierre Lemieux for a minute who will discuss Acasti's clinical trial.

Thank you, Andre. Good morning, everyone.

With the encouraging results we've seen with our -- for our clinical trials to date, we're moving one step closer to potential commercialization of CaPre. In our most recently completed double-blind TRIFECTA trial, CaPre successfully met the trial's primary endpoint, achieving a statistically significant mean placebo adjusted decrease in triglycerides from baseline to week 12 with reductions of 36.4% for 1 gram and 38.6% for 2 grams.

In addition, a statistically significant reduction of 5.2% for non-HDL, cholesterol, considered the most active marker of cardiovascular disease was recorded within the two groups compared to placebo. CaPre was also shown to have a slight decrease in LDL cholesterol or the so-called bad cholesterol at the 2 gram level, and slight increases in HDL cholesterol -- the so-called good cholesterol -- were found at both the 1 and the 2 gram level.

In addition, clinically meaningful reductions of BLDL cholesterol, considered a highly significant predictor of coronary artery disease, were seen. The fact that CaPre does not have deleterious effect on LDL is an important finding as published data with certain EPA/DHA base product on the market has shown an increase in LDL cholesterol.

The results are even more notable when you consider that the majority of the patients had mild to moderate hypertriglyceridemia. Based on literature published, clinical data, and results from our previously completed Phase 2 open-label cold study, greater benefits could be expected in patients with severe hypertriglyceridemia, using higher dosages of CaPre, including a 4 gram loop.

On top of this, results from our recently announced pharmacokinetic or PK study also confirmed CaPre's safety and efficacy. Notably, the bioavailability of CaPre was not meaningfully affected by the fat content of the meal. This is, again, an important finding as a low-fat diet is often part of the management of hypertriglyceridemia patients.

These are encouraging results, which further indicate CaPre may be an important treatment possibility for a medical condition afflicting a large number of adults and for which treatment options are unlimited. We are well-positioned to move forward with our clinical programs.

Looking forward, Acasti expects full TRIFECTA results by year end. Once available, the Corporation will finalize its next steps, including its ongoing discussion with FDA concerning the Phase 3 clinical trial.

The focus of our Phase 3 clinical trial will be on patients with severe hypertriglyceridemia, the only indication currently recognized by the FDA for omega-3-based products.

With that, I'll turn the call back over to John.

Well, thanks, Pierre. Well, this ends our formal remarks today. I will now turn the call over to the operator for the Q&A portion of the call. Operator?

(Operator Instructions). Doug Loe, Euro Pacific.

A couple of questions for me. So, first of all, we were certainly heartened to hear that you thought that you had demand for NKO and EKO at peak capacity of 150 metric tons annual production. Clearly a couple of years ago, you thought that end market demand was at least double that when you made the decision to construct the expansion facilities.

So I just wanted a little bit of additional granularity on what you thought your proportion of market share in the krill oil omega-3 market could be over, say, a -- I don't know, one- to three-year time horizon, over what timeframe you would expect to double capacity to 300, especially since a couple of your peers have announced that they plan on increasing their own capacity to substantially higher levels than that. So that's the first question.

And then sort of related to that, Pierre, in your initial comments, you talked about there being some positive industry tailwinds driving krill oil adoption presumably worldwide. And I just -- we have our own ideas on what those tailwinds might be, but I wonder if you could just provide some additional details on that just from an industry macro environment perspective?

I will just get my questions out of the way here, and you can adjust them in turn. Just a question for Pierre with regard to the TRIFECTA study and the forthcoming discussions with FDA and moving into a pivotal Phase 3 study, I was just wondering if you had any feedback even in these early days as to whether or not the limited number of severely hypertriglyceridemic patients in TRIFECTA might be a -- sort of a cautionary element of TRIFECTA that might motivate FDA to ask that you do an additional US-based Phase 2 study in severely diseased patients and whether or not that may or may not extend timelines to advancing into a Phase 3. Just some comfort around whether or not existing data will be sufficient to allow you to advance directly into a pivotal Phase 3, whatever insights you have on that and on timelines into a pivotal would be helpful. I will leave it there, thanks.

