UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Amendment No. 1
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission File Number
(Exact name of Registrant as specified in its Charter)
Not Applicable |
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(State or other jurisdiction of in Company or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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☒ |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on September 1, 2023, was $3,376,464.
The number of shares of Registrant’s Common Stock outstanding as of September 1, 2023 was
1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Quarterly Report" or “Form 10-Q”) contains or incorporates by reference certain information and statements that may constitute forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of U.S. federal securities laws, both of which we refer to as forward-looking statements, including, without limitation, statements relating to certain expectations, projections, new or improved product introductions, market expansion efforts, and other information related to our business strategy and future plans. Forward-looking statements can, but may not always, be identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “would”, “should”, “believe”, “objective”, “ongoing”, “assumes”, “goal”, “likely” and similar references to future periods or the negatives of these words and expressions and by the fact that these statements do not relate strictly to historical or current matters. The statements we make regarding the following matters are forward-looking by their nature and are based on certain of the assumptions noted below. Forward-looking statements in this Quarterly Report may include, but are not limited to, statements about expectations regarding being subject to taxation in both Canada and the United States; our ability to obtain additional financing in the future and continue as a going concern; uncertainties related to general economic, political, business, industry, and market conditions, including the ongoing COVID-19 pandemic and military conflict between Russia and Ukraine, inflationary pressures, and geopolitical conflicts, the anticipated benefits from the divestiture of our cannabis business, our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; our expectations regarding potential pursuit of strategic acquisitions, joint venture or partnerships, our ability to retain members of our management team and our employees; competition existing today or that will likely arise in the future; and our ability to satisfy the continued listing requirements of the Nasdaq or any other exchange on which our securities may trade on.
These forward-looking statements are based on management’s current expectations and are subject to a number of risks, uncertainties, and assumptions, including market and economic conditions, the effect of the COVID-19 pandemic, business prospects or opportunities, future plans and strategies, projections, technological developments, anticipated events and trends and regulatory changes that affect us, our customers and our industries. Although the Company and management believe that the expectations reflected in such forward-looking statements are reasonable and based on reasonable assumptions and estimates, there can be no assurance that these assumptions or estimates are accurate or that any of these expectations will prove accurate. Forward-looking statements are inherently subject to significant business, economic and competitive risks, uncertainties and contingencies that could cause actual events to differ materially from those expressed or implied in such statement.
Undue reliance should not be placed on forward-looking statements. Actual results and developments are likely to differ, and may differ materially, from those anticipated by the Company and expressed or implied by the forward-looking statements contained or incorporated by reference in this Quarterly Report. Such statements are based on a number of assumptions and risks that may prove to be incorrect, including, without limitation, assumptions about:
2
Certain forward-looking statements contained herein and incorporated by reference concerning the Company’s business and operations are based on estimates prepared by the Company using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of the industry in which the Company operates which the Company believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While the Company is not aware of any misstatement regarding any industry or government data presented herein, the industry in which the Company operates involves risks and uncertainties and is subject to change based on various factors. Many factors could cause our actual results, level of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by forward-looking statements, including, without limitation, the factors discussed under “Risk Factors” in the Annual Report on Form 10-K for the year ended March 31, 2023. In particular, you should consider the following risks that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements:
There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those expressly or implied expected or estimated in such statements. Shareholders and investors should not place undue reliance on forward-looking statements as the plans, intentions or expectations upon which they are based might not occur. Although the Company cautions that the foregoing list of risk factors, as well as those risk factors presented under the heading “Risk Factors” and elsewhere in this Quarterly Report, are not exhaustive, shareholders and investors should carefully consider them and the uncertainties they represent and the risks they entail. The forward-looking statements contained in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. Unless otherwise indicated, forward-looking statements in this Quarterly Report describe our expectations as of the date of this Quarterly Report and, accordingly, are subject to change after such date. We do not undertake to update or revise any forward-looking statements for any reason, except as required by applicable securities laws.
3
Risks Factors Summary
Set forth below is summary of some of the principal risks the Company faces:
Risks Relating to our Business and Industry:
Risks Relating to Our Accounting and Financial Policies
Risks Relating to Our Liquidity
Legal and Regulatory Risks Relating to Our Business
Risks Relating to Our Human Resources
4
Risks Relating to Our Information Technology
Risks Relating to Our Intellectual Property
Risks Relating to Ownership of Our Common Shares
General Risk Factors
Explanatory Note
Management has determined, after discussion with the Company’s independent registered public accounting firm, that the accounting policy change in the Original form 10Q should not have been implemented and there was a correction to the recasting of the prior year numbers. The decision was made to keep the Cost of sales and selling, general and administrative expenses consistent with the prior year.
The effect of the restatement is to increase cost of sales by $1,468,648 with an offsetting decrease in selling, general and administrative expense for the three month period ended June 30, 2023, and a decrease in cost of sales by $1,585,120 with an offsetting increase in selling, general and administrative expense for the three month period ended June 30, 2022. There was no effect on net loss, cash flows or financial position as a result of this restatement.
In addition management decided to adjust the estimate for the contingent liability recorded in the Original filed 10-Q to reflect the arbitrator award for PMGSL Holdings LLC as reported in the 8-K filed August 25, 2023. The effect of this restatement was an increase in accrued expenses of $3,400,000 with a corresponding increase in other expenses.
Correspondingly, this Amendment amends and restates Items 1 and 2, which includes our revised discussion of operating results to reflect the impact of the correction.
In addition, the Exhibit Index in Item 6 of Part II of the Original Form 10-Q is hereby amended and restated in its entirety and new certifications of the Company’s principal executive officer and principal financial officer required under Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 dated as of the date of filing of this Amendment are filed and furnished, as applicable, as exhibits to this Amendment.
Table of Contents
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Page |
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PART I. |
7 |
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Item 1. |
7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
37 |
5
Item 3. |
56 |
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Item 4. |
57 |
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PART II. |
59 |
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Item 1. |
59 |
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Item 1A. |
60 |
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Item 2. |
61 |
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Item 3. |
61 |
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Item 4. |
61 |
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Item 5. |
61 |
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Item 6. |
62 |
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63 |
In this Quarterly Report on Form 10-Q, all dollar amounts are in United States Dollars unless otherwise indicated.
6
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
Condensed Consolidated Interim Financial Statements of
(Unaudited)
neptune WELLNESS SOLUTIONS inc.
For the three-month periods ended June 30, 2023 and 2022
7
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Financial Statements
(Unaudited)
For the three-month periods ended June 30, 2023 and 2022
Financial Statements
8
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Balance Sheets (Unaudited)
(in U.S. dollars)
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As at |
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As at |
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Notes |
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June 30, |
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March 31, |
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Assets |
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Restated |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
Short-term investment |
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Trade and other receivables |
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Prepaid expenses |
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Inventories |
5 |
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Total current assets |
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Property, plant and equipment |
6 |
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Operating lease right-of-use assets |
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Intangible assets |
7 |
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Goodwill |
7 |
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Total assets |
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$ |
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$ |
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Liabilities and Equity (Deficiency) |
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Current liabilities: |
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Trade and other payables |
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$ |
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$ |
Current portion of operating lease liabilities |
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Loans and borrowings |
8 |
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Provisions |
9 |
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Liability related to warrants |
10 |
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Total current liabilities |
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Operating lease liabilities |
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Loans and borrowings |
8 |
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Other liability |
13(c) |
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Total liabilities |
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Shareholders' Equity (Deficiency): |
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Share capital - par value ( |
11 |
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Warrants |
14 |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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( |
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( |
Deficit |
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( |
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( |
Total equity (deficiency) attributable to equity holders of the Company |
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( |
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( |
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Non-controlling interest |
12 |
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( |
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( |
Total shareholders' equity (deficiency) |
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( |
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( |
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16 |
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Subsequent events |
18 |
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Total liabilities and shareholders' equity (deficiency) |
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$ |
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$ |
See accompanying notes to the condensed consolidated interim financial statements.
On behalf of the Board: |
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/s/ Julie Philips |
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/s/ Michael Cammarata |
Julie Philips |
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Michael Cammarata |
Chair of the Board |
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President and CEO |
9
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Statements of Loss and Comprehensive Loss
(Unaudited) (in U.S. dollars)
For the three-month periods ended June 30, 2023 and 2022
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Three-month periods ended |
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Notes |
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June 30, |
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June 30, |
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Restated |
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Restated |
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$ |
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$ |
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Royalty revenues |
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Other revenues |
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Total revenues |
16 |
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impairment loss on inventories |
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( |
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( |
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Impairment loss on inventories |
5 |
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— |
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( |
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Total cost of sales |
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( |
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( |
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Gross profit (loss) |
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( |
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Research and development expenses |
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( |
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( |
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Selling, general and administrative expenses |
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( |
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( |
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Impairment loss on assets held for sale |
4 |
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— |
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( |
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Net gain on sale of property, plant and equipment |
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— |
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Loss from operating activities |
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( |
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( |
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Finance income |
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— |
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Finance costs |
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( |
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( |
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Foreign exchange gain (loss) |
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( |
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Loss on issuance of derivatives |
10 |
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( |
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( |
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Gain on revaluation of derivatives |
10, 15 |
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Total other income (expense) |
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Loss before income taxes |
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( |
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( |
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Net loss |
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( |
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( |
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Other comprehensive loss |
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Net change in unrealized foreign currency losses |
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( |
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( |
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Total other comprehensive loss |
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( |
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( |
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Total comprehensive loss |
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$( |
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$( |
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Net loss attributable to: |
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Equity holders of the Company |
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$( |
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$( |
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Non-controlling interest |
12 |
|
( |
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( |
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Net loss |
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$( |
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$( |
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Total comprehensive loss attributable to: |
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Equity holders of the Company |
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$( |
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$( |
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Non-controlling interest |
12 |
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( |
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( |
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Total comprehensive loss |
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$( |
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$( |
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Basic loss per share attributable to: |
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Common Shareholders of the Company |
14 |
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$( |
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$( |
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Diluted loss per share attributable to: |
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Common Shareholders of the Company |
14 |
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$( |
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$( |
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Basic and diluted weighted average number of common shares |
14 |
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The Company has removed certain captions compared to prior filings, as they are not required by US GAAP.
See accompanying notes to the condensed consolidated interim financial statements.
10
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Statements of Changes in Equity
(Unaudited) (in U.S. dollars)
For the three-month periods ended June 30, 2023 and 2022
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Accumulated |
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other |
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comprehensive |
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Share Capital |
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loss |
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||
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Notes |
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Number |
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Dollars |
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Warrants |
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Additional |
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Cumulative |
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Deficit |
|
Equity attributable to equity holders of the Company |
|
Equity attributable to non-controlling interest |
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Total |
Balance as at March 31, 2023 |
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$ |
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$ |
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$ |
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$( |
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$( |
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$( |
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$( |
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$( |
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Net loss for the period |
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— |
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— |
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— |
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— |
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— |
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( |
|
( |
|
( |
|
( |
Other comprehensive loss for the period |
|
|
— |
|
— |
|
— |
|
— |
|
( |
|
— |
|
( |
|
— |
|
( |
Total comprehensive loss for the period |
|
|
— |
|
— |
|
— |
|
— |
|
( |
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( |
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( |
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( |
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( |
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Transaction with equity holders recorded directly |
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Contributions by and distribution to equity holders |
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Share-based payment |
13 |
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— |
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— |
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— |
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— |
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— |
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— |
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Warrants exercised |
11(f) |
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( |
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— |
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— |
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— |
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— |
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Direct Offering (including pre-funded warrants), |
11(h) |
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— |
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— |
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— |
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— |
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Total contributions by and distribution to equity holders |
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— |
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— |
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— |
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||||||
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Balance as at June 30, 2023 |
|
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|
$ |
|
$ |
|
$ |
|
$( |
|
$( |
|
$( |
|
$( |
|
$( |
See accompanying notes to the condensed consolidated interim financial statements.
11
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Statements of Changes in Equity (Continued)
(Unaudited) (in U.S. dollars)
For the three-month periods ended June 30, 2023 and 2022
|
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Attributable to equity holders of the Company |
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Accumulated |
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other |
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|
|
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|
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comprehensive |
|
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|
|
|
|
|
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Share Capital |
|
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|
loss |
|
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||
|
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|
Number |
|
Dollars |
|
Warrants |
|
Additional |
|
Cumulative |
|
Deficit |
|
Equity attributable to equity holders of the Company |
|
Equity attributable to non-controlling interest |
|
Total |
Balance as at March 31, 2022 |
|
|
|
$ |
|
$ |
|
$ |
|
$( |
|
$( |
|
$ |
|
$ |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
( |
|
( |
Other comprehensive loss for the period |
|
|
— |
|
— |
|
— |
|
— |
|
( |
|
— |
|
( |
|
— |
|
( |
Total comprehensive loss for the period |
|
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
( |
|
( |
|
( |
|
|
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|
|
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|
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|
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Transaction with equity holders recorded directly |
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|
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Contributions by and distribution to equity holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment |
13 |
|
— |
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|||
RSUs released, net of withholding taxes |
11(d), 13(b)(ii) |
|
|
|
— |
|
( |
|
— |
|
— |
|
( |
|
— |
|
( |
||
Direct Offering (including pre-funded warrants), |
11(h) |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
Total contributions by and distribution to equity holders |
|
|
|
|
– |
|
|
— |
|
— |
|
|
— |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at June 30, 2022 |
|
|
|
$ |
|
$ |
|
$ |
|
$( |
|
$( |
|
$ |
|
$ |
|
$ |
See accompanying notes to the condensed consolidated interim financial statements.
12
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Statements of Cash Flows
(Unaudited) (in U.S. dollars)
For the three-month periods ended June 30, 2023 and 2022
|
|
|
|
||
|
|
|
Three-month periods ended |
||
|
Notes |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
Net loss for the period |
|
|
$( |
|
$( |
Adjustments: |
|
|
|
|
|
Depreciation of property, plant and equipment |
|
|
|
||
Non-cash lease expense |
|
|
|
||
Amortization of intangible assets |
|
|
|
||
Share-based payment |
13 |
|
|
||
Impairment loss on inventories |
5 |
|
— |
|
|
Expected credit losses |
|
|
|
||
Loss on issuance of derivatives |
|
|
|
||
Net finance expense |
|
|
|
||
Unrealized foreign exchange (gain) loss |
|
|
|
( |
|
Interest paid |
|
|
( |
|
— |
Revaluation of derivatives |
|
|
( |
|
( |
Impairment loss on assets held for sale |
4 |
|
— |
|
|
Payment of lease liabilities |
|
|
( |
|
— |
Net gain on sale of property, plant and equipment |
|
|
— |
|
( |
Changes in operating assets and liabilities |
|
|
|
( |
|
Net cash used in operating activities |
|
|
( |
|
( |
Cash flows from investing activities: |
|
|
|
|
|
Acquisition of property, plant and equipment |
|
|
( |
|
— |
Net cash used in investing activities |
|
|
( |
|
— |
Cash flows from financing activities: |
|
|
|
|
|
Repayment of loans and borrowings |
|
|
( |
|
— |
Net increase in loans and borrowings, net of financing fees |
|
|
|
— |
|
Gross proceeds from the issuance of shares and warrants through a Direct Offering |
10 |
|
|
||
Shares and warrants issuance costs |
10 |
|
( |
|
( |
Proceeds from exercise of options and pre-funded warrants |
10 |
|
|
||
Net cash provided by financing activities |
|
|
|
||
Foreign exchange gain (loss) on cash and cash equivalents |
|
|
|
( |
|
Net decrease in cash and cash equivalents |
|
|
( |
|
( |
Cash and cash equivalents, beginning of period |
|
|
|
||
Cash and cash equivalents as at June 30, 2023 and 2022 |
|
|
$ |
|
$ |
|
|
|
|
|
|
Cash and cash equivalents is comprised of: |
|
|
|
|
|
Cash |
|
|
$ |
|
$ |
See accompanying notes to the condensed consolidated interim financial statements.