Okay, Doug. So I will try to remember your first question.

Timeline to getting to 300-metric tons capacity, and are you seeing demand to that level as you clearly would have a couple of years ago?

Obviously, as you know, we've been out of the market for two years. So what is important for us is recapture our market share, which we've managed to secure most of it through the transition period. Like I said, by June, we should be able to sell all our capacity, but here and we are going to go through more details in the near future in the strategy -- Neptune strategy, but obviously we are -- our objective is to capture as fast as possible revenue above and beyond the 150 metric ton. But there's work to be done.

We needed to have our product in order to be active on business development. And so the team now is just really active on that front. So I would not give any guidelines on when we would be able to sell the 300-metric ton capacity. But what I can say, though, is that by mid-next year, we will be at full capacity, and that's why we feel very comfortable and optimistic that we will go way beyond that quantity, and that's why we're going to go ahead and move to the next level, which is increasing that 150-metric ton capacity.

This is Pierre speaking. I will answer your second question, but just to piggyback on Andre, I think now we have to be careful here. I think it's inaccurate to say that we are in the position to sell 150 metric tons today. We are beginning to sell NKO, which is very good. We have customer orders but not as expected. It is going to take some time to get to that level.

But while we get there and we will get there, it's very imperative for the Board to get this capacity increase to 300 metric tons with limited CapEx, which will provide obviously the real leverage that will benefit our performance and ultimately our stock price. So we're really focused on these two elements.

On your question on the tailwind, I mean I am just looking, probably the same data as you are, clearly, a couple of factors here. First of all, if you look at the krill oil within the marine spaces, we're going to have a 7% component waiting. So we are looking forward on a worldwide basis with probably an increase of 10% to 15% going forward just on a pure krill business, but also I think there is another factor going on right now as more signs are underlying the krill research, there is a high potential it can displace other biomass in the marine spaces. So I think we're getting both factors in our advantage.

And as far as the volume, to put it in perspective, our indication is that is roughly 800 metric tons of shipment last year. So it's fairly small versus the total shipment, probably over 90,000 metric tons, so I think there's lots of room to grow within that total marine space and I think also within the krill oil.

Great.

And Pierre Lemieux will answer the third question.

Right. So, if I remember your question, you were asking whether or not we will expect some data in the population above the 500 milligram per deciliter.

Well, first of all, I want you to remember that in the next step of Phase 3 we will also be looking at safety data. So that's one thing that we will need to put forward to the FDA. At the same time, we based ourselves on the precedent -- Amarin and Omthera, for instance, in having the Phase 2 data to support their Phase 3. So that means we do not expect Phase 2 data to move forward.

We do have some information on the (inaudible). Unfortunately, we don't have enough patients to really conclude, but certainly we have something in our hands to -- with the FDA. Eventually we can move forward. So there's no concerns overall.

Okay. That's great feedback. Thanks, gentlemen.

Robin Cornwell, Catalyst Research.

Thank you for those comments. They were very useful. I just wanted to talk about the degradation of the krill inventory again. Just to -- if you could just expand a little bit as to what went wrong and whether or not any of the existing inventory now -- I know you said you've taken as many steps as you can to account for any of the inventory, but can you just explain a little bit more what happened?

Yes. Obviously, being out of production for two years, we bought that raw material way back and expecting to be back in production earlier, as you know. With our initial guideline, we were facing some degradation on the inventory that we purchased in 2012. And to answer your question, yes, I think that it covers pretty much everything that we might be facing in terms of loss on this -- or provision on the inventory that we have on hand. We are still managing to try to sell that raw material, but I think that we -- our stand was to be conservative and basically provide for the degradation of the krill that we have from prior years.

Okay. And I guess just following through on that, the sales of the krill supplied by Rimfrost were lower, and there has been some commentary that the demand for krill oil in the US has somewhat matured. Can you make a comment as to both why the sales are lower this quarter?

Sales from Rimfrost you mean?

From Rimfrost, yes.

I mean I can answer that, and maybe -- Mike Timperio's on the line, he might add to my comment. But we were in a situation where, like I previously said, that a lot of our customers were expecting Neptune to be shipping NKO. So it did have an impact on Q2 in terms of revenue obviously.

We could have shipped Rimfrost to our customers, but they were willing to wait and wait for the NKO, which we will get in Q4. So it's not a question of the demand going -- being weaker, it's just a decision that our distributor took.

And having said that, though, we will keep on shipping Rimfrost oil, and there is still demand on our distribution for that oil. So there will be a combination of both net NKO and Rimfrost, but obviously making more emphasis on our manufactured product.

Okay. And I guess just finally, their comment that the plant could be then now expanded to 300,000, was I clear in hearing Pierre when he mentioned that you would -- I just wasn't clear as to relocating closer to the supplier of krill. Is that -- would you be outsourcing your production after the 300,000?

No, maybe there were two concepts. Maybe I wasn't clear enough. First, I think although the original design was for 150 metric ton, clearly the true benefit will come once we get to 300. And I think in the design phase, it was conceived that we would get there with limited CapEx. That is the project demand it was currently refining. But obviously the key was to get to 150 metric ton, which we should get to in the next 30, 45 days. So that's an important project.

Aside from that, the other project is to get closer to the biomass and to that end where the plant is located, but the biomass is coming from obviously a different source. So the further integrated we can become, either through partnership association and what not, we can have a better assessment of our krill sourcing, which will ultimately provide also some cause benefits for better yield in plants.

So I think what we said is that as a separate exercise, the whole supply chain has to be reviewed in much more detail, which we will. And that's just to get better access -- to get access to better higher yield quality by one. Is that clear?

Yes, thank you very much. That's all I have right now.

Chen Lin, Lin Asset Management.

My question is mainly on the financial side. You mentioned you have the sufficient capital into the product cash flow positive. So you saw the cash -- share buyback program, which did very good in these market conditions. Can I ask what kind of balance sheet you're looking at at the end of this quarter in both Neptune and Acasti, and when do you think you would expect to get into the cash flow positive territory?

Obviously we will get to cash flow positive territory as soon as the plant is fully ramped up. So there will be still a cash burn, like I said. My estimate is CAD4 million, CAD5 million until we get there. It should be by early next year, calendar 2015. And so in terms of cash position, we are roughly north of CAD20 million right now. So we should be obviously around the CAD15 million targets when we get to cash flow positive.

In terms of Acasti, Acasti now has a little bit more than CAD20 million in its bank account, and until we -- the burn rate is quite limited until they actually initiate their Phase 3 study.

But to be clear -- this is Pierre speaking, I think it's very clear to us that Acasti's cash will be preserved for the development of the trial. So, therefore, the stock buyback is a Neptune issue, and of the CAD20-odd million we have and Andre said, we earmarked CAD5 million for cash burn -- cash flow positive is CAD15 million less of that number. We will take a portion of it to act on the buyback, and that will be obviously depending on market conditions.

Great. Thank you. The next question is the company, Acasti. Do you plan to go through with the Phase 3 on your own, or are you -- you are looking for partners to carry some of the cost?

For the time being, I mean the discussion -- there was discussion at the Board level. The strategy for now, which remains to be confirmed, is to be going on the Phase 3 standalone.

Okay. Thank you.

Dan Trang, Stonegate Securities.

Wondering what the response has been from your customers now that you have the plant up and running now?

Let me -- Mike, are you on the line? Can you answer this one?

Yes. Do you hear me well?

Yes, we do.

Actually, you know, I just transferred. Obviously there is a bit of a trust that we are going to be delivering on product again and relief to a degree because a lot of people have marketed NKO very aggressively over the years. So the customers overall are just waiting for us to ship to the level they need, and I've been waiting for it while using third-party products.

So to answer your questions, the customers that we kept obviously on board are quite excited again that we're going to be delivering them products.

So there is no -- there is absolutely no right now deception obviously because the deception was when the whole thing happened three years ago. Today there is more like a progressive momentum in terms of what we can ship and when. So we are answering to these customers as we speak.

Okay. When can you expect sales to return to historic levels?