13
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Statements of Cash Flows (continued)
(Unaudited) (in U.S. dollars)
For the three-month periods ended June 30, 2023 and 2022
Additional cash flow disclosure:
Changes in operating assets and liabilities:
|
|
Three-month periods ended |
||
|
|
June 30, |
|
June 30, |
|
|
|
|
|
Trade and other receivables |
|
$ |
|
$( |
Prepaid expenses |
|
( |
|
( |
Inventories |
|
( |
|
( |
Trade and other payables |
|
|
||
Deferred revenues |
|
— |
|
|
Provisions |
|
|
||
Other liabilities |
|
( |
|
( |
Changes in operating assets and liabilities |
|
$ |
|
$( |
14
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
1. Reporting entity:
Neptune Wellness Solutions Inc. (the "Company" or "Neptune") is incorporated under the Business Corporations Act (Québec) (formerly Part 1A of the Companies Act (Québec)). The Company is domiciled in Canada and its registered office is located at 100-545 Promenade du Centropolis, Laval, Québec. The condensed consolidated interim financial statements of the Company comprise the Company and its subsidiaries, Biodroga Nutraceuticals Inc. ("Biodroga"), SugarLeaf Labs, Inc. ("SugarLeaf"), 9354-7537 Québec Inc., Neptune Holding USA, Inc., Neptune Health & Wellness Innovation, Inc., Neptune Forest, Inc., Neptune Care, Inc. (formerly known as Neptune Ocean, Inc.), Neptune Growth Ventures, Inc., 9418-1252 Québec Inc., Neptune Wellness Brands Canada, Inc. and Sprout Foods, Inc. (“Sprout”). All subsidiaries are wholly-owned, except for Sprout for which the Company has a
Neptune is a diversified and fully integrated health and wellness company. Through its flagship consumer-facing brands, Neptune Wellness, Forest Remedies, Biodroga, MaxSimil®, Sprout®, Nosh® and NurturMe®, Neptune is redefining health and wellness by building a broad portfolio of natural, plant-based, sustainable and purpose-driven lifestyle brands and consumer packaged goods products in key health and wellness markets, including nutraceuticals and organic baby food.
On June 8, 2022, Neptune announced the launch of a new Consumer Packaged Goods ("CPG") focused strategic plan to reduce costs, improve the Company's path to profitability and enhance current shareholder value. This plan builds on the Company's initial strategic review that took place in fall of 2021 and focuses on two primary actions: (1) the divestiture of the Company's Canadian cannabis business and (2) a realignment of focus and operational resources toward increasing the value of Neptune's CPG business.
Sale of Cannabis Assets
On October 17, 2022, Neptune announced an agreement to sell substantially all of its Cannabis assets (including, but not limited to, the production facility located in Sherbrooke, Québec and certain legal entities including various related brand names and trademarks, including MoodRing and PanHash) to PurCann Pharma Inc. These assets were reported as Assets Held For Sale ("AHFS") as of September 30, 2022. On November 9, 2022 the sale to PurCann Pharma Inc. was completed.
Share consolidation and delisting from TSX
On June 9, 2022, Neptune announced the completion of the Company's proposed consolidation of its common shares (the "Common Shares") on the basis of one (1) post-consolidation Common Share for every thirty-five (35) pre-consolidation Common Shares (the "Share Consolidation"). The post-consolidation Common Shares commenced trading on the NASDAQ and the TSX at the market open on June 13, 2022. The Share Consolidation reduced the number of Common Shares issued and outstanding from approximately
On July 29, 2022, Neptune announced that it has applied and received approval for a voluntary delisting of its common shares from the Toronto Stock Exchange ("TSX"). The delisting from the TSX will not affect the Company's listing on the Nasdaq Capital Market ("Nasdaq"). Neptune's common shares were delisted from the TSX at the close of trading on August 15, 2022.
Going concern
These condensed consolidated interim financial statements have been prepared on a going concern basis, which presumes that the Company will continue realizing its assets and discharging its liabilities in the normal course of business for the foreseeable future. The Company has incurred significant operating losses and negative cash flows from operations since inception. To date, the Company has financed its operations primarily through the public offering and private placement of Common Share units, consisting of Common Shares and warrants, convertible debt, the proceeds from research grants and research tax credits, and the exercises of warrants, rights and options. For the three-month period ended June 30, 2023, the Company incurred a net loss of $
As of the date these financial statements are authorized for issuance, there is minimal cash balance. The Company requires funding in the very near term in order to continue its operations. The Company’s lack of cash resources and current share price may adversely affect its ability to raise new capital and execute its business strategy. If the Company is unable to obtain funding in the very near-term, it may have to cease operations and liquidate its assets.
These conditions cast substantial doubt about the Company's ability to continue as a going concern.
Going forward, the Company will seek additional financing in various forms. To achieve the objectives of its business plan, Neptune plans to raise the necessary funds through additional securities offerings and the establishment of strategic alliances. The ability of the Company to complete the needed financing and ultimately achieve profitable operations is dependent on a number of factors outside of the Company’s control and subject to market conditions. The Company’s business plan is dependent upon, among other things, its ability to achieve profitability, continue to obtain adequate ongoing debt and/or equity financing to finance operations within and beyond the next twelve months.
These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the going concern basis not be valid. These adjustments could be material.
Restatement
Management has determined, after discussion with the Company’s independent registered public accounting firm, that the accounting policy change in the Original form 10-Q should not have been implemented and there was a correction to the recasting of the prior year numbers. The decision was made to keep the Cost of sales and selling, general and administrative expenses consistent with the prior year.
15
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
The effect of the restatement is to increase cost of sales by $
In addition management decided to adjust the estimate for the contingent liability recorded in the Original filed 10-Q to reflect the arbitrator award for PMGSL Holdings LLC as reported in the 8K filed August 25, 2023. The effect of this restatement was an increase in accrued expenses of $
2. Basis of preparation:
These condensed consolidated interim financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) as codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).
Effective March 31, 2022, the Company changed its reporting currency from Canadian dollars (“CAD”) to U.S. dollars (“USD”). This change in reporting currency has been applied retroactively such that all amounts in the consolidated financial statements of the Company and the accompanying notes thereto are expressed in U.S. dollars. References to "$" and "USD" are U.S dollars and references to “CAD $” and "CAD" are to Canadian dollars. For comparative purposes, historical consolidated financial statements were recast in U.S. dollars by translating (i) assets and liabilities at the closing exchange rate in effect at the end of the respective period, (ii) revenues, expenses and cash flows at the average exchange rate in effect for the respective period and (iii) equity transactions at historical exchange rates. Translation gains and losses are included as part of the cumulative foreign currency translation adjustment, which is reported as a component of shareholders’ equity under accumulated other comprehensive loss.
The assets and liabilities of foreign operations with a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at the monthly average exchange rates for the period. Differences arising from the exchange rate changes are recorded within foreign currency translation adjustments, a component of other comprehensive income (loss).
Transactions in foreign currencies are translated to the respective functional currencies of the Company’s subsidiaries at the average exchange rates for the period. The monetary items denominated in currencies other than the functional currency of a subsidiary are translated at the exchange rates prevailing at the balance sheet date. Non-monetary items denominated in currencies other than the functional currency are translated at historical rates. Gains and losses resulting from re-measurement are recorded in the Company’s consolidated statement of loss as foreign exchange gain (loss).
As a result of the divestiture of its Canadian cannabis business, a significant portion of its remaining revenues, expenses, assets and liabilities are denominated in US dollars. In addition and as a result of the increasing operations in the U.S., Neptune changed its functional currency from Canadian dollars (“CAD”) to U.S. dollars (“USD”), effective October 1, 2022. This change in functional currency has been applied prospectively from the date of the change.
All assets and liabilities were reported using the same USD values as previously reported under the USD reporting currency described above. The cumulative translation account in Neptune was effectively frozen and the accumulated balance as at September 30, 2022 is carried forward. Changes in the cumulative translation account after October 1, 2022 relate to conversion of subsidiary financial statements whose functional currency is not USD. As of October 1, 2022, the 2020 Warrants and 2021 Warrants no longer met the criteria for liability classification as a result of the change in functional currency and therefore were reclassified to equity on this date (see notes 11(f) and 13).
The preparation of the condensed consolidated interim financial statements in accordance with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from the estimates made by management.
Estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
16
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
Estimates include the following:
3. Significant accounting policies:
These unaudited Consolidated Interim Financial Statements have been prepared in accordance U.S. GAAP and on a basis consistent with those accounting principles followed by the Company and disclosed in note 2 of its Annual Consolidated Financial Statements for the year ended March 31, 2023, and should be read in conjunction with and Notes thereto.
These consolidated financial statements include the accounts of the Company and its subsidiaries in which the Company has a controlling financial interest. All intercompany balances and transactions have been eliminated from the Company’s consolidated financial statements. On February 10, 2021, Neptune acquired a
New standards
In October 2021, the FASB issued ASU 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC Topic 805, Business Combinations, ASU 2021-08 improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the (1) recognition of an acquired contract liability and (2) payment terms and their direct effect on subsequent revenue recognized by the acquirer. ASU 2021-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2022. The Company has adopted ASU 2021-08 for its fiscal year beginning April 1, 2023, and the Company’s evaluation of the impact of this adoption was immaterial on the financial statements presented.
In June 2016, the FASB issued ASU 2016-13, Financial instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and earlier adoption is permitted beginning in the first quarter of fiscal 2019. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). The purpose of this amendment is to create a two-tier rollout of major updates, staggering the effective dates between larger public companies and all other entities. This granted certain classes of companies, including Smaller Reporting Companies (“SRCs”), additional time to implement major FASB standards, including ASU 2016-13. Larger public companies will still have an effective date for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities are permitted to defer adoption of ASU 2016-13, and its related amendments, until the earlier of fiscal periods beginning after December 15, 2022. The Company has adopted ASU 2016-13 for its fiscal year beginning April 1, 2023, and the Company’s evaluation of the impact of adoption was immaterial on the financial statements presented.
Accounting pronouncements not yet adopted
None for the moment.
4. Business combination and disposal:
On June 8, 2022, the Company announced a planned divestiture of the Canadian cannabis business and that the Company would focus on winding up its cannabis operations pending one or more sales transactions. Following this announcement, the Canadian cannabis disposal group assets met the criteria to be classified as held for sale. At September 30, 2022, the disposal group had been measured at fair value less cost to sell and impaired to reflect the asset sale and purchase agreement (the "ASPA") signed with a third-party on October 16, 2022 for $
The transaction closed on November 9, 2022.
On
17
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
Sprout’s other equity interest owners granted Neptune a call option (the "Call Option") to purchase the remaining
As at the close of the transaction, the value of the asset related to the Call Option was determined to be $
5. Inventories:
|
|
|
|
June 30, |
|
March 31, |
|
|
|
|
|
|
|
Raw materials |
|
|
|
$ |
|
$ |
Finished goods |
|
|
|
|
||
Supplies and spare parts |
|
|
|
|
||
|
|
|
|
$ |
|
$ |
During the three-month ended June 30, 2023, the Company recorded impairment losses of $
6. Property, plant and equipment:
During the year ended March 31, 2023, property, plant and equipment related to the Canadian cannabis asset group were classified as assets held for sale on the balance sheet (refer to note 4(b)). As indicated in note 4(b), the Cannabis related assets were written down, resulting in impairment losses of $
7. Goodwill and intangible assets:
The Company assesses at each reporting date whether there is an indication that an asset group or a reporting unit may be impaired.
During the fourth quarter of year ended March 31, 2023, the Company performed an annual impairment testing of the Sprout goodwill. The Company compared the carrying amount of the reporting unit to the fair value. The fair value of the Sprout reporting unit was determined to be lower than the carrying value and a $
During the third quarter of the year ended March 31, 2023 due to the Company’s sustained decrease in share price, the Company concluded a triggering event occurred and performed a quantitative impairment test for the Sprout reporting unit. Based on the results of the Company’s third quarter impairment analysis, the estimated fair value of the Sprout reporting unit exceeded its carrying value, and no impairment was recognized.
During the second quarter of year ended March 31, 2023, there were changes in the general economic and financial conditions of the markets the Company serves. The Company’s Sprout reporting unit was adversely impacted during the second quarter of 2022 by these conditions, which impacted the operating results. Accordingly, management concluded that these factors were indicators of impairment. As a result, management performed an impairment test for the Sprout reporting unit, for which it revised its assumptions on projected earnings and cash flows growth, as well as its assumptions on discount rates used to apply to the forecasted cash flows, using its best estimate of the conditions existing at September 30, 2022. The Company compared the carrying amount of the reporting unit to the fair value. The fair value of the Sprout reporting unit was determined to be lower than the carrying value and a $
As part of the impairment testing process, during the above periods in fiscal 2023, the Company considered a number of factors including, but not limited to, current macroeconomic conditions such as inflation, economic growth, and interest rate movements, industry and market considerations, stock price performance (including performance relative to peers) and overall financial performance of the Sprout reporting unit. Although management used its best estimate to assess the potential impact of the changes in the general economic conditions on the Company’s business, management exercised significant judgment to estimate forecasted cash flows and discount rate, using assumptions which are subject to significant uncertainties. For trademarks, the fair value was determined using a relief from royalty model, for which the rate used is a significant assumption.
18
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
Cash flows were projected based on past experience, actual operating results and the
There was no change to the fair value of the Biodroga goodwill, aside from currency translation induced changes.
The aggregate amount of goodwill is allocated to each reporting unit as follows:
|
|
June 30, |
|
March 31, |
|
|
|
|
|
Biodroga |
|
$ |
|
$ |
|
|
$ |
|
$ |
8. Loans and borrowings:
|
|
|
June 30, |
|
March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note originally of $ |
|
$ |
|
$ |
|
|
|
|
|
|
|
Promissory note of $ |
|
|
|||
|
|
|
|
|
|
Promissory notes totaling $ |
|
|
|||
|
|
|
|
|
|
Senior secured notes (the "Notes") issued by the Company on January 12, 2023 for gross proceeds of $ |
|
|
|||
|
|
|
|
|
|
Accounts receivable factoring facility contracted by Sprout on January 25, 2023, to which an inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna Capital Solutions LLC, was added effective April 21, 2023. The maximum available has been amended to $ |
|
|
19
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
|
|
|
|
|
|
Promissory note of $ |
|
|
|||
|
|
|
|
|
|
|
|
|
|
||
Less current portion of loans and borrowings |
|
|
|
||
Loans and borrowings |
|
|
$ |
|
$ |
On May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the "Waiver Agreement"), with CCUR Holdings, Inc. and the purchasers named therein, related to the Note Purchase Agreement dated as of
On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna Capital Solutions LLC, effective April 21, 2023. The maximum available has been amended to $
On April 27, 2023, the Company announced that Sprout extended the maturity of its existing $
During the three-month ended June 30, 2023, interest expense of $
9. Provisions
As of June 30, 2023, a provision of $
Effective as of September 20, 2022, the Company notified the Former CEO that it was exercising its legal rights to terminate the Royalty Agreement. In response to such termination, the Former CEO is seeking a declaratory judgment that the Company did not have the legal right to terminate the Royalty Agreement.
20
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
10
The Company has issued common shares, pre-funded warrants and warrants as part of its financing arrangements which are exercisable for a variable number of shares. Common shares and pre-funded warrants are classified as equity. Warrants are classified as liabilities rather than equity. As of October 1, 2022, as a result of the change in functional currency of Neptune, the 2020 Warrants and 2021 Warrants no longer met the criteria for liability classification and therefore were reclassified as equity prospectively (see note11(f)).
On May 11, 2023, the Company announced its public offering ("May 2023 Direct Offering") of
Proceeds of the $
21
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
In connection with the offering closed on May 15, 2023, the Company has agreed that certain existing warrants to purchase up to an aggregate of
On January 12, 2023, Neptune closed on a senior secured notes financing (such notes, the "Notes") for gross proceeds of $
On October 11, 2022, the Company closed a registered direct offering ("October 2022 Direct Offering") of
On June 23, 2022, Neptune issued a total of
Proceeds of the June 2022 Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. The fair value of the liability-classified warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $
In addition to the issuance cost specific to the direct offering, the Company incurred legal fees in connection with all financing arrangements in the year ended March 31, 2023 which amounted to $
During the month of August 2022, a total of
The fair value of the Series C Warrants and Series D Warrants liability was determined using the Binomial model. Warrants are revalued each period-end at fair value and accounted for in the Company's profit and loss statement under “gain on revaluation of derivatives”.