As Mr. Fitzgibbon talked about, in two years, a lot of things happened in the market, so we need to reset the strategies, which I added to some of them. In terms of where we should be, as soon as we hit the full capacity level, we will be close to -- close if not exceeding the historically high number, which was year 2012, 2013. So we should be there as soon as we have the capacity. And this is right now -- this right now looking to third-quarter 2015. Second-quarter 2015.

Yes, so let me be clear on this one. Like I said earlier, by June, which is the second quarter of 2015 -- 2015, 2016 fiscal year, which is June 2015 to August, which is basically roughly a year from now, a little bit less, we should be able to sell all our capacity.

Second quarter of fiscal year.

Okay. And switching gears a bit, what is the reasoning behind stock repurchase aside from just -- obviously it is at a low level, but kind of wanted to know why you decided to implement that?

Well, first I think -- it was specifically to use the excess cash. As you see on our balance sheet, we have a little bit more than CAD20 million net. And on the nets and balance sheet, more than CAD20 million cash.

So obviously with management strategy, we are going to keep some money for strategic projects. Obviously the first and the foremost important allocation of fund is to get to cash flow positive. And after a deep assessment of that -- of the different scenarios, we felt that there were a significant amount of money available. And frankly, we are opportunistic because from a return perspective, I think buying our own stock is the best return we can have of any process out there or available. And that is based on today's market condition.

NCIB's benefit provides flexibility. If that changes in the future, we may change our minds. And we have other potential source of cash for investment, but right now at the board level, we felt that buying our stock would be the best return available without impacting the Company's ability to operate, of course.

Quinn Goldman, Park City Capital.

This is Quinn here. Thanks for taking my calls. First, I want to commend you all on the initiation of the buyback. It certainly puts management and the Board squarely in line with shareholders, so definitely appreciate that.

One, on the buyback specifically, it sounds like you guys are waiting to initiate that or actually go into market to buy, and so you are cash flow positive. So I just want to make sure I get the timing right that that view is going to be early 2015 where you would actually be in the market purchasing stock?

No, no, I wasn't clear, I apologize. What I said is that we have a good handle on how much cash we need out of our reserve to invest in the plant to be cash flow positive. So we have that earmarked.

Notwithstanding that, we will be acting as soon as we get the approbation depending on the market conditions. We have value today, and I don't even know exactly when, but see next week we are ready to go. Then we will be able to act at that time, and the Board will be, as you have seen back on an ongoing basis with management, we will be able to act as soon as we get the approval from the authorities.

Okay. Great. Thanks for that clarification. And then my second question relating to Acasti, I know you guys are kind of waiting to really elaborate on everything until the new CEO is announced, and Andre, you commented earlier that the current strategy is to do Acasti Phase 3 trials alone. But given kind of the price reaction following the trial results, was there any consideration to just buying Acasti outright? The ownership stake you guys don't own?

Let me give the Board perspective. No, this is something we've definitely discussed obviously from a Neptune perspective looking at our investment in Acasti. But, frankly, I mean there are various fish to fry, and I think that from a Neptune perspective, our focus number one is to get our costs down as low as possible at the plant and being through Michel's effort to get our sales back. So I think there's enough on our plate right now, and I think Acasti has significant management. There are some board members that are focused exclusively on Acasti. I think for the time being, that's the right balance, which we feel is appropriate given what we have on our plate at Neptune. That could change in the future, but right now that's our path forward.

Okay. Thanks, guys. Appreciate the color.

Ray Gordos, Forte Capital.

I am looking through the results, and I like the fact you guys are going after research and development. It sounds like you guys got a real game plan together, but it sounds like you're walking a very tight line between the share buyback, the research and development, the marketing costs, and then looking for a way to increase production when you get to 150,000.

So considering 35% margins and the idea that you will be able to sell 150,000 of your full capacity by the second quarter, you're talking about two quarters of burn, which is roughly CAD10 million, not including your buyback, and then you're looking at roughly CAD15 million in sales on that quarter where you are expected to be at full capacity and selling full capacity at roughly CAD4.5 million to CAD5 million who are looking at roughly breakevens. Where are you guys going to come up with the capital to take the plant from 150,000 to 300,000 tons or to increase your production for additional revenues in the future?