Changes in the value of the liability related to the warrants for the three-month period ended June 30, 2023 and 2022 were as follows:
|
|
Warrants |
|
Amount |
|
|
|
|
|
Outstanding as at March 31, 2022 |
|
|
$ |
|
Warrants issued during the period |
|
|
||
Net revaluation gain |
|
|
|
( |
Movements in exchange rates |
|
|
|
( |
Outstanding as at June 30, 2022 |
|
|
$ |
|
|
|
|
|
|
Outstanding as at March 31, 2023 |
|
|
$ |
|
Warrants issued during the period |
|
|
||
Net revaluation gain |
|
|
|
( |
Outstanding as at June 30, 2023 |
|
|
$ |
22
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
The following table provides the relevant information on the outstanding warrants as at June 30, 2023:
Reference |
|
Date of issuance |
|
Number of warrants outstanding |
|
Number of warrants exercisable |
|
Exercise price |
|
Expiry date |
|
|
|
|
|
|
|
|
|
|
|
Series A Warrants |
|
|
|
|
$ |
|
||||
Series B Warrants |
|
|
|
|
$ |
|
||||
Series C Warrants |
|
|
|
|
$ |
|
||||
Series C Warrants |
|
|
|
|
$ |
|
||||
Series D Warrants |
|
|
|
|
$ |
|
||||
Series E Warrants |
|
|
|
|
$ |
|
||||
Series E Warrants |
|
|
|
|
$ |
|
||||
January 2023 Warrants |
|
|
|
|
$ |
|
||||
May 2023 Warrants |
|
|
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
The derivative warrant liabilities are measured at fair value at each reporting period and the reconciliation of changes in fair value for the three-month periods ended June 30, 2023 and 2022 is presented in the following tables:
|
|
2020 Warrants |
|
2021 Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Balance - beginning of period |
|
$— |
|
$ |
|
$— |
|
$ |
|
|
|
|
|
|
|
|
|
Change in fair value to date of transfer to equity |
|
— |
|
( |
|
— |
|
( |
Translation effect |
|
— |
|
( |
|
— |
|
( |
|
|
|
|
|
|
|
|
|
Balance - end of period |
|
$— |
|
$ |
|
$— |
|
$ |
|
|
Series A Warrants |
|
Series B Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Balance - beginning of period |
|
$ |
|
$ |
|
$ |
|
$ |
|
|
|
|
|
|
|
|
|
Change in fair value |
|
( |
|
( |
|
|
( |
|
Translation effect |
|
— |
|
( |
|
— |
|
( |
|
|
|
|
|
|
|
|
|
Balance - end of period |
|
$ |
|
$ |
|
$ |
|
$ |
23
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
|
|
Series C Warrants |
|
Series D Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Balance - beginning of period |
|
$ |
|
$— |
|
$ |
|
$— |
|
|
|
|
|
|
|
|
|
Warrants issued during the period |
|
— |
|
|
— |
|
||
Change in fair value |
|
( |
|
( |
|
( |
|
( |
Translation effect |
|
— |
|
|
— |
|
||
|
|
|
|
|
|
|
|
|
Balance - end of period |
|
$ |
|
$ |
|
$ |
|
$ |
|
|
Series E Warrants |
|
January 2023 Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Balance - beginning of period |
|
$ |
|
$— |
|
$ |
|
$— |
|
|
|
|
|
|
|
|
|
Change in fair value |
|
( |
|
— |
|
( |
|
— |
|
|
|
|
|
|
|
|
|
Balance - end of period |
|
$ |
|
$— |
|
$ |
|
$— |
|
|
May 2023 Warrants |
||
|
|
June 30, |
|
June 30, |
|
|
|
|
|
Balance - beginning of period |
|
$— |
|
$— |
|
|
|
|
|
Warrants issued during the period |
|
|
— |
|
Change in fair value |
|
( |
|
— |
|
|
|
|
|
Balance - end of period |
|
$ |
|
$— |
The fair value of the derivative warrant liabilities was estimated using the Black-Scholes option pricing model and based on the following assumptions:
|
|
2020 Warrants |
|
2021 Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Share price |
|
N/A |
|
$ |
|
N/A |
|
$ |
Exercise price |
|
N/A |
|
$ |
|
N/A |
|
$ |
Dividend yield |
|
N/A |
|
— |
|
N/A |
|
— |
Risk-free interest |
|
N/A |
|
|
N/A |
|
||
Remaining contractual life (years) |
|
N/A |
|
|
N/A |
|
||
Expected volatility |
|
N/A |
|
|
N/A |
|
|
|
Series A Warrants |
|
Series B Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Share price |
|
$ |
|
$ |
|
$ |
|
$ |
Exercise price |
|
$ |
|
$ |
|
$ |
|
$ |
Dividend yield |
|
— |
|
— |
|
— |
|
— |
Risk-free interest |
|
|
|
|
||||
Remaining contractual life (years) |
|
|
|
|
||||
Expected volatility |
|
|
|
|
24
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
|
|
Series C Warrants |
|
Series D Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Share price |
|
$ |
|
$ |
|
$ |
|
$ |
Exercise price |
|
$ |
|
$ |
|
$ |
|
$ |
Dividend yield |
|
— |
|
— |
|
— |
|
— |
Weighted average risk-free interest |
|
|
|
|
||||
Weighted average remaining contractual life (years) |
|
|
|
|
||||
Weighted average expected volatility |
|
|
|
|
|
|
Series E Warrants |
|
January 2023 Warrants |
||||
|
|
June 30, |
|
October 11, 2022 |
|
June 30, |
|
January 12, 2023 |
|
|
|
|
|
|
|
|
|
Share price |
|
$ |
|
$ |
|
$ |
|
$ |
Weighted average exercise price |
|
$ |
|
$ |
|
$ |
|
$ |
Dividend yield |
|
— |
|
— |
|
— |
|
— |
Weighted average risk-free interest |
|
|
|
|
||||
Weighted average remaining contractual life (years) |
|
|
|
|
||||
Weighted average expected volatility |
|
|
|
|
|
|
May 2023 Warrants |
||
|
|
June 30, |
|
May 15, 2023 |
|
|
|
|
|
Share price |
|
$ |
|
$ |
Exercise price |
|
$ |
|
$ |
Dividend yield |
|
— |
|
— |
Risk-free interest |
|
|
||
Remaining contractual life (years) |
|
|
||
Expected volatility |
|
|
The Company measured its derivative warrant liabilities at fair value on a recurring basis. These financial liabilities were measured using level 3 inputs. The Company uses the historical volatility of the underlying share to establish the expected volatility of the warrants. An increase or decrease in this assumption to estimate the fair values using the Binomial model option pricing model would result in an increase or a decrease in the fair value of the instruments, respectively.
11. Capital and other components of equity:
Authorized capital stock:
Unlimited number of shares without par value:
Preferred shares, issuable in series, rights, privileges and restrictions determined at time of issuance:
All issued shares are fully paid.
During the three-month periods ended June 30, 2023 and 2022, Neptune issued
During the three-month periods ended June 30, 2023 and 2022 , Neptune issued
During the three-month period ended June 30, 2023, Neptune issued
During the three-month period ended June 30, 2022, Neptune issued
25
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
During the three-month periods ended June 30, 2023 and 2022, Neptune issued
As of October 1, 2022, as a result of the change in functional currency of Neptune, the 2020 Warrants and 2021 Warrants no longer met the criteria for liability classification and therefore were reclassified as equity prospectively. The reclassification did not impact the net earnings for the period.
On May 15, 2023, as part of the May 2023 Direct Offering described under note 10, Neptune issued
On March 10, 2023, Sprout issued promissory notes for gross proceeds of $
On June 23, 2022, as part of the June 2022 Direct Offering described under note 10, Neptune issued a total of
Changes in the value of equity related to the warrants were as follows:
|
|
June 30, 2023 |
|
June 30, 2022 |
||||
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
average |
|
Number of |
|
average |
|
Number of |
|
|
exercise price |
|
warrants |
|
exercise price |
|
warrants |
|
|
|
|
|
|
|
|
|
Warrants outstanding at April 1, 2023 and 2022 |
|
$ |
|
|
$ |
|
||
Issued |
|
|
|
|
||||
Exercised |
|
|
( |
|
|
( |
||
Warrants outstanding at June 30, 2023 |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
Warrants exercisable at June 30, 2023 |
|
$ |
|
|
$ |
|
Warrants of the Company classified as equity are composed of the following as at June 30, 2023 and March 31, 2023:
|
|
|
|
|
|
June 30, 2023 |
|
|
|
|
|
March 31, 2023 |
|
|
Number |
|
Number |
|
|
|
Number |
|
Number |
|
|
|
|
outstanding |
|
exercisable |
|
Amount |
|
outstanding |
|
exercisable |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants IFF (i) |
|
|
|
$ |
|
|
|
$ |
||||
Warrants AMI (ii) |
|
|
|
|
|
|
||||||
2020 Warrants (iii) |
|
|
|
|
|
|
||||||
2021 Warrants (iv) |
|
|
|
|
|
|
||||||
March 2023 Warrants |
|
|
|
|
|
|
||||||
Pre-Funded Warrants |
|
|
|
|
— |
|
— |
|
— |
|||
|
|
|
|
$ |
|
|
|
$ |
26
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
On February 15, 2023, Neptune issued
On July 13, 2022, Neptune issued
On September 9, 2022, Neptune issued
On May 15, 2023, Neptune issued a total of
On June 23, 2022, Neptune issued a total of
27
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
12. Non-controlling interest:
The summarized financial information of Sprout is provided below. This information is based on amounts before inter-company eliminations and include the effects of the Company’s purchase price adjustments.
Summarized statement of loss and comprehensive loss:
|
|
Three-month period ended |
||
|
|
June 30, 2023 |
|
June 30, 2022 |
|
|
Restated |
|
|
Revenue from contracts with customers |
|
$ |
|
$ |
Cost of sales |
|
( |
|
( |
Selling, general and administrative expenses |
|
( |
|
( |
Finance costs |
|
( |
|
( |
Loss before tax |
|
( |
|
( |
Net loss |
|
( |
|
( |
Total comprehensive loss |
|
( |
|
( |
Loss attributable to the subsidiary's non-controlling interest |
|
( |
|
( |
Comprehensive loss attributable to the subsidiary's non-controlling interest |
|
$( |
|
$( |
Summarized statement of balance sheets:
|
|
|
June 30, |
|
March 31, |
Current assets |
|
|
$ |
|
|
Non-current assets |
|
|
|
||
Current liabilities |
|
|
|
||
Non-current liabilities |
|
|
|
||
Total equity (deficiency) |
|
|
( |
|
( |
Attributable to: |
|
|
|
|
|
Equity holders of the Company |
|
|
$( |
|
$( |
Non-controlling interest |
|
|
( |
|
( |
Summarized statement of cash flow:
|
|
Three-month period ended |
||
|
|
June 30, 2023 |
|
June 30, 2022 |
Cash flow used in operating activities |
|
$( |
|
$( |
Cash flow provided by investing activities |
|
— |
|
— |
Cash flow provided by financing activities |
|
|
||
Net increase (decrease) in cash and cash equivalents |
|
$ |
|
$( |
(1) Cash flow from financing activities is partially provided through intercompany advances. |
|
|
|
|
13. Share-based payment:
Under the Company’s share-based payment arrangements, stock-based compensation expenses of $
As at June 30, 2023, the Company had the following share-based payment arrangements:
The Company has established a stock option plan for directors, officers, employees and consultants. The exercise price of the stock options granted under the plan is not lower than the closing price of the common shares listed on the Nasdaq on the eve of the grant. The terms and conditions for acquiring and exercising options are set by the Board of Directors, subject to, among others, the following limitations:
28
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
The number and weighted average exercise prices of stock options are as follows:
|
|
|
2023 |
|
2022 |
||||
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
|
average |
|
|
|
average |
|
|
|
|
|
exercise |
|
Number of |
|
exercise |
|
Number of |
|
|
|
price |
|
options |
|
price |
|
options |
|
|
|
|
|
|
|
|
|
|
Options outstanding at April 1st, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
||
Forfeited/Cancelled |
|
|
— |
|
— |
|
|
( |
|
Expired |
|
|
— |
|
— |
|
|
( |
|
Options outstanding at June 30, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
June 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Exercisable options |
||||
|
|
Weighted |
|
|
|
|
|
|
|
|
remaining |
|
|
|
Weighted |
|
Weighted |
|
|
contractual |
|
Number of |
|
number of |
|
average |
Exercise |
|
life |
|
options |
|
options |
|
exercise |
price |
|
outstanding |
|
outstanding |
|
exercisable |
|
price |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
$ |
|||
$ |
|
|
|
|
||||
$ |
|
|
|
|
||||
$ |
|
|
|
|
||||
$ |
|
|
|
|
||||
|
|
|
|
|
$ |
Stock-based compensation recognized under this plan amounted to $
On July 8, 2019, the Company granted
On July 8, 2019, the Company granted
The number and weighted average exercise prices of market performance options are as follows:
|
|
|
2023 |
|
|
|
2022 |
||
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
|
average |
|
|
|
average |
|
|
|
|
|
exercise |
|
Number of |
|
exercise |
|
Number of |
|
Notes |
|
price |
|
options |
|
price |
|
options |
|
|
|
|
|
|
|
|
|
|
Options outstanding at April 1, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
||
Options outstanding at June 30, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
29
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
Stock-based compensation recognized under this plan amounted to $
The Company has established an equity incentive plan for employees, directors and consultants of the Company. The plan provides for the issuance of restricted share units, performance share units, restricted shares, deferred share units and other share-based awards, subject to restricted conditions as may be determined by the Board of Directors. Upon fulfillment of the restricted conditions, as the case may be, the plan provides for settlement of the awards outstanding through shares.
The number and weighted average share prices of DSUs are as follows:
|
|
|
|
|
2023 |
|
|
|
2022 |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
|
average |
|
|
|
average |
|
|
|
|
|
share |
|
Number of |
|
share |
|
Number of |
|
Notes |
|
price |
|
DSUs |
|
price |
|
DSUs |
|
|
|
|
|
|
|
|
|
|
DSUs outstanding at April 1, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
||
DSUs outstanding at June 30, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
DSUs exercisable at June 30, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
Of the
Stock-based compensation recognized under this plan amounted to $
During the year ended March 31, 2020, as part of the employment agreement of the CEO, the Company granted RSUs which vest over
|
|
|
|
|
2023 |
|
|
|
2022 |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
|
average |
|
|
|
average |
|
|
|
|
|
share |
|
Number of |
|
share |
|
Number of |
|
Notes |
|
price |
|
RSUs |
|
price |
|
RSUs |
|
|
|
|
|
|
|
|
|
|
RSUs outstanding at April 1st, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
||
Granted |
|
|
|
|
|
||||
Released through the issuance of common shares |
11(d) |
|
|
|
|
( |
|||
Withheld as payment of withholding taxes |
11(d) |
|
|
|
|
( |
|||
RSUs outstanding at June 30, 2023 and 2022 |
|
|
$ |
|
|
$ |
|
Stock-based compensation recognized under this plan amounted to
On November 14, 2021, the Company and its CEO entered into an agreement pursuant to which the CEO’s existing employment agreement was amended to waive the Company’s obligation to procure directors and officers insurance coverage of up to $
The balance of the liability accrual to the CEO is $
30
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
According to the employment agreement with the CEO, a long-term incentive of $
As at June 30, 2023, the liability related to this long-term incentive of $
14. Loss per share:
When the Company has a net loss, the effects of options, DSUs, RSUs and warrants are excluded from the calculation of diluted loss per share for periods in which a company sustains a loss. Accordingly, diluted loss per share was the same as basic loss per share because the Company has incurred losses in the periods presented. All outstanding options, DSUs, RSUs and warrants could potentially be dilutive in the future.
When the Company has net income, basic net income per share using the two-class method is presented. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to equity holders and that determines basic net income per share for each class of stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to equity holders. A participating security is defined as a security that may participate in undistributed earnings with shares.
The Company’s capital structure includes securities that participate with shares on a one-for-one basis for distribution of dividends. The following classes of warrants are considered participating securities as they are entitled to participate in dividend distributions alongside equity holders for which the two-class method is applied in computing earnings per share: Series A Warrants, Series B Warrants, Series C Warrants, Series D Warrants, Series E Warrants, 2020 Warrants, 2021 Warrants, January 2023 Warrants, May 2023 Warrants and Pre-Funded Warrants. The Company determines the diluted net income per share by using the more dilutive of the two class-method or the treasury stock method. The issued and unexercised liability and equity classified warrants do not participate in losses of the Company, thus an allocation of losses is not performed when the Company is in a loss position.
More specifically, the breakdown between participating and non-participating warrants is as follows:
Reference |
|
Number of warrants outstanding |
|
Number of participating warrants |
|
Number of non-participating warrants |
|
|
|
|
|
|
|
Series A Warrants |
|
|
|
— |
||
Series B Warrants |
|
|
|
— |
||
Series C Warrants |
|
|
|
— |
||
Series D Warrants |
|
|
|
— |
||
Series E Warrants |
|
|
|
— |
||
January 2023 Warrants |
|
|
|
— |
||
May 2023 Warrants |
|
|
|
— |
||
Warrants classified as liability |
|
|
|
— |
||
|
|
|
|
|
|
|
Warrants IFF |
|
|
— |
|
||
Warrants AMI |
|
|
— |
|
||
2020 Warrants |
|
|
|
— |
||
2021 Warrants |
|
|
|
— |
||
March 2023 Warrants |
|
|
— |
|
||
Pre-Funded Warrants |
|
|
|
— |
||
Warrants classified as equity |
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods ended June 30, 2023 and 2022, the Company has a net loss, and therefore, the basic and dilutive loss per share is calculated as follows:
|
|
Three-month periods ended |
||
|
|
June 30, |
|
June 30, |
|
|
|
|
|
Net loss attributed to equity holders |
|
$( |
|
$( |
Basic and dilutive loss attributed to common shareholders |
|
$( |
|
$( |
|
|
|
|
|
Basic and dilutive weighted-average number of common shares outstanding |
|
|
||
|
|
|
|
|
Net loss per share attributable to common shareholders of the Company: |
|
|
|
|
Basic and dilutive loss per share |
|
$( |
|
$( |
The following table summarizes outstanding securities not included in the computation of diluted net income (loss) per share as the effect would have been anti-dilutive for each respective period.
31
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
|
|
Three-month periods ended |
||
Securities |
|
June 30, |
|
June 30, |
|
|
|
|
|
Options, RSU's, DSU's |
|
|
||
Warrants |
|
|
15. Fair-value:
The Company uses various methods to estimate the fair value recognized in the consolidated financial statements. The fair value hierarchy reflects the significance of inputs used in determining the fair values:
Financial assets and liabilities measured at fair value on a recurring basis are the call option granted to Neptune by Sprout's non-controlling interest owners of equity, the liability to CEO for long-term incentive, and liability related to warrants.
32
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and March 31, 2023:
|
|
|
June 30, 2023 |
||||||
|
Notes |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
Other financial assets - Sprout Call Option |
4 |
|
– |
|
– |
|
– |
|
– |
Total |
|
|
$— |
|
$— |
|
$— |
|
$— |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Liability related to warrants |
10 |
|
$— |
|
$— |
|
$ |
|
$ |
Other liability |
13(c) |
|
– |
|
– |
|
|
||
Total |
|
|
$— |
|
$— |
|
$ |
|
$ |
|
|
|
March 31, 2023 |
||||||
|
Notes |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
Other financial assets - Sprout Call Option |
4 |
|
– |
|
– |
|
– |
|
– |
Total |
|
|
$— |
|
$— |
|
$— |
|
$— |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Liability related to warrants |
10 |
|
$— |
|
$— |
|
$ |
|
$ |
Other liability |
13(c) |
|
– |
|
– |
|
|
||
Total |
|
|
$— |
|
$— |
|
$ |
|
$ |
The liabilities related to warrants were recorded at their fair value using a Binomial pricing model. Warrants are revalued each period end at fair value through profit and loss using level 3 inputs (note 10).
The Company has determined that the carrying values of its short-term financial assets and liabilities approximate their fair values given the short-term nature of these instruments. The carrying value of the short-term investment also approximates its fair value given the short-term maturity of the reinvested funds. For variable rate loans and borrowings, the fair value is considered to approximate the carrying amount.
Sprout’s other equity interest owners granted Neptune a call option (the "Call Option") to purchase the remaining
16
33
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
(b) Contingencies:
In the normal course of business, the Company is involved in various claims and legal proceedings, for which the outcomes, inflow or outflow of economic benefits, are uncertain. The most significant of which are ongoing are as follows:
Further, on February 24, 2021, the Office of the Attorney General of the State of New Mexico (“NMAG”) delivered to Sprout a civil investigative demand requesting similar documents and information with regards to the Report and the NMAG’s investigation into possible violations of the False Advertising Act of New Mexico. Sprout is responding to the requests of the NMAG.
Since February 2021, several putative consumer class action lawsuits have been brought against Sprout alleging that its products (the “Products”) contain unsafe and undisclosed levels of various naturally occurring heavy metals, namely lead, arsenic, cadmium and mercury. Sprout has denied the allegations in these lawsuits and contends that its baby foods are safe and properly labeled. The claims raised in these lawsuits were brought in the wake of the highly publicized Report. All such putative class actions have since been dismissed. No provision has been recorded in the financial statements for these cases.
In addition to the consumer class actions discussed above, Sprout is currently named in three lawsuits (filed in California State Court on June 16, 2021, filed in Hawaii State Court on January 9, 2023 and filed in Nevada Federal Court on March 3, 2023, respectively) alleging some form of personal injury from the ingestion of Sprout’s Products, purportedly due to unsafe and undisclosed levels of various naturally occurring heavy metals. These lawsuits generally allege injuries related to neurological development disorders such as autism spectrum disorder and attention deficit hyperactivity disorder. Sprout denies that its Products contributed to any of these injuries. In addition, the Office of the Attorney General for the District of Columbia (“OAG”) sent a letter to Sprout dated October 1, 2021, similar to letters sent to other baby food manufacturers, alleging potential labeling and marketing misrepresentations and omissions regarding the health and safety of its baby food products, constituting an unlawful trade practice. Sprout has agreed to meet with the OAG and will vigorously defend against the allegations. No provision has been recorded in the financial statements for this matter.
These matters may have a material adverse effect on Sprout's financial condition, or results of operations.
34
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
The outcome of these claims and legal proceedings against the Company cannot be determined with certainty and is subject to future resolution, including the uncertainties of litigation.
17. Operating Segments:
The Company measures its performance based on a segment, which is the consolidated level.
Revenue is attributed to geographical locations based on the origin of customers’ location:
|
|
|
Three-month periods ended |
||
|
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
Canada |
|
|
$ |
|
$ |
United States |
|
|
|
||
Other countries |
|
|
|
||
|
|
|
$ |
|
$ |
Long-lived assets of the Company are located in the following geographical location:
|
|
June 30, |
|
March 31, |
Canada |
|
$ |
|
$ |
United States |
|
|
||
Total property, plant and equipment |
|
$ |
|
$ |
|
|
June 30, |
|
March 31, |
Canada |
|
$ |
|
$ |
Total intangible assets |
|
$ |
|
$ |
|
|
June 30, |
|
March 31, |
Canada |
|
$ |
|
$ |
Total goodwill |
|
$ |
|
$ |
The Company derives revenue from the sales of goods which are recognized at a point in time as follows:
|
|
|
Three-month periods ended |
||
|
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
Nutraceutical products |
|
|
$ |
|
$ |
Cannabis and hemp products |
|
|
— |
|
|
Food and beverages products |
|
|
|
||
|
|
|
$ |
|
$ |
35
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2023 and 2022
18. Subsequent events:
On July 31, 2023, the Company filed a preliminary prospectus on Form S-1 to raise additional funds. We plan to use the proceeds of the offering, after repayment of debt, for general corporate purposes, including working capital. The principal reasons for this offering are to increase our working capital and to provide capital for general corporate purposes.
On August 4, 2023, the Company announced the promotion of Lisa Gainsborg, currently Neptune's Financial Controller, to Interim Chief Financial Officer, effective immediately, replacing Raymond Silcock who has resigned for personal reasons.
On August 7, 2023, the Company announced that its Board of Directors has initiated Phase II of a comprehensive review and evaluation of strategic options for the Company to unlock and maximize shareholder value. This phase will encompass consideration of all available strategic business and financial alternatives, which may include, but is not limited to, the monetization of assets, strategic partnerships, and/or the acquisition of the remaining parts of Sprout Organics through an equity/debt transaction.
On August 16, 2023, the Company entered into a Summary Restructuring Term Sheet with NH Expansion Credit Fund Holdings L.P. ("MSEC"), which provides the Company with an option to exchange its existing Sprout debt for Sprout equity, on or prior to November 13, 2023 (the "Exchange"). The Exchange would be subject to the execution of definitive agreements and receipt of required consents. The term sheet further provides for amendments to other Sprout debts promissory notes in the event that the Exchange is consummated, including that such promissory notes would have their maturity date extended to June 30, 2025 and the termination of the guarantee currently provided by the Company. The term sheet further specifies certain as well as terms governing a transaction that, if consummated, would result in Sprout becoming an independent trading entity.
In July 2023 and August 2023, one investor exercised all of its pre-funded warrants to purchase common shares of Neptune, resulting in the issuance of
On August 23, 2023, an arbitrator awarded PMGSL $
36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis together with our consolidated financial statements and related notes in Part I, Item 1. The following discussion contains forward-looking statements, which statements are subject to considerable risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption “Risk Factors” in Part II, Item 1A.
Certain statements contained in this Quarterly Report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, and are subject to the “safe harbor” created by these sections. Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements can be found under the caption “Risk Factors” in Part II, Item 1A, and elsewhere in this Quarterly Report. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.
All amounts in the tables contained in this MD&A are in millions of dollars, except for basic and diluted income (loss) per share which are shown in dollars.
37
Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
GENERAL
Neptune Wellness Solutions Inc. (“Neptune”, the “Company”, “we”, “us” or “our”) is a modern consumer packaged goods ("CPG") company driven by a singular purpose: to transform the everyday for a healthier tomorrow. Neptune is a diversified health and wellness company with multiple brand units. With a mission to redefine health and wellness, Neptune is focused on building a broad portfolio of high quality, affordable consumer products in response to long-term secular trends and market demand for natural, plant-based, sustainable and purpose-driven lifestyle brands. The Company utilizes a highly flexible, cost-efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation, Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods. Neptune has expanded its operations since June 2020 into brand units in order to better address its markets. The main brand units are Nutraceuticals and Organic Foods & Beverages. All amounts in this Quarterly Report are in US dollars, unless otherwise noted.
BUSINESS STRATEGY
Neptune’s vision is to change consumer habits through the creation and distribution of environmentally friendly, ethical and innovative consumer product goods. Our mission is to redefine health and wellness and help humanity thrive by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreak of the COVID-19 virus, Neptune has taken transformative, and successful, actions to increase its sales, distribution and reach in both the business-to-business (“B2B”) and business-to-consumer (“B2C”) models in the consumer-packaged goods (“CPG”) market. Neptune has a dual go-to market B2B and B2C strategy focused on expanding its global distribution reach. The strategy sets Neptune apart from its competition and has started to yield consistent, long-term revenue opportunities for the Company.
The Company’s long-term strategy is focused on the health and wellness sector with an emphasis on select CPG verticals, including Nutraceuticals and Organic Foods & Beverages. Neptune’s current brand portfolio across these verticals include Sprout®, Neptune Wellness, Forest Remedies®, and MaxSimil®.
Neptune’s future will be focused on brand creation, accelerating organic growth with emphasis on increased efficiency and margin expansion.
On August 7, 2023, the Company announced that its Board of Directors (the "Board") has initiated Phase II of a comprehensive review and evaluation of strategic options for the Company to unlock and maximize shareholder value. This phase will encompass consideration of all available strategic business and financial alternatives, which may include, but is not limited to, the monetization of assets, strategic partnerships, and/or the acquisition of the remaining parts of Sprout Organics through an equity/debt transaction. In 2021, we embarked on Phase I of our strategic review, a phase centered around streamlining our operations, maximizing resources, and realizing annualized cost savings. An essential part of this was the strategic divestiture and disposal of non-core assets to set the stage for our long-term goals. While we made significant strides, we recognize there's more to be accomplished. The Board and management deem it prudent to promptly commence the next phase of our strategic review process. Phase I of our strategic review was focused on building a strong foundation from which Neptune will be positioned to stabilize and grow into a pure-play CPG company. Our decision to formally commence Phase II of this strategic review reflects our commitment to rebuilding and enhancing shareholder value. We believe that this comprehensive evaluation of our strategic options acts as the first step toward allowing us to fully leverage our assets and deliver value for all our key stakeholders, including shareholders, customers, partners, and employees.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
SALES AND DISTRIBUTION
Nutraceutical Products
The Company sells its nutraceutical products mainly in bulk softgels or liquids to multiple distributors and customers, who commercialize these products under their private label. While the Company may have orders in place with approximately 100 different distributors and customers at any one time, the majority of the Company’s sales are concentrated with a small group of distributors and customers. Agreements with these distribution partners may be terminated or altered by them unilaterally in certain circumstances.
The Company sells its Neutraceutical products through distributors and directly to retail outlets in the United States. It also sells its products online through its own website forestremedies.com as well as e-commerce sites.
Organic Foods and Beverages
The Company, though its Sprout subsidiary, sells its products to mass retailers, grocery stores and other retail outlets, as well as online through e-commerce sites and its own website sproutorganics.com.
OUR B2C BRAND PORTFOLIO STRATEGY
We are currently working on accelerating brand equity for our brand portfolio:
|
Biodroga. Neptune, through its Biodroga subsidiary, provides product development and turnkey solutions (4PL) to its customers throughout North America. Biodroga offers a full range of services, whether it is leveraging our global network of suppliers to find the best ingredients or developing unique formulations that set our customers apart from their competition. Biodroga’s core products are MaxSimil, various Omega-3 fish oils and other nutritional products, as well as softgel solutions. |
|
MaxSimil. Neptune has an exclusive license to use the patented nutritional ingredient, MaxSimil, an omega-3 fatty acid delivery technology that uses enzymes that mimic the natural human digestive system to predigest omega-3 fatty acids. The Journal of Nutrition, by the Oxford University Press, recently released the results of a clinical study that evidences MaxSimil’s superior absorption as compared with standard fish oil supplements. MaxSimil was first introduced to the market in 2018, and is sold as a straight omega-3 supplement with standard and unique concentration of EPA/DHA. MaxSimil is also starting to be presented in combination with specialty ingredients such as Curcumin and Vitamin K2. |
|
Forest Remedies®. Under our Forest Remedies® brand, we offer first-of-their kind vegan multi-omega gummies and soft gels with packaging that is 100% plastic-free. Launched on March 10, 2022, our Forest Remedies Multi Omega 3-6-9 line of supplements marked an important milestone in our efforts to transform Neptune into a high-growth branded CPG company. |
|
Sprout®. Neptune entered a new market with the Neptune/Sprout combination. Sprout has created a trusted organic baby food brand with a comprehensive range of products that are always USDA certified organic, non-GMO and contain nothing artificial. Sprout’s products target four segments: Stage 2 (children 6 months and up), Stage 3 (children 8 months and up), Toddler (children aged 12 months and up) and Snacks (children 8 months and up). Since our acquisition of a controlling interest in Sprout, the Company has begun expansion efforts in Sprouts’ distribution substantially in all of Target’s U.S. retail stores. The Company also announced on July 27, 2021, its initial launch into the Canadian market through its partnership with food retailer Metro Inc. Certain toddler snacks under this brand label are now available in Metro grocery stores in the province of Ontario. |
COMPETITION
The nutraceutical and organic foods and beverages industries are highly competitive. There are many companies, public and private universities, and research organizations actively engaged in the research and development of products that may be similar to our products. It is probable that the number of companies seeking to develop products similar to our products will increase. Many of these and other existing or potential competitors have substantially greater financial, technical and human resources than we do and may be better equipped to develop, manufacture and market products.
We seek to differentiate our products and marketing from our competitors based on product quality, customer service, marketing support, pricing and innovation, and believe that our strategy enables us to effectively compete in the marketplace. For additional information regarding the competitive nature of our businesses, see “Risks Related to Our Business” under the heading “Risk Factors” of this Form 10-Q.
39
Management’s Discussion and Analysis of Financial Condition and Results of Operations
SEASONALITY
In addition to general economic factors, we are impacted by seasonal factors and trends such as major cultural events and other unpredictable matters. Although we believe the impact or seasonality on our consolidated results of operations is minimal, our quarterly results may vary significantly in the future due to the timing of nutraceutical contract manufacturing orders as well promotions and ordering patterns of our other customers. We cannot provide assurance future revenues will follow historical patterns. The market price of our common shares may be adversely affected by these factors.
40
Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS UPDATE
Liquidity and Going Concern
We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses. There is substantial doubt about our ability to continue as a going concern. As of September 5, 2023, we had approximately $0.6 million in cash and cash equivalents. We believe our current cash position will be sufficient to operate our business for approximately 1 month under our current business plan. In addition, we are pursuing several cash generating transactions as well as planning for further expense reductions. There can be no assurance that any cash generating transaction will be completed or that our expense reductions measures will be sufficient to allow as to continue operating our business. We need substantial additional funding to continue operating our business. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. We may have to liquidate our assets in the very near term if additional funding is not received in the upcoming months.
Our management has concluded that substantial doubt exists about our ability to continue as a going concern for one year from the issuance date of our latest financial statements, which substantial doubt continues to exist.