The CAD5 million that I previously mentioned on the cash burn was to get to the cash flow position -- cash flow breakeven position or positive position. So it's not CAD5 million per quarter. So it's a CAD5 million loan. So -- and in terms of -- what was the other question?

I think Andre is right. First of all, the cash burn to get cash positive is not CAD15 million (inaudible). Secondly, the CAD150 million to CAD300 million plan to expansion will not be done in a symmetric way unless we spend it in the first phase. So we're talking about limited CapEx, and we have no handle on that now. But if not, it would be material. And C), if you look at the stock buyback, we can buy a portion of our stock because we have announced the first phase will be for 1.5 million shares. Do the math on how much that represents, it is a subtraction of our CAD20 million.

Because your point is well taken. It would be foolish to buy stock and then realize in six months when we go back to the market, that it will be an unacceptable situation for Neptune. And believe me, we are looking to that, and as the Board, we will be also looking advantage of how much we're going to buy on these stock buybacks. So we are going to go with the first phase. The first phase is up to 1.5 million shares on each bite. So I think we are clearly going to keep that point of yours in mind.

We've been clear on the expansion from 150,000 to 300,000. We want to have limited CapEx, and this is what management is working at finding ways to increase their capacity without having to invest. I think that we've invested enough. We have to be imaginative and find ways to double the capacity without -- with very minimal investments.

Okay. So maybe I misunderstood, but I thought I heard that burn is going to be about CAD5 million in the quarter.

No, it was CAD5 million until we get to cash flow positive, which we believe will happen early 2015.

Okay. But if you are burning CAD5 million, you need CAD15 million in sales with your margins in order to make that CAD5 million back, correct?

Yes.

Okay. So, in order to be at CAD15 million in revs considering what happened before when the plant was fully operational, you would have to be at CAD60 million a year, which is roughly full capacity, correct?

Yes, correct.

And you guys did state that you expect to be selling full capacity by the second quarter of next year, not the first?

Yes, but I mean we have Rimfrost as well as our third-party manufacturer. We will be generating revenue from this third-party. Like I previously said, we go hand-in-hand with Rimfrost. So there will be revenue coming from there, and let's not forget there's potential royalties that -- not potential. We are getting royalties from Rimfrost and also potentially from Aker and Enzymotec when the case with ESPT was resolved. So there's a lot of potential revenue that will definitely help the cash position of Neptune.

Just to add to Rick's question, actually with the 150-metric ton capacity, we will be in excess of CAD20 million a year. So we talk about the breakeven condition with CAD15 million, that should be exceeded, starting in the third quarter. So there is projection, which we were talking about a burn rate, a total over the next two quarters of CAD5 million, and we expect really by the second quarter of fiscal year to now start to be in the cash flow positive position.

I think your point is well taken. There's no question that we will not allow cash to be used foolishly and then to realize we weren't receiving cash. Your point is well taken, but we feel comfortable with the actions that we have taken.

Okay. Thank you, guys.

Robin Cornwell, Catalyst Research.

I just had a follow-up, and back to the same issue of expanding the plant to 300,000, you could expand it by increasing productivity with the existing structure you have. But you would -- we seem to be talking also that you are going to add to -- physically to the plant. Can you just maybe walk us through? Because I think there's perhaps a little confusion as to how you could get to 300,000 and not necessarily spend too much CapEx. I know you don't want to give away trade secrets, but I think this is a fairly important step for the future revenues.

Yes. I won't tell you all my secrets, Robin, but there's some information I can share. We are -- we have put in place a community that is basically fully dedicated at finding a solution and different option to increase our capacity from 150,000 to 300,000. There is the standard way to do it, which would be adding equipment, which is the last option that we want on the table. But there are different solutions or different options, I should say, that we are looking at right now, which basically goes by concentrating the throughput in the process, whether it is through different technology by, for example, decreasing the water content or slightly changing the raw material or the combination of raw material.

And this is basically at fairly low cost. There will be some cost story, but very minimal investments. And because of the structure of the plant as is, it can accommodate -- a lot of the equipment in the system can accommodate 300 metric tons. But we are limited by the yield of the raw materials that we're treating at the beginning of the process. So these are different options that we are focusing on in order to increase the capacity at very minimal costs.