Financial Positioning
We are taking the steps necessary to shore up cash reserves in the immediate term and position our balance sheet properly to fund our growth initiatives as we push towards profitability. To this end, we have explored multiple options to balance the need for providing near-term financial stability while ensuring we continue to build long-term shareholder value. As a result, we have entered into multiple agreements for the purchase and sale of shares of our common stock and pre-funded warrants in October 2022, June 2022, March 2022 and May 2023. We also issued promissory notes in July 2022, November 2022 and January 2023, and entered into an accounts receivable factoring facility in January 2023, to which an inventory financing was added, effective April 21, 2023. Taking into account all considerations, we believe these actions are in the best interest of the company and will benefit shareholders in the long-term.
Closing of a $4,000,000 Registered Direct Offering
On May 11, 2023, the Company announced the pricing of its public offering of 12,121,212 of its common shares (or common share equivalents in lieu thereof) and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share and accompanying warrant, resulting in gross proceeds of approximately $4.0 million. The warrants have an exercise price of $0.33 per share, are immediately exercisable upon issuance and will expire five years following the date of issuance. The closing of the offering occurred on May 15, 2023. The Company has used the proceeds of the offering, after repayment of debt, for general corporate purposes. Refer to the Use of Proceeds disclosures in the Financial section of the MD&A. While the Company does not currently have any agreement with respect to an acquisition, the Company intends to evaluate potential opportunities and could use proceeds of the offering to invest in one or more complementary businesses. The principal reasons for this offering are to increase the Company's working capital, improve its ability to access the capital markets in the future, and to provide capital for general corporate purposes.
In connection with this offering, the Company has agreed that certain existing warrants to purchase up to an aggregate of 8,423,733 common shares that were previously issued in March 2022, June 2022, and October 2022, at exercise prices ranging from $1.62 to $11.20 per share and expiration dates ranging from September 14, 2023 to June 23, 2029, were amended to reduce the exercise prices of the applicable warrants to $0.33, with expiration dates five years following the closing of the offering, i.e. on May 15, 2028, with the exception of warrants to purchase up to 972,763 common shares which will expire on June 23, 2029 as currently contemplated.
Extended maturity for the Existing Secured Promissory Note from MSEC
On April 27, 2023, the Company announced that Sprout extended the maturity of its existing $13 million secured promissory note with MSEC. The note maturity has been extended from February 1, 2024 to December 31, 2024, which will bear interest at the rate of 15.0% per annum through and including December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024.
Inventory Financing
On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna Capital Solutions LLC, effective April 21, 2023, in addition to the accounts receivable factoring facility that is already in place since January 25, 2023. The inventory line will provide Sprout with working capital. The maximum available has been amended to $7.5 million, from $5.0 million previously announced accounts receivable factoring facility.
Waiver Agreement
On May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Waiver Agreement”), with CCUR Holdings, Inc. and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023. The Waiver Agreement provides that the required prepayment of $2.0 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023, which was effectively filed on July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of twenty four percent (24%) per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due.
On August 23, 2023, an arbitrator awarded PMGSL $2.2 million as well as certain attorneys' fees and expenses, totaling in the aggregate approximately $4.0 million, which includes pre-award interest. While the arbitrator dismissed PMGSL’s primary claim seeking damages in the high eight figures, the arbitrator found that Neptune failed to provide administrative assistance in removing legends on common shares issued to PMGSL and failed to pay severance to Peter Galloway upon his termination from the Company. Neptune’s claims against PMGSL were dismissed. The award is required to be paid by the Company by September 29, 2023, and if unpaid will accrue post-award interest at 10.5% per annum simple interest until payment. The award was made pursuant to a binding arbitration arising from a previously disclosed dispute under the Asset Purchase Agreement between the Company and PMGSL in connection with the Company's acquisition of Sugarleaf Labs, Inc. The Company strongly disagrees with this award and intends to challenge it in the appropriate forum. Based on currently available information a provision of $4,000,000 and $600,000 has been recognized for this case as of June 30, 2023 and March 31, 2023, respectively.
41
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RECENT CORPORATE DEVELOPMENTS
Change in Management
On August 4, 2023, the Company announced the promotion of Lisa Gainsborg, currently Neptune's Financial Controller, to Interim Chief Financial Officer, effective immediately, replacing Raymond Silcock who has resigned for personal reasons. Ms. Gainsborg possesses significant experience and knowledge of accounting and finance across both public and private companies, with background in financial statement preparation, Securities and Exchange Commission reporting, Sarbanes-Oxley compliance, the creation of accounting and reporting controls and procedures, and experience with developing enterprise resource planning systems.
Change in Auditors
On May 25, 2023, the Audit Committee and Board of Directors of the Company approved the engagement of Berkowitz Pollack Brant Advisors + CPAs (“BPB”) as our independent registered public accounting firm to audit our consolidated financial statements for the year ending March 31, 2024. Accordingly, KPMG LLP (“KPMG”), which was previously serving as the Company's independent auditors, were informed that they will be dismissed upon completion of their audit of the Company's consolidated financial statements as of and for the year ended March 31, 2023 and the issuance of their report thereon. The engagement of BPB is subject to the approval of the shareholders at the next Annual General Meeting.
Receipt of NASDAQ Notifications
The Company has received a written notification (the "Notification Letter") from the Nasdaq Stock Market LLC ("Nasdaq") on December 29, 2022, notifying the Company that it is not in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2), which requires that the closing bid price for the Company's common shares listed on Nasdaq be maintained at a minimum of US$1.00. Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. Based on the closing bid price of the Company's common shares for the 30 consecutive business days from November 15, 2022 to December 28, 2022, the Company no longer met the minimum bid price requirement.
The Notification Letter has no immediate effect on the listing of the Company's common shares on Nasdaq. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided 180 calendar days, or until June 27, 2023, to regain compliance with the minimum bid price requirement, during which time the Company's common shares will continue to trade on the Nasdaq Capital Market. To regain compliance, the Company's common shares must have a closing bid price of at least US$1.00 for a minimum of 10 consecutive trading days. On June 27, 2023, the Company filed for an extension to this deadline and the Nasdaq has determined that the Company is eligible for an additional 180 calendar day period, or until December 26, 2023, to regain compliance. If at any time before December 26, 2023, the bid price of our Common Shares closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq will provide written confirmation that we have regained compliance. The Company's business operations are not affected by the receipt of the Notification Letter. The Company intends to monitor the closing bid price of its common shares and may, if appropriate, consider implementing available options, including, but not limited to, implementing a reverse share split of its outstanding common shares, to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules.
On July 21, 2023, the Company announced that it has received a letter from the Nasdaq Stock Market LLC ("Nasdaq") notifying the Company that, based on the reported stockholders' equity of Neptune as reported in its recent Annual Report on Form 10-K, the Company does not meet the minimum stockholders' equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) stating listed companies must maintain stockholders' equity of at least $2,500,000. The Nasdaq notification letter has no immediate effect on the Company's business operations or the listing of the Company's common shares, and they will continue to trade on the Nasdaq Capital Market under the symbol "NEPT". Pursuant to the Nasdaq Listing Rule 5550(b)(1) the Company has 45 calendar days, or until September 5, 2023 , to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance. The Company intends to regain compliance within the applicable compliance period and is currently working on a plan to submit to Nasdaq.
On August 22, 2023, the Company announced that it will be conduct a share consolidation of its outstanding common shares ("Common Shares") on the basis of one (1) post-consolidation Common Share for every forty (40) pre-consolidation Common Shares (the "Consolidation"). The Consolidation was previously approved by the board of directors of the Company on August 7, 2023. Each fractional Common Share remaining after completion of the Consolidation that is less than one (1) whole of a Common Share will be increased to one (1) whole Common Share. The Consolidation will reduce the number of Common Shares issued and outstanding from approximately 24.1 million Common Shares to approximately 0.6 million Common Shares. The precise effective date of the Consolidation and the date upon which the Common Shares will begin trading on the NASDAQ on a post-Consolidation basis has not yet been determined so no amounts in this report have been adjusted to reflect the share consolidation.
42
Management’s Discussion and Analysis of Financial Condition and Results of Operations
SELECTED CONSOLIDATED ANNUAL AND QUARTERLY INFORMATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION (in millions, except per share data)
The following table sets out selected consolidated financial information.
|
|
|
Three-month periods ended |
||
|
|
|
June 30, |
|
June 30, |
|
|
|
|
|
Recasted |
|
|
|
$ |
|
$ |
Total revenues |
|
|
10.628 |
|
16.272 |
Adjusted EBITDA1 |
|
|
(10.667) |
|
(11.351) |
Net loss |
|
|
(9.800) |
|
(6.504) |
Net loss attributable to equity holders of the |
|
|
(8.314) |
|
(4.284) |
Net loss attributable to non-controlling interest |
|
|
(1.486) |
|
(2.220) |
Basic and diluted loss attributable |
|
|
(0.51) |
|
(0.72) |
|
|
As at |
|
As at |
|
As at |
|
|
$ |
|
$ |
|
$ |
Total assets |
|
30.538 |
|
30.928 |
|
104.955 |
Working capital2 |
|
(25.027) |
|
(17.484) |
|
7.071 |
Non-current financial liabilities |
|
17.616 |
|
17.455 |
|
13.800 |
(Deficiency) equity attributable to equity holders of the Company |
|
(18.398) |
|
(11.940) |
|
48.116 |
(Deficiency) equity attributable to non-controlling interest |
|
(17.107) |
|
(15.621) |
|
12.722 |
1 The Adjusted EBITDA is a non-GAAP measure. It is not a standard measure endorsed by US GAAP requirements. A reconciliation to the Company’s net loss is presented below. In the quarter ended September 30, 2022, the Company recasted comparative Adjusted EBITDA to conform to its current definition. As a result, the following adjustments were removed in the current and comparative quarters: litigation provisions, business acquisition and integration costs, signing bonus, severance and related costs, and write-down of inventories and deposits.
2 Working capital is calculated by subtracting current liabilities from current assets. Because there is no standard method endorsed by US GAAP, the results may not be comparable to similar measurements presented by other public companies. Current assets as at June 30, 2023, March 31, 2023 and March 31, 2022 were $23.399, $23.550 and $37.388 respectively, and current liabilities as at June 30, 2023, March 31, 2023 and March 31, 2022 were $48.426, $41.034 and $30.317 respectively.
43
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CONSOLIDATED FINANCIAL ANALYSIS
NON-GAAP FINANCIAL PERFORMANCE MEASURES
The Company uses one adjusted financial measure, Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) to assess its operating performance. This non-GAAP financial measure is presented in a consistent manner, unless otherwise disclosed. The Company uses this measure for the purposes of evaluating its historical and prospective financial performance, as well as its performance relative to competitors. The measure also helps the Company to plan and forecast for future periods as well as to make operational and strategic decisions. The Company believes that providing this information to investors, in addition to its GAAP financial statements, allows them to see the Company’s results through the eyes of Management, and to better understand its historical and future financial performance. Neptune’s method for calculating Adjusted EBITDA may differ from that used by other corporations.
A reconciliation of net loss to Adjusted EBITDA is presented below.
ADJUSTED EBITDA
Although the concept of Adjusted EBITDA is not a financial or accounting measure defined under US GAAP and it may not be comparable to other issuers, it is widely used by companies. Neptune obtains its Adjusted EBITDA measurement by excluding from its net loss the following items: net finance costs (income), depreciation and amortization, and income tax expense (recovery). Other items such as equity classified stock-based compensation, non-employee compensation related to warrants, impairment losses on non-financial assets, revaluations of derivatives, costs related to conversion from IFRS to US GAAP and other changes in fair values are also added back to Neptune's net loss. The exclusion of net finance costs (income) eliminates the impact on earnings derived from non-operational activities. The exclusion of depreciation and amortization, stock-based compensation, non-employee compensation related to warrants, impairment losses, revaluations of derivatives and other changes in fair values eliminates the non-cash impact of such items, and the exclusion of costs related to conversion from IFRS to US GAAP, together with the other exclusions discussed above, present the results of the on-going business. From time to time, the Company may exclude additional items if it believes doing so would result in a more effective analysis of underlying operating performance. Adjusting for these items does not imply they are non-recurring. For purposes of this analysis, the Net finance costs (income) caption in the reconciliation below includes the impact of the revaluation of foreign exchange rates.
In the quarter ended September 30, 2022, the Company recast comparative Adjusted EBITDA to conform to the current definition. As a result, the following adjustments were removed in the current and comparative quarters: litigation provisions, business acquisition and integration costs, signing bonus, severance and related costs, and write-down of inventories and deposits.
Adjusted EBITDA1 reconciliation, in millions of dollars
|
|
Three-month periods ended |
||
|
|
June 30, |
|
June 30, |
|
|
|
|
Recasted |
|
|
|
|
|
Net loss for the period |
|
$(9.800) |
|
$(6.504) |
Add (deduct): |
|
|
|
|
Depreciation and amortization |
|
0.341 |
|
1.039 |
Revaluation of derivatives |
|
(3.617) |
|
(9.524) |
Net finance costs |
|
1.793 |
|
1.635 |
Equity classified stock-based compensation |
|
0.616 |
|
1.187 |
Impairment loss on long-lived assets |
|
— |
|
0.816 |
Adjusted EBITDA1 |
|
$(10.667) |
|
$(11.351) |
1 The Adjusted EBITDA is not a standard measure endorsed by US GAAP requirements. In the quarter ended September 30, 2022, the Company recasted comparative Adjusted EBITDA to conform to its current definition. As a result, the following adjustments were removed in the current and comparative quarters: litigation provisions, business acquisition and integration costs, signing bonus, severance and related costs, and write-down of inventories and deposits.
44
Management’s Discussion and Analysis of Financial Condition and Results of Operations
OPERATING SEGMENTS
The Company’s management structure and performance is measured based on a single segment, which is the consolidated level, as this is the level of information used in internal management reports that are reviewed by the Company’s Chief Operating Decision Maker.
Geographical information
Revenue is attributed to geographical locations based on the origin of customers’ location.
|
|
|
Three-month periods ended |
||
|
|
|
June 30, |
|
June 30, |
|
|
|
Total |
|
Total |
|
|
|
|
|
|
Canada |
|
|
$3.801 |
|
$5.056 |
United States |
|
|
6.805 |
|
10.932 |
Other countries |
|
|
0.022 |
|
0.284 |
|
|
|
$10.628 |
|
$16.272 |
The Company’s property plant and equipment, intangible assets, goodwill and assets held for sale are attributed to geographical locations based on the location of the assets.
|
|
|
|
|
|
As at |
|
|
|
|
|
|
June 30, 2023 |
|
|
Property, plant and equipment |
|
Goodwill |
|
Intangible assets |
Canada |
|
$0.224 |
|
$2.480 |
|
$1.531 |
United States |
|
1.035 |
|
— |
|
— |
Total |
|
$1.259 |
|
$2.480 |
|
$1.531 |
|
|
|
|
|
|
As at |
|
|
|
|
|
|
March 31, 2023 |
|
|
Property, plant and equipment |
|
Goodwill |
|
Intangible assets |
Canada |
|
$0.251 |
|
$2.426 |
|
$1.607 |
United States |
|
1.152 |
|
— |
|
— |
Total |
|
$1.403 |
|
$2.426 |
|
$1.607 |
45
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RESULTS ANALYSIS
Summary of Changes to the Condensed Consolidated Interim Statements of Loss
three-month period ended June 30, 2023 compared to June 30, 2022
|
|
For the three-month period ended |
Changes |
||
|
|
June 30, 2023 |
June 30, 2022 |
Changes in $ |
Changes in % |
|
|
Restated |
Restated |
|
|
Total revenues |
|
$10.628 |
$16.272 |
(5.644) |
-34.7% |
Total cost of sales |
|
(9.286) |
(19.167) |
9.881 |
51.6% |
Gross profit (loss) |
|
1.342 |
(2.895) |
4.237 |
146.4% |
Gross profit (loss) margin |
|
12.6% |
-17.8% |
30.4% |
-171.0% |
|
|
|
|
|
|
Research and development expenses, net of tax credits and grants |
|
(0.022) |
(0.215) |
0.193 |
89.8% |
Selling, general and administrative expenses |
|
(11.972) |
(10.552) |
(1.420) |
-13.5% |
Impairment losses |
|
— |
(0.816) |
0.816 |
100.0% |
Other elements from the operating loss |
|
— |
0.085 |
(0.085) |
-100.0% |
Loss from operating activities |
|
(10.652) |
(14.393) |
3.741 |
26.0% |
|
|
|
|
|
|
Net finance costs |
|
(1.793) |
(0.915) |
(0.878) |
-96.0% |
Foreign exchange gain (loss) |
|
(0.184) |
1.407 |
(1.591) |
-113.1% |
Gain on issuance and change in fair value of derivatives |
|
2.829 |
7.397 |
(4.568) |
-61.8% |
Litigation settlement |
— |
— |
— |
0.0% |
|
|
|
0.852 |
7.889 |
(7.037) |
-89.2% |
Loss before income taxes |
|
(9.800) |
(6.504) |
(3.296) |
-50.7% |
|
|
|
|
|
|
Net loss |
|
(9.800) |
(6.504) |
(3.296) |
-50.7% |
|
|
|
|
|
|
Adjusted EBIDTA |
|
(10.667) |
(11.351) |
0.684 |
6.0% |
Revenues
Total consolidated revenues for the three-month period ended June 30, 2023 amounted to $10.6 million representing a decrease by $5.6 million or 35% compared to $16.3 million for the three-month period ended June 30, 2022.
Food and beverages revenues represented an increase of $0.2 million or 2% in comparison to the quarter ended June 30, 2022, resulting from Sprout’s extended distribution in all 50 U.S. states and Canada. As for Neutraceuticals revenues, there was a decrease of $2.9 million or 57% when compared to the same period the prior year due to timing as Nutraceutical B2B sales are not quarterly linear. In addition, there was a decrease of $2.7 million or 100% in Cannabis revenues from the now-divested Cannabis business.
Geographic Revenues
From a geographic point of view, revenues for the current quarter decreased by $1.3 million or 25% in Canada, decreased by $4.1 million or 38% in the United States and decreased by $0.263 million or 92% for other countries (all royalty revenues) compared to the quarter ended June 30, 2022.
The decrease of revenue in Canada for the quarter is mainly due to the divestiture of the Cannabis business.
Gross Profit (Loss)
Gross profit (loss) is calculated by deducting the cost of sales from total revenues. Cost of sales consists primarily of costs incurred to manufacture products, including sub-contractors, freight expenses and duties on raw materials, storage and handling costs and lab testing on raw materials, and to acquire finished goods.
The consolidated gross profit (loss) for the three-month period ended June 30, 2023 amounted to $1.3 million compared to $(2.9) million for the three-month period ended June 30, 2022, an improvement of $4.2 million or 146%.
This change is due to a decrease in revenues of $5.6 million offset by a reduction in cost of sales of $9.9 million. This improvement to the Gross profit was attributable to the increase in food and beverage revenues, the divestiture of the cannabis business and cost cutting measures, offset by the decrease in neutraceutical revenues due to timing of customer orders
46
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross Margin Percentage
For the three-month periods ended June 30, 2023 and 2022, the consolidated gross margin went from (17.8)% in 2022 to 12.6% in 2023, an increase of 30.4%.
Research and Development (“R&D”) Expenses
For the quarter ended June 30, 2023, the consolidated R&D expenses amounted to $0.0 million, compared to $0.2 million for the quarter ended June 30, 2022, a decrease by $0.2 million or 90%, as most of the R&D expenses used to be in the now divested Cannabis business.
Selling, General and Administrative (“SG&A”) Expenses
Consolidated SG&A expenses for the quarter ended June 30, 2023 amounted to $12.0 million compared to $10.6 million for the same period the prior year, an increase of $1.4 million or 13.5% primarily due to the additional legal accrual offset by a decrease in payroll and payroll related expenses.
Impairment losses
Aggregate impairment losses amounted to $0.0 million compared to $0.8 million for the same period last year, decrease of $0.8 million or 100%. There was no impairment losses for the current period.
Finance costs
Net finance costs, foreign exchange and loss on issuance of derivatives amounted to a gain of $0.9 million for the quarter ended June 30, 2023, compared to a gain of $7.9 million for the three-month period ended June 30, 2022, a decrease of $7 million or 89% for the quarter ended June 30, 2023. The variation for this period is mainly attributable to the increase in interest expense on the Company’s financing facilities, the reduction in the gain on revaluation of warrant liabilities as well as foreign exchange impact. The gain on revaluation of the warrants was primarily driven by the decrease in the Company's stock price.
Income taxes
Income tax expense (recovery) was nil for the three-month periods ended June 30, 2023 and 2022. As entities are in carry forward loss positions, there is no impact to income taxes for the quarter.
Adjusted EBITDA
Consolidated Adjusted EBITDA loss decreased by $0.7 million or 6% for the quarter ended June 30, 2023 to an Adjusted EBITDA loss of $10.7 million compared to $11.4 million for the quarter ended June 30, 2022. The decrease in Adjusted EBITDA loss for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 was driven by an improvement in loss from operating activities of $3.3 million, a reduction of impairment losses of $.8 million offset by a litigation settlement of $3.4 million and an addback of SG&A expenses including depreciation, equity classified stock-based compensation, non-employee compensation related to warrants of $4.8 million.
Net loss
For the quarter ended June 30, 2023, the net loss amounted to $9.8 million compared to $6.5 million for the quarter ended June 30, 2022, an increase by $3.3 million or 51%. was driven by the increase in gross profit of $4.2 million, a decrease in R&D expenses of $0.2 million, a reduction in impairment losses of $0.8 million, a decrease in SG&A expenses of $2.0 million, offset by an increase in finance costs of $0.9 million, an increase in foreign exchange loss of $1.6 million, a reduction in gain on the fair value of derivatives of $4.6 million and an increase in litigation settlement of $3.4 million.
47
Management’s Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL AND CAPITAL MANAGEMENT
USE OF PROCEEDS
The use of proceeds for the three-month periods ended June 30, 2023 and 2022, in millions of dollars, was as follows:
|
|
Three-month periods ended |
||
|
|
June 30, |
|
June 30, |
|
|
2023 |
|
2022 |
|
|
|
|
|
Sources: |
|
|
|
|
Proceeds from the issuance of shares and warrants through a Direct Offering |
|
$4.000 |
|
$5.000 |
Proceeds from exercise of options and pre-funded warrants |
|
0.001 |
|
— |
Increase in loans and borrowings |
|
2.009 |
|
— |
Foreign exchange gain on cash and cash equivalents held in foreign |
|
0.437 |
|
— |
|
|
6.447 |
|
5.000 |
|
|
|
|
|
Uses: |
|
|
|
|
Acquisition of property, plant and equipment |
|
0.004 |
|
— |
Repayment of loans and borrowings |
|
1.000 |
|
— |
Costs of issuance of shares and warrants |
|
0.759 |
|
0.465 |
Foreign exchange loss on cash and cash equivalents held in foreign |
|
— |
|
0.647 |
Cash flows used in operating activities |
|
5.298 |
|
6.382 |
|
|
7.061 |
|
7.494 |
|
|
|
|
|
Net cash outflows |
|
$(0.614) |
|
$(2.494) |
Sources of Funds
For the three-month period ended June 30, 2023, the increase in loans and borrowings, net of repayments, was $2.0 million and proceeds from a Direct Offering were of $4.0 million. The proceeds were mainly used for operating activities, primarily inventory procurement, salaries and professional fees. For the three-month period ended June 30, 2022, gross proceeds of $5.0 million were raised from a Direct Offering with $6.4 million of cash being used for operating activities and an additional $1.1 million for other purposes, bringing net cash outflows in the period to $2.5 million.
Direct Offerings
On May 15, 2023, Neptune issued a total of 7,706,050 pre-funded warrants (“Pre-Funded Warrants”), along with 4,415,162 common shares of the Company, as part of a registered direct offering ("May 2023 Direct Offering"). Each Pre-Funded Warrant was exercisable for one Common Share. The common shares and the Pre-Funded Warrants were sold together with 12,121,212 May 2023 Warrants (the "May 2023 Warrants"). Each of the May 2023 Warrant is exercisable for one common share. Each of the common share and Pre-Funded Warrants and the accompanying May 2023 Warrants were sold together at a combined offering price of $0.33, for aggregate gross proceeds of $4.0 million before deducting fees and other estimated offering expenses. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $0.0001 and are exercisable commencing on the Closing Date and will terminate when such Pre-Funded Warrants are exercised in full. The May 2023 Warrants have an exercise price of $0.33 per share and can be exercised for a period of 5 years from the date of issuance. The Pre-Funded Warrants were exercised in part during the three-month ended June 30, 2023 for gross proceeds of $541.
On June 23, 2022, Neptune closed agreements with several institutional investors for the purchase and sale of an aggregate of 1,300,000 common shares of the Company, 645,526 pre-funded warrants and accompanying series of warrants to purchase up to an aggregate of 2,591,052 common shares warrants, at an offering price of $2.57 per share and accompanying warrants in a registered direct offering priced at-the-market under Nasdaq rules. Each series of warrants have an exercise price of $2.32 per share and are immediately exercisable upon issuance. One series of warrants will expire two years following the date of issuance and one series of warrants will expire five years following the date of issuance. The gross proceeds from the offering were $5.0 million, prior to deducting placement agent's fees and other offering expenses payable by Neptune. The pre-funded warrants were fully exercised on June 24, 2022 for $65.
Loans and borrowings
On July 13, 2022, Neptune announced that Sprout Foods Inc. ("Sprout"), the Company's organic plant-based baby food and toddler snack company, entered into an amendment of each of its existing Secured Promissory Notes. In connection with this amendment, investment funds managed by Morgan Stanley Expansion Capital ("Morgan Stanley" or "MSEC") have agreed to immediately commit an additional $3 million in Secured Promissory Notes to Sprout. The maturity date of the note facility of February 1, 2024 is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The $13.0 million of amended Secured Promissory Notes have a 10% interest rate per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. The amended Secured Promissory Notes may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Company and MSEC, into common shares of the Company. MSEC was issued 372,670 common shares of Neptune, having a value of $0.6 million in connection with this commitment, for the payment of borrowing costs. On April 27, 2023, the Company announced that Sprout extended the maturity of its existing $13 million secured promissory note with MSEC. The note maturity has been extended from February 1, 2024 to December 31, 2024, which will bear interest at the rate of 15.0% per annum through and including December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024.
48
Management’s Discussion and Analysis of Financial Condition and Results of Operations
On August 26, 2022, Neptune's Sprout subsidiary entered in a new $0.25 million Secured Promissory Note agreement. The maturity date of the new note facility is February 1, 2024. The $0.25 million Secured Promissory Note has a 10% interest rate per annum, increasing by 1% per annum every three months during the term of this Secured Promissory Note. The interest will be compounded and added to the principal amount on a quarterly basis. This Secured Promissory Note may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Company and the holder, into common shares of the Company. Neptune issued 36,765 common shares having a value of $0.1 million in connection with this Secured Promissory Note, for the payment of borrowing costs.
On November 8, 2022, Sprout entered into two agreements to issue an additional $0.55 million of Secured Promissory Notes, on the same terms as the previous Secured Promissory Note discussed above. In connection with these financings, Neptune issued 146,330 common shares for a value of $0.1 million to the holders of these Secured Promissory Notes on February 15, 2023, for the payment of borrowing costs.
On January 13, 2023, Neptune announced that it has closed on a senior secured notes financing (such notes, the "Notes") for gross proceeds of $4.0 million with CCUR Holdings, Inc. and Symbolic Logic, Inc. (collectively, the "Noteholders"). The Notes will mature 12 months from the initial closing and bear interest at a rate of 16.5% per annum. The notes are secured by the assets of Neptune excluding the assets of Sprout. Interest will be payable in kind on the first 6 monthly payment dates after the initial closing date and thereafter will be payable in cash. Pursuant to the terms of the Notes, the Company also issued to the Noteholders warrants to purchase an aggregate of 850,000 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of $0.53 per common share. On March 9, 2023, the Company entered into a Waiver and First Amendment to the Notes (the "Waiver Agreement"). The Waiver Agreement waives certain administrative, regulatory and financial statement related covenants as further described in the Waiver Agreement as required by the terms of the Notes. The lender has the right to demand immediate repayment in the event of default. Furthermore, in connection with the Waiver Agreement, the Notes were amended to provide that the Purchasers shall be paid an exit fee in the aggregate amount of $0.2 million, payable as follows: (i) on or prior to May 15, 2023, $0.1 million and (ii) on the Maturity Date (as defined in the Note Purchase Agreement), $0.1 million and the interest rate was increased to 24% for a period extending until the Company meets specified criteria in the Waiver Agreement. On May 22, 2023, the "Company" entered into a Waiver and Second Amendment to Note Purchase Agreement (the "Second Waiver Agreement"), with CCUR Holdings, Inc. ("Collateral Agent") and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023 (the "Note Purchase Agreement"). The Second Waiver Agreement provides that the required prepayment of $2 million (the "Mandatory Prepayment"), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023. Pursuant to the Second Waiver Agreement, the Company was required to pay, and has paid, $1 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of 24% per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due
On January 25, 2023, Neptune announced that its organic baby food brand subsidiary, Sprout Organics, has entered into an accounts receivable factoring facility with Alterna Capital Solutions, LLC ("Alterna"). The maximum available is $5 million. The terms of the agreement include a Funds Usage Fee of prime plus 1% with a minimum interest rate of 8% per annum. Alterna was granted a security interest in Sprout's accounts receivable. The agreement will remain in effect for a 12-month period, effective January 23, 2023, and will be automatically renewed. Neptune provided a commercial guaranty in connection with this agreement. On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna, effective April 21, 2023. The inventory line will provide Sprout with working capital for additional inventory to meet consumer demand and product line expansion. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023, adding a line of inventory to the accounts receivable factoring facility that is already in place.
On March 10, 2023, Sprout issued promissory notes for gross proceeds of $0.3 million to various investors, on the same terms as the MSEC promissory notes. Pursuant to the terms of the promissory notes, the Company also issued to these investors warrants ("March 2023 Warrants") to purchase an aggregate of 111,111 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of $0.54 per common share. The aggregate fair value on issuance of the March 2023 Warrants was $0.0 million.
CAPITAL RESOURCES
Liquidity position
As at June 30, 2023, the Company’s liquidity position, consisting of cash and cash equivalents, was $1.4 million. Furthermore, as at June 30, 2023, the Company’s trade and other payables exceed its total current assets. Accordingly, the Company is required to actively manage its liquidity and expenses and payments of payables are not being made as the amounts become due. As of the date the financial statements are authorized for issuance, the cash balance is expected to be sufficient to operate the business for approximately 1 month under the current business plan. The Company requires funding in the very near term in order to continue its operations. If the Company is unable to obtain funding in the near-term, it may have to cease operations and liquidate its assets.
Liquidity and Capital Resources
Cash flows and financial condition for the three-month periods ended June 30, 2023 and 2022
Summary
As at June 30, 2023, cash and cash equivalent totaled $1.4 million, a decrease of $0.6 million or 31% compared to cash and cash equivalents totaling $2.0 million as at June 30, 2022.
Operating activities
During the three-month period ended June 30, 2023 our operating activities used cash of $5.3 million compared to $6.4 million in the three-month period ended June 30, 2022.
Investing activities
The Company's business models require low capital expenditures ("CAPEX") future investments. For the three-month period ended June 30, 2023, $0.0 million was used for investing activities; in the same period the prior year, $0.0 million was used for investing activities.
49
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financing activities
The Company has been successful in obtaining financing from public issuances, private placements and debts. The Company entered into Registered Direct Offerings closed on June 23, 2022 ($5.0 million), October 11, 2022 ($6.0 million) and May 15, 2023 ($4.0 million). Secured promissory notes totaling $4.1 million were issued by Sprout during the year ended March 31, 2023: $3.0 million in July 2022, $0.25 million in August 2022, $0.55 million in November 2022 and $0.3 million in March 2023. Senior secured notes of $4.0 million were also issued by Neptune in January 2023. Also in January 2023, Sprout entered into an accounts receivable factoring facility, for which the maximum available was $5.0 million, which was increased to $7.5 million in April 2023 following the addition of an inventory financing (of which $4.9 million was used as at June 30, 2023).
The Company's current cash position will be sufficient to support its financial needs approximately 1 month under the current business plan. Should the Company's various financing initiatives such as potential public issuances, private placements, preferred shares issuances, or debt financings not materialize, further actions such as further cost reduction initiatives and Company spinoffs of subsidiaries remain as viable options. See the Going Concern section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Furthermore, certain liabilities, such as the warrant liabilities, are dependent on Neptune’s share price and would only become payable if they are in the money. The warrants, if exercised, settle in common shares of the Company and therefore do impact on the Company’s cash. Unless exercised on a cashless basis (where permitted), warrant holders are required to pay the cash strike price to exercise the warrant and thus the exercise of warrants could result in a cash infusion to the Company.
Loans and borrowings
On February 10, 2021, as part of the Sprout acquisition, Sprout issued a promissory note of $10.0 million guaranteed by the Company and secured by a first-ranking mortgage on all movable assets of Sprout current and future, corporeal and incorporeal, and tangible and intangible. The outstanding principal balance bears interest at the rate of 10% per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. On April 27, 2023, the Company announced that Sprout extended the maturity of its existing $13 million secured promissory note with MSEC. The note maturity has been extended from February 1, 2024 to December 31, 2024, which will bear interest at the rate of 15.0% per annum through and including December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024.