That's very good. Thank you. I just have one other question. Can you update us on the USPTO timing? Is there any change in timing that you manage?

Benoit Huart will answer this question.

As far as the IPR or the decision or the hearing for the staffing board, everything is on schedule. We expect a hearing soon, and we anticipate the decision in early 2015.

Sorry, early 2000 and -- ?

2015.

2015. Okay.

Calendar year.

Okay. Thank you very much.

(Operator Instructions). [Serj Parkra], Aegis Capital.

Two things. In respect to Neptune, can you show a little more color on the efforts on the marketing and sales primarily for the big-box stores and a little more color on whether or not you have any prospects as far as the new CEO?

Yes, well, I think -- let me add to this. Let's be clear to the last one. I think even on the call and I spoke, but we are taking this process very seriously, the CEO search. We are -- we have spent -- I and three of my colleagues on the board -- Jerry, John, and Harlan -- we've spent some time with outside candidates and with our inside candidate, Andre. And now that we have a strategy that is pretty much set in consensual -- or on a consensus basis, management and the board, it's an easier platform out to fill the skill set to lead the Company forward. So I'm hopeful that by the latest, end of November, we will make an announcement on our CEO.

As far as the first question, I know Michel is there, I will leave Michel to elaborate, but we basically reviewed how we should get to market and concluded that the food, drug and mass, which offers the largest segment in the US, of course, but also there's probably where you have the redder ocean, so I say. So, therefore, we have to go at that diligently. So we decided that the white-label, private-label for branding had to go. And now at this point in time, we shouldn't get too specific, but maybe Michel, you can provide some color in terms of our comfort level as we can be benefit seating in approaching some of the major players in that market segment?

Okay. Thank you. Now what about Acasti?

Michel -- you want to add, Michel, on that what I said?

Well, I think at this point, we are definitely proactive in enacting with the private-label oils brand. I should say we will go to the big bucks starting in Canada, but also having firmed up some discussion to a possible partnership to equip their stores with a better delivery system and possibly adding to the supply chain by association.

So we cannot really disclose at this point exactly the US strategy, but in Canada we are actually very active right now with the stores, and we obviously have a pretty good situation, having a better product overall to propose to basically all those brands. So there is great receptivity, and we're very proactive on it.

Okay. Wonderful. And in respect to the casting, what is your strategy and what is your game plan as far as getting more patients for the next trial? How does that look?

Well, first of all, the first strategy is to have a CRO based in the US, so mainly the trial will be done in the US. And we know that it's not going to be a problem to recruit in patients with high triglycerides in that country. It's going to be a North American trial, so we are going to still have some Canadian centers. But to have a different CRO running and having multiple settings in the US will do the trick, so I don't think we foresee any problems over there.

Do you plan on doing a test on higher counts? You did the 1 gram and 2 gram. Do you anticipate doing a 3 gram and 4 gram?

Yes, the 4 grams, yes. 2 grams and 4 grams, that's right, compared to placebo.

Okay. Looking forward to it. Thank you

Rick Schottenfeld, Coyote Capital.

Going to the Acasti side, I just want to understand, we talked earlier about partnership for CaPre, and you said your preference was to go it alone. As a company with limited pharmaceutical experience, have you had meetings with pharmaceutical companies and concluded that the deals they are offering aren't compelling? Because obviously we are going to need capital for those trials, and I just want to understand more about the thought process for not partnering on CaPre.

Rick, I think this is actually a very good question, and this is something that the relevant board members that are -- have experience are addressing right now with Pierre. So if you allow, I would like not to answer that question because the strategy of Acasti is not quite finished. I think that on the trial side, it's clear where we think we should be going, but how we do it, there are CAD20-odd million where that gets us, and we are right into discussion with that. Actually there are some more qualified board members in line to talk about that. I would like to defer that question if you don't mind.

All right. Thanks.

Thank you. I am showing no further questions at this time. I would like to turn the conference back over to John Ripplinger for closing remarks.

Well, thank you, everybody. This ends our Q2 conference call. Thank you for joining us today. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.