On August 26, 2022, Sprout entered in a new $0.25 million Secured Promissory Note agreement. The maturity date of the new note facility is February 1, 2024. The $250,000 Secured Promissory Note has a 10% interest rate per annum, increasing by 1% per annum every three months during the term of this Secured Promissory Note. The interest will be compounded and added to the principal amount on a quarterly basis. This Secured Promissory Note may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Company and the holder, into common shares of the Company. Neptune issued 36,765 common shares for a value of $0.1 million in connection with this Secured Promissory Note, for the payment of borrowing costs.
On November 8, 2022, Sprout entered into an agreement to issue an additional $0.55 million of Secured Promissory Notes, on the same terms as the Secured Promissory Note entered into with MSEC. On February 15, 2023, in connection with this financing, Neptune issued 146,330 common shares to the holders of these Secured Promissory Notes for a value of $0.1 million.
On January 13, 2023, Neptune announced that it has closed on a senior secured notes financing (such notes, the "Notes") for gross proceeds of $4.0 million with CCUR Holdings, Inc. and Symbolic Logic, Inc. (collectively, the "Noteholders"). The Notes will mature 12 months from the initial closing and bear interest at a rate of 16.5% per annum. The notes are secured by the assets of Neptune excluding the assets of Sprout. Interest will be payable in kind on the first 6 monthly payment dates after the initial closing date and thereafter will be payable in cash. Pursuant to the terms of the Notes, the Company also issued to the Noteholders warrants to purchase an aggregate of 850,000 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of $0.53 per common share. On March 9, 2023, the Company entered into a Waiver and First Amendment to the Notes (the "Waiver Agreement"). The Waiver Agreement waives certain administrative, regulatory and financial statement related covenants as further described in the Waiver Agreement as required by the terms of the Notes. The lender has the right to demand immediate repayment in the event of default. Furthermore, in connection with the Waiver Agreement, the Notes were amended to provide that the Purchasers shall be paid an exit fee in the aggregate amount of $0.2 million, payable as follows: (i) on or prior to May 15, 2023, $0.1 million and (ii) on the Maturity Date (as defined in the Note Purchase Agreement), $0.1 million and the interest rate was increased to 24% for a period extending until the Company meets specified criteria in the Waiver Agreement.
On January 25, 2023, Neptune announced that its organic baby food brand subsidiary, Sprout Organics, has entered into an accounts receivable factoring facility with Alterna Capital Solutions, LLC ("Alterna"). The maximum available is $5 million. The terms of the agreement include a Funds Usage Fee of prime plus 1% with a minimum interest rate of 8% per annum. Alterna was granted a security interest in Sprout's accounts receivable. The agreement will remain in effect for a 12-month period, effective January 23, 2023, and will be automatically renewed. Neptune provided a commercial guaranty in connection with this agreement. On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna, effective April 21, 2023. The inventory line will provide Sprout with working capital for additional inventory to meet consumer demand and product line expansion. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023, adding a line of inventory to the accounts receivable factoring facility that is already in place.
On March 10, 2023, Sprout issued promissory notes for gross proceeds of $0.3 million to various investors, on the same terms as the MSEC promissory notes. Pursuant to the terms of the promissory notes, the Company also issued to these investors warrants ("March 2023 Warrants") to purchase an aggregate of 111,111 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of $0.54 per common share.
50
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Form S-3 Limitations
As a result of our inability to timely file the Annual Report for the year ended March 31, 2023 under the Securities Exchange Act of 1934, as amended, we will not be eligible to use a registration statement on Form S-3 to conduct public offerings of our securities until we have timely filed all periodic reports with the SEC for a period of twelve months. Our inability to use Form S-3 during this time period may have a negative impact on our ability to access the public capital markets in a timely fashion because we are required to file a long-form registration statement on Form S-1 and have it reviewed and declared effective by the SEC. This may limit our ability to access the public markets to raise debt or equity.
Equity
Equity consists of the following items (in millions):
|
|
June 30, |
|
March 31, |
|
|
2023 |
|
2023 |
|
|
|
|
|
Share capital |
$ |
323.411 |
$ |
321.946 |
Warrants |
|
6.291 |
|
6.155 |
Additional paid-in capital |
|
58.755 |
|
58.139 |
Accumulated other comprehensive loss |
|
(14.899) |
|
(14.539) |
Deficit |
|
(391.956) |
|
(383.641) |
Total equity (deficiency) attributable to equity holders of the Company |
$ |
(18.398) |
$ |
(11.940) |
Total equity (deficiency) attributable to non-controlling interest |
|
(17.107) |
|
(15.621) |
Total equity (deficiency) |
$ |
(35.505) |
$ |
(27.561) |
CONTRACTUAL OBLIGATIONS
The following are the contractual obligations as at June 30, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
Required payments per year |
|
Carrying |
|
Contractual |
|
Less than |
|
1 to |
|
4 to |
|
More than |
Trade and other payables and provisions |
|
$29.487 |
|
$27.765 |
|
$26.737 |
|
$— |
|
$— |
|
$— |
Lease liabilities1 |
|
2.280 |
|
2.530 |
|
0.504 |
|
0.826 |
|
0.291 |
|
0.908 |
Loans and borrowings2,4 |
|
25.218 |
|
26.305 |
|
9.565 |
|
16.740 |
|
— |
|
— |
Other liability3 |
|
0.023 |
|
15.000 |
|
— |
|
— |
|
— |
|
15.000 |
|
|
$57.008 |
|
$71.600 |
|
$36.806 |
|
$17.566 |
|
$0.291 |
|
$15.908 |
(1) Includes interest payments to be made on lease liabilities corresponding to discounted effect.
(2) Includes interest payments to be made on loans and borrowings.
(3) According to the employment agreement with the CEO, a long-term incentive is payable if the Company reaches a level of market capitalization.
Liabilities related to warrants are excluded from the table above, as they are to be settled in shares. A $2.75 million accrual for the settlement of a legal case was also excluded from the contractual cash flows for trade and other payables and provisions, as the Company intends to settle in shares.
Under the terms of its financing agreements, the Company is not required to meet financial covenants. However the Company does have several covenants related to other matters such as financial statement deadlines, which if not respected, provide for certain obligations to become due on demand. The Company does not currently have funds available to repay lenders were that to occur.
On November 14, 2021, the Company and its CEO entered into an agreement pursuant to which the CEO’s existing employment agreement was amended to waive the Company’s obligation to procure directors and officers insurance coverage of up to $15 million for the period covering July 1, 2021 to July 31, 2022. The parties agreed that if the Company had successfully completed a strategic partnership prior to December 31, 2021, the CEO would have been entitled to approximately $6.9 million in cash and would have been granted fully vested options to purchase 8.5 million shares of the Company’s common stock. The parties also agreed that if certain contingencies did not occur by December 31, 2021, the parties would negotiate for a period of 30 days and, in the absence of an agreement, would be entitled to a grant of vested RSUs with a value of approximately $8.6 million (or if the Company is unable to grant such RSUs, then a combination of cash and vested RSUs with equivalent value). On January 31, 2022, the parties agreed to extend the 30-day negotiation period for an additional 30 days. As the strategic partnership was not consummated by December 31, 2021, the CEO was entitled to the compensation mentioned above. The Company has accrued in trade and other payable the liability to the CEO of $8.6 million during the year ended March 31, 2023 and the balance of the accrual was $0.0 million as at June 30, 2023. The related charge for the three-month period ended June 30, 2023 is nil and would have otherwise been included in selling general and administrative expenses.
The Company is required to pay royalties of 1% of its revenues in semi-annual installments, for an unlimited period to the former CEO. A provision of $1.0 million for royalty payments is included in the table above for amounts currently due and is not otherwise included in table above.
Refer also to provisions disclosed in note 9, commitments disclosed in note 16(a) and legal proceedings in note 16(b) of the consolidated financial statements for the years ended June 30, 2023 and 2022.
The Company has no significant off-balance sheet arrangements as at June 30, 2023, other than those mentioned above and the commitments disclosed in note 16 of the condensed consolidated interim financial statements for the three-month periods ended June 30, 2023 and 2022.
51
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ACCOUNTING POLICIES
OUR ACCOUNTING POLICIES
Please refer to Note 3 of the annual consolidated financial statements as at March 31, 2023 for more information about significant accounting policies used to prepare the financial statements.
When preparing the financial statements in accordance with US GAAP, the management of Neptune must make estimates and judgements that affect the amounts reported in the financial statements and the notes thereto. Such estimates are based on Management’s knowledge of current events and actions that the Company may take in the future.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The condensed consolidated interim financial statements are prepared in accordance with US GAAP. In preparing the condensed consolidated interim financial statements for the three-month periods ended June 30, 2023 and 2022, Management made estimates in determining transaction amounts and statement of financial position balances. Certain policies have more importance than others. We consider them critical if their application entails a substantial degree of judgment or if they result from a choice between numerous accounting alternatives and the choice has a material impact on reported results of operation or financial position. Please refer to the annual consolidated financial statements as at March 31, 2023 for more information about the Company’s most significant accounting policies and the items for which critical estimates were made in the financial statements and should be read in conjunction with the notes to the consolidated financial statements for the years ended March 31, 2023 and 2022.
Estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Critical accounting estimates are:
An allowance for current expected credit losses is maintained to reflect credit risk for trade accounts receivable based on a current expected credit loss model which factors in changes in credit quality since the initial recognition of trade accounts receivable based on customer risk categories. Current expected credit losses also consider collection history and specific risks identified on a customer-by-customer basis. Trade accounts receivable are presented net of allowances for current expected credit losses.
Most of the Company's customers are distributors for a given territory and are privately-held, provincially owned and publicly owned companies. The profile and credit quality of the Company’s customers vary significantly. Adverse changes in a customer’s financial position could cause the Company to limit or discontinue conducting business with that customer, require the Company to assume more credit risk relating to that customer’s future purchases or result in uncollectible accounts receivable from that customer. Such changes could have a material adverse effect on business, consolidated results of operations, financial condition and cash flows.
The Company’s extension of credit to customers involves judgment and is based on an evaluation of each customer’s financial condition and payment history. From time to time, the Company will temporarily transact with customers on a prepayment basis where circumstances warrant. The Company’s credit controls and processes cannot eliminate credit risk.
During the three-month period ended June 30, 2023, the Company transacted with a few new customers for which financial positions deteriorated during the year. The Company has recorded specific provisions related to these customers.
The expected credit loss for the three-month period ended June 30, 2023 was $0.0 million and for June 30, 2022 was $0.0 million. As at June 30, 2023, 85% of our trade receivables are past due (March 31, 2023 – 82%). We have provided for 72% of past due receivables as at June 30, 2023 (March 31, 2023- 66%). Most of the past due trade receivables are from legacy customers of B2B cannabis services revenues as well as legacy Health and Wellness customers, for which they were provided for in fiscal 2021.
Expected credit loss is subject to estimation risk and measurement uncertainty because the financial health of certain customers is difficult to predict.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. As necessary, the Company records write-downs for excess, slow moving and obsolete inventory. To determine these amounts, the Company regularly reviews inventory quantities on hand and compares them to estimates of historical utilization, future product demand, and production requirements. Write-downs of inventories to net realizable value are recorded in cost of sales in the consolidated financial statements.
In the quarters ended June 30, 2023 and 2022, inventories have been reduced by nil and $3.1 million respectively, as a result of a write-down to their net realizable value, which is included in cost of sales.
The write-off of inventory for the three-month period ended June 30, 2022 was largely related to the completion of inventory write-downs of legacy Health and Wellness products as well as inventory write downs for legacy products related to the SugarLeaf facility.
Net realizable value is subject to measurement uncertainty because it can be difficult to predict market demands and timing of supply due to logistics.
The Company assesses at each reporting date whether there is an indication that an asset group or a reporting unit may be impaired.
During the second quarter of 2022, there were changes in the general economic and financial conditions of the markets the Company serves. The Company’s Sprout reporting unit was adversely impacted during the second quarter of 2022 by these conditions, which impacted the operating results. Accordingly, management concluded that these factors were indicators of impairment.
52
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As a result, management performed an impairment test for the Sprout reporting unit, for which it revised its assumptions on projected earnings and cash flows growth, as well as its assumptions on discount rates used to apply to the forecasted cash flows, using its best estimate of the conditions existing at September 30, 2022. Although management used its best estimate to assess the potential impact of the changes in the general economic conditions on the Company’s business, management exercised significant judgment to estimate forecasted cash flows and discount rate, using assumptions which are subject to significant uncertainties. Accordingly, differences in estimates could affect whether a reporting unit is impaired and the dollar amount of that impairment, which could be material. The Company compared the carrying amount of the reporting unit to the fair value. The fair value of the Sprout reporting unit was determined to be lower than the carrying value and a $7,570,471 goodwill impairment expense was recorded in the quarter ended September 30, 2022.
The fair value of the reporting unit was estimated using a discounted cash flow model with a WACC post-tax discount rate of 11.0% and a market multiples valuation approach. The discount rate represents the risk adjusted WACC of the reporting unit, based on publicly available information and that of comparable companies operating in similar industries. Determination of the WACC requires separate analysis of the cost of equity and debt, and considers a risk premium based on an assessment of risks related to the projected cash flows of the reporting unit.
Cash flows were projected based on past experience, actual operating results and the three-year business plan including a terminal growth rate of 3.5%.
In the third quarter of 2022 due to the Company’s sustained decrease in share price, the Company concluded a triggering event occurred and performed a quantitative impairment test for the Sprout reporting unit. As part of the impairment testing process, the Company considered a number of factors including, but not limited to, current macroeconomic conditions such as inflation, economic growth, and interest rate movements, industry and market considerations, stock price performance (including performance relative to peers) and overall financial performance of the Sprout reporting unit. Although management used its best estimate to assess the potential impact of the changes in the general economic conditions on the Company’s business, management exercised significant judgment to estimate forecasted cash flows and discount rate, using assumptions which are subject to significant uncertainties. Based on the results of the Company’s third quarter 2022 impairment analysis, the estimated fair value of the Sprout reporting unit exceeded its carrying value, and no impairment was recognized.
The most significant assumptions used to estimate the fair values using a discounted cash flow model included the forecasted revenue, gross margins, net working capital investment, terminal value as well as the discount rate. These significant assumptions are classified as Level 3 in the fair value hierarchy, signifying that they are not based on observable market data. A decrease in the projected cash flow or an increase in discount rate could have resulted in a higher impairment charge. Should these projections not be realized, or the discount rate needs to be increased, an impairment loss may be needed in future periods.
As of March 31, 2023, the Company made the following assessments:
Biodroga – As part of its annual impairment test, Management determined that the fair value of Biodroga was higher than its carrying value and thus no impairment charge was recorded for the reporting unit. The most significant assumptions used to estimate the fair values using discounted cash flow model included the forecasted revenue, gross margins, net working capital investment, terminal value as well as the discount rate. These significant assumptions are classified as Level 3 in the fair value hierarchy, signifying that they are not based on observable market data. A decrease in the projected cash flow or an increase in discount rate could have resulted in an impairment charge. Should these projections not be realized, an impairment loss may be needed in future periods. As of March 31, 2023, the assumptions used in determining the fair value were not subject to a degree of uncertainty that would have caused impairment to be recorded, as there was sufficient headroom between the fair value of the reporting unit and its carrying value.
Sprout – In 2023, as part of the annual impairment test of Sprout, Management determined that the fair value of the reporting unit was lower than its carrying amount. As a result, an impairment charge of $18.0 million was allocated to the Sprout tradename and an impairment charge of $19.5 million was allocated to the goodwill of Sprout. The most significant assumptions used to estimate the fair values using discounted cash flow model included the forecasted revenue, gross margins, net working capital investment, terminal value as well as the discount rate. These significant assumptions are classified as Level 3 in the fair value hierarchy, signifying that they are not based on observable market data. Due to the impairment losses recorded in the second and fourth quarter of fiscal 2023, these assets are now carried at a nil value.
No event that would trigger re-evaluation of this assessment occurred during the three-month period ended June 30, 2023.
On July 8, 2019, the Company granted 100,000 non-market performance options under the Company stock option plan at an exercise price of $155.05 per share to the CEO, expiring on July 8, 2029. These options vest after the attainment of non-market performance conditions within the following ten years. These non-market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revalued up to the date of approval of the amendments (grant date). These options are valued based on level 3 inputs. During the twelve-month period ended March 31, 2022, changes in estimated probability of achievement of the non-market performance conditions or the expected number of years to achieve the performance conditions resulted in a recovery of stock-based compensation recognized under this plan. None of these non-market performance options have vested as at June 30, 2023. Changes in these assumptions would impact the timing of which the expense is recognized. These options were not exercisable as at June 30, 2023 and March 31, 2023.
On July 8, 2019, the Company granted 157,142 market performance options under the Company stock option plan at an exercise price of $155.05 per share to the CEO, expiring on July 8, 2029. The options vest after the attainment of market performance conditions within the following ten years. The market condition was factored into the fair value. Some of these market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revalued up to the date of approval of the amendments (grant date).
53
Management’s Discussion and Analysis of Financial Condition and Results of Operations
On June 23, 2022, Neptune issued a total of 645,526 pre-funded warrants (“Pre-Funded Warrants”), along with 1,300,000 common shares of the Company, as part of a registered direct offering ("June 2022 Direct Offering"). Each Pre-Funded Warrant was exercisable for one Common Share. The common shares and the Pre-Funded Warrants were sold together with 1,945,526 Series C Warrants (the "Series C Warrants"), and 1,945,526 Series D Warrants (the "Series D Warrants" and collectively, the "June 2022 Common Warrants"). Each common share and Pre-Funded Warrant and the accompanying June 2022 Common Warrants were sold together at a combined offering price of $2.57, for aggregate gross proceeds of $5.0 million before deducting fees and other estimated offering expenses. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $0.0001 and are exercisable commencing on the Closing Date and will terminate when such Pre-Funded Warrants are exercised in full. The Series C Warrants and the Series D Warrants have an exercise price of $2.32 per share and can be exercised for a period of 5 years and 2 years respectively from the date of issuance.
Proceeds of the June 2022 Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. The fair value of the liability-classified warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $4,046,836 for the Series C Warrants and $3,080,121 for the Series D Warrants. Because the fair value of the liability classified warrant exceeds the total proceeds, no consideration was allocated to the Common Shares and Pre-Funded Warrants and a loss of $2,126,955 was immediately recognized in the net loss of the period as there were no additional rights or privileges identified. Total issue costs related to this private placement of $465,211, was recorded under finance costs.
On October 11, 2022, the Company closed a registered direct offering ("October 2022 Direct Offering") of 3,208,557 of its Common Shares and warrants ("Series E Warrants") to purchase up to 6,417,114 Common Shares in the concurrent Private Placement. The combined purchase price for one Common Share and one warrant was $1.87. The Series E Warrants have an exercise price of $1.62 per Common Share, are exercisable immediately following the date of issuance and will expire five years from the date of issuance. The Company received gross proceeds of $6,000,002 and net proceeds of $5,135,002 after deducting the placement agent fees and expenses, and the Company’s offering expenses. Based on the fair value of the warrants as at the date of closing, which was determined using a Black-Scholes model, the Company recorded the full proceeds to liabilities, with an initial liability of $7,029,614 and a loss on initial recognition of $1,029,614. Because the fair value of the liability classified warrant exceeded the total proceeds, no consideration was allocated to the Common Shares. Total issue costs related to this offering of $865,000 were recorded under finance costs.
On January 12, 2023, Neptune closed on a senior secured notes financing (such notes, the "Notes") for gross proceeds of $4,000,000 with CCUR Holdings, Inc. and Symbolic Logic, Inc. (collectively, the "Noteholders"). Pursuant to the terms of the Notes, the Company also issued to the Noteholders warrants ("January 2023 Warrants") to purchase an aggregate of 850,000 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of $0.53 per common share. The fair value of the warrants as at the date of closing was determined using a Black-Scholes model.
On March 10, 2023, Sprout issued promissory notes for gross proceeds of $300,000 to various investors. Pursuant to the terms of those promissory notes, the Company also issued to these investors warrants ("March 2023 Warrants") to purchase an aggregate of 111,111 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of $0.54 per common share. The aggregate fair value on issuance of the March 2023 Warrants was $0.0 million.
On May 15, 2023, Neptune issued a total of 7,706,050 pre-funded warrants (“Pre-Funded Warrants”), along with 4,415,162 common shares of the Company, as part of a registered direct offering ("May 2023 Direct Offering"). Each Pre-Funded Warrant was exercisable for one Common Share. The common shares and the Pre-Funded Warrants were sold together with 12,121,212 May 2023 Warrants (the "May 2023 Warrants"). Each of the May 2023 Warrant is exercisable for one common share. Each of the common share and Pre-Funded Warrants and the accompanying May 2023 Warrants were sold together at a combined offering price of $0.33, for aggregate gross proceeds of $4,000,000 before deducting fees and other estimated offering expenses. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $0.0001 and are exercisable commencing on the Closing Date and will terminate when such Pre-Funded Warrants are exercised in full. The May 2023 Warrants have an exercise price of $0.33 per share and can be exercised for a period of 5 years from the date of issuance. Proceeds of the May 2023 Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. The fair value of the liability-classified warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $2,025,247 for the May 2023 Warrants. The Pre-Funded Warrants were also valued using the Black-Scholes model, resulting in $1,255,240 relative fair value recorded under equity, and by difference, $719,513 was allocated to the Common Shares. The Pre-Funded Warrants were exercised in part during the three-month period ended June 30, 2023 for gross proceeds of $541. Total issue costs related to this direct offering were of $758,628, of which $136,461 were recorded under common stock, $238,065 were recorded under equity warrants and $384,102 were recorded under finance costs.
According to the employment agreement with the CEO, a long-term incentive of $15 million is payable if the Company’s US market capitalization is at least $1 billion. The Company uses a risk-neutral Monte Carlo simulation to estimate the fair-value of this instrument and recognizes the incentive over the estimated period to reach the market capitalization. The incentive is being recognized over the estimated period to reach the market capitalization. The risk-neutral Monte-Carlo simulation uses level 3 inputs. The assumptions used in the simulation include a risk free-rate of 3.81% and a volatility of 86.88% for the three-month period ended June 30, 2023 (respectively 2.98% and 70.32% for the three-month period ended June 30, 2022). An increase or decrease in the volatility assumption significantly impacts the fair value of the long-term incentive.
The Company may be involved with other parties, including suppliers of products, in providing goods or services to a customer when it enters into revenue transactions for the sale of products that it does not manufacture. In these instances, the Company must determine whether it is a principal in these transactions by evaluating the nature of its promise to the customer. The Company is a principal and records revenue on a gross basis if it controls a promised good before transferring that good to the customer. On the other hand, the Company records revenue as the net amount when it does not meet the criteria to be considered a principal.
54
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING CHANGES
The accounting policies and basis of measurement applied in the condensed consolidated interim financial statements for the three-month periods ended June 30, 2023 and 2022 are consistent year over year.
As a result of a significant portion of its revenues, expenses, assets and liabilities being denominated in US dollars and the increasing American scope of its operations, Neptune changed its functional currency from Canadian dollars (“CAD”) to U.S. dollars (“USD”), effective October 1, 2022. This change in functional currency has been applied prospectively from the date of the change.
ISSUED AND OUTSTANDING SECURITIES
The following table details the number of issued and outstanding securities as at the date of this MD&A:
|
|
Number of Securities |
|
|
|
Common shares |
|
24,117,599 |
Share options |
|
595,295 |
Deferred share units |
|
4,308 |
Restricted share units |
|
2,789 |
Warrants |
|
24,387,821 |
Total number of securities |
|
49,107,812 |
The Company’s common shares are being traded on NASDAQ Capital Market under the symbol ‟NEPT”. Effective August 15, 2022, the Company's common shares no longer trade on the TSX. Each option, restricted share, restricted share unit, deferred share unit and warrant is exercisable into one common share to be issued from the treasury of the Company.
55
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information otherwise required under this item.
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Item 4. Controls and Procedures.
INTERNAL CONTROLS DISCLOSURE
Disclosure Controls and Procedures ("DC&P") and Internal Control Over Financial Reporting ("ICFR")
As required by applicable rules of the SEC, Management is responsible for the establishment and maintenance of DC&P and ICFR. Our DC&P and ICFR has been designed based on the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with US GAAP. Regardless of how well the DC&P and ICFR are designed, internal controls have inherent limitations and can only provide reasonable assurance that the controls are providing reliable financial reporting information in accordance with US GAAP. These inherent limitations include, but are not limited to, human error and circumvention of controls and as such, there can be no assurance that the controls will prevent or detect all misstatements due to errors or fraud, if any.
Evaluation of DC&P
The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have evaluated the design and effectiveness of our Disclosure Controls and Procedures as of June 30, 2023 and, based on their evaluation, have concluded that the Disclosure Controls and Procedures were not effective as of that date due to material weaknesses disclosed below.
Internal controls over financial reporting ("ICFR")
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with US GAAP.
Internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error or overriding of controls. Because of the inherent limitations, only reasonable assurance with respect to financial statement preparation and presentation can be provided and misstatements may not be prevented or detected. Management evaluated the design and effectiveness of the Company’s internal control over financial reporting as of June 30, 2023 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework 2013. Based on its evaluation, management concluded that our internal control over financial reporting was not effective as of June 30, 2023 due to material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
Consistent with June 30, 2022, the Company did not effectively design, implement and operate effective process-level control activities related to its key processes (such as the financial reporting process (including consolidation and journal entries), the purchase to pay process (including cutoff), the inventory process, the order to cash process and the equity process (financial instruments and stock-based compensation), account level assertions and disclosures, including entity level controls and information technology general controls (“ITGCs”).
Further, there were inadequate controls over user and privileged access to information technology (IT) systems for multiple components to adequately restrict access to appropriate finance and IT personnel and enforce appropriate segregation of duties. As a result, process-level automated control activities and manual control activities that are dependent upon information derived from IT systems were also ineffective. The pervasive nature of these deficiencies contributed to the other material weaknesses below:
As a result of these deficiencies, material misstatements were identified and corrected in the consolidated financial statements as of and for the year ended March 31, 2023. Because there is a reasonable possibility that material misstatement of the consolidated financial statements will not be prevented or detected on a timely basis, we concluded the deficiencies represent material weaknesses in our internal control over financial reporting and our internal control over financial reporting was not effective as of June 30, 2023.
Our CEO and CFO have taken additional steps to support that the financial statements as of and for the three-month period ended June 30, 2023 are presented fairly in accordance with US GAAP.
Changes in ICFR
For the quarter ended June 30, 2023, the Company has concluded that there were no changes in its ICFR that has materially affected or is reasonably likely to materially affect the Company’s ICFR for the three-month period ended June 30, 2023.
We are a non-accelerated filer under the Exchange Act and not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. Therefore, this quarterly report does not include an attestation report of our registered public accounting firm regarding our management’s assessment of internal control over financial reporting.
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Remediation Plan
Beginning during the year ended March 31, 2021, and under the direction of our CEO and CFO, we have been developing a comprehensive plan to remediate the identified material weaknesses. We began implementing certain measures as part of the remediation plan including: (i) development of a detailed remediation plan addressing the material weaknesses related to the control environment, risk assessment and monitoring, (ii) institution of policies and processes to support the functioning of internal controls over financial reporting, (iii) design of a comprehensive risk assessment process, (iv) process level and IT general controls design enhancement and (v) hiring of individuals with appropriate skills and experience.
The turnover in accounting personnel experienced in the last twelve months has delayed the implementation of the remediation plan. We remain committed to the identification, design and implementation of steps still needed to remediate the material weaknesses in our internal controls and to ensure that our internal controls over financial reporting will be designed and operating effectively by:
The material weaknesses being addressed by the above-mentioned remediation plan will not be considered remediated until the applicable controls operate for a sufficient period of time, and management concludes, through testing, that these controls are operating effectively. This has not occurred to date.
Although we have commenced the remediation process and intend to complete it as promptly as possible, we cannot estimate how long it will take to remediate these material weaknesses. In addition, new material weaknesses may be discovered that require additional time and resources to remediate. Until the remediation is complete, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with US GAAP.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is engaged from time-to-time in various legal proceedings and claims. The outcome of such proceedings and claims against the Company is subject to future resolution, including the uncertainties of litigation. Regardless of the outcome, resolving legal proceedings and other disputes can have an adverse impact on us because of legal costs, diversion of management's time and resources, and other factors.
Refer to Note 9, "Provisions", Note 16, “Commitments and Contingencies,” and Note 18, "Subsequent events" of our condensed consolidated interim financial statements in Part I, Item 1 within this Quarterly Report, for further information on our legal proceedings.
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Item 1A. Risk Factors.
An investment in our common shares, or in securities convertible into or exchangeable for our common shares, involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Quarterly Report, as well as in our other filings with the SEC, in evaluating our business. If any of the following risks actually occur, our business, financial condition, operating results and future prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline and you might lose all or part of your investment. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business, financial condition, operating results, liquidity, and future prospects. Certain statements below are forward-looking statements. For additional information, see Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report.
During the three-month ended June 30, 2023, except as set forth below there were no material changes to the risks and uncertainties described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K.
The terms of our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The Note Purchase Agreement, as amended (the “Note Purchase Agreement”), governing the promissory notes (the “2023 Notes”) that we issued on January 12, 2023 contain a number of restrictive covenants, including covenants related to financial statement filing deadlines, that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to incur liens, make investments, loans, advances and acquisitions, incur additional indebtedness or guarantees, pay dividends on capital stock or redeem, repurchase or retire capital stock, engage in transactions with affiliates, sell assets, including capital stock of our subsidiaries, alter the business we conduct, alter their organizational documents, and consolidate or merge.
We defaulted on the conditions of the Note Purchase Agreement and entered into a Waiver and First Amendment to the Notes (the “First Waiver Agreement”) on March 9, 2023. The First Waiver Agreement waives certain administrative, regulatory and financial statement related covenants as required by the terms of the Notes. Furthermore, in connection with the First Waiver Agreement, the Notes were amended to provide that the Purchasers shall be paid an exit fee in the aggregate amount of $200,000, payable as follows: (i) on or prior to May 15, 2023, $100,000 and (ii) on the Maturity Date (as defined in the Note Purchase Agreement), $100,000 and the interest rate has increased to 24% for a period extending until the Company meets specified criteria in the First Waiver Agreement.
On May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Waiver Agreement”), with CCUR Holdings, Inc. and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023 (see Note 13 to the consolidated financial statements as at and for the year ended March 31, 2023). The Waiver Agreement provides that the required prepayment of $2.0 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of twenty four percent (24%) per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due.
A breach of the covenants under the Note Purchase Agreement, or any replacement facility, could result in an event of default under the applicable indebtedness, unless we obtain a waiver to avoid such default. If we are unable to obtain a waiver, such an event of default may allow the creditors to accelerate the related debt and may result in the acceleration of or default under any other debt to which a cross-acceleration or cross-default provision applies. In the event that we breach one or more covenants, our lender may declare an event of default and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to it to collateralize such indebtedness. The occurrence of any of these events could restrict our operations, which could have a material adverse effect on our business, financial condition and results of operations. In the event our lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as refinancing or restructuring our indebtedness, selling assets or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate revenues.
While the Note Purchase Agreement was amended to provide for a waiver of certain defaults, there can be no guarantee that we will not breach covenants in the Note Purchase Agreement or the 2023 Notes in the future. In the event that we breach one or more covenants, our lender may declare an event of default, increase the interest rate to 24% and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to it to collateralize such indebtedness. The occurrence of any of these events could restrict our operations, which could have a material adverse effect on our business, financial condition and results of operations.
There is currently no established public trading market for the Warrants.
There is no established public trading market for the Warrants, and we do not expect such a market to develop. In addition, we do not plan on making an application to list the Warrants on the Nasdaq, or any other securities exchange or other trading system. This may affect the pricing of the Warrants in the secondary market, the transparency and availability of trading prices, the liquidity of the Warrants, and the extent of issuer regulation. Except in limited circumstances specified in the Warrants, holders of the Warrants will not be entitled to any voting rights, dividends or other rights as shareholders of the Company, prior to the exercise of their Warrants. If the price of the Common Shares does not exceed the exercise price of the Warrants during the period when the Warrants are exercisable, the Warrants may not have any value.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
Refer to Part I, “Consolidated Financial Statements,” on page F-1 within this Quarterly Report for our Consolidated Financial Statements.
EXHIBIT INDEX
Exhibit No. |
|
Description of Exhibit |
10.1* |
|
|
31.1* |
|
Certification by Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* |
|
|
32** |
|
|
101.INS* |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104* |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* |
|
Filed herewith |
** |
|
Furnished herewith |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Neptune Wellness Solutions Inc. |
|
|
|
|
|
Date: September 5, 2023 |
|
By: |
/s/ Michael Cammarata |
|
|
|
Michael Cammarata |
|
|
|
President, Chief Executive Officer and Director (Principal Executive Officer) |
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