UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 40-F
(Check one)
[ ] Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934
or
[X] Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended: February 28, 2011 | Commission file number: 1-33526 |
NEPTUNE TECHNOLOGIES & BIORESSOURCES INC.
(Exact name of registrant as specified in its charter)
Quebec | 2836 | Not Applicable |
(Province or other jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer Identification |
incorporation or organization) | Classification Code Number (if applicable)) | Number (if applicable)) |
225 Promenade du Centropolis
Suite 200
Laval, Quebec,
Canada H7T 3B3
(450) 687-2262
(Address and telephone number of Registrants principal executive
offices)
CT Corporation System
111 Eighth Avenue, New York,
NY 10011
(212) 894-8700
(Name, address (including zip
code) and telephone number (including area code) of agent for service in the
United States)
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Title of each class | Name of each exchange on which registered |
Common Shares | The Nasdaq Stock Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act: | None |
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: | None |
For annual reports, indicate by check mark the information filed with this form:
[X] Annual Information Form | [X] Audited Annual Financial Statements |
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report:
Common Shares outstanding as of February 28, 2011: 42,490,874
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13(d) or 15(d) of the Exchange Act during the proceeding 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 in the past 90 days.
Yes [X] No [ ] |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes [ ] No [ ] |
DISCLOSURE CONTROLS AND PROCEDURES
The Registrant’s chief executive officer and principal financial officer have concluded that, based on an evaluation of the Registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, the Registrant’s disclosure controls and procedures were effective as of February 28, 2011.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Registrant’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Registrant’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
The Registrant’s management assessed the effectiveness of the Registrant’s internal control over financial reporting as of February 28, 2011. In making this assessment, the Registrant’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. The Registrant’s management, including the Chief Executive Officer and the principal financial officer, concluded that, as of February 28, 2011, the Registrant’s internal control over financial reporting was effective based on the criteria in Internal Control – Integrated Framework issued by COSO.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change was identified in the Registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
AUDIT COMMITTEE FINANCIAL EXPERT
The Registrant’s board of directors has determined that it has at least one audit committee financial expert serving on its audit committee. Mr. Michel Chartrand has been determined to be such audit committee financial expert and is independent, as that term is defined by the Nasdaq’s listing standards applicable to the Registrant. The Securities and Exchange Commission has indicated that the designation of Mr. Chartrand as an audit committee financial expert does not make Mr. Chartrand an “expert” for any purpose, impose any duties, obligations or liability on Mr. Chartrand that are greater than those imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the audit committee or board of directors.
CODE OF ETHICS
The Registrant has adopted a code of ethics entitled “Code of Business Conduct and Ethics for Directors, Officers and Employees” that applies to all directors, officers and employees, including the Registrant’s principal executive officer, principal financial officer and principal accounting officer. The Registrant’s code of ethics is available on the Registrant’s Internet website: www.neptunebiotech.com.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The disclosure provided under “[15. Report on Audit Committee—External Auditor Fees]” on page [y] of Exhibit 99.1, the Registrant’s Annual Information Form, is incorporated by reference herein.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The disclosure provided under “[Charter of the Audit Committee of the Board of Directors—Responsibilities for Engaging External Auditors]” in Schedule “A” of Exhibit 99.1, the Registrant’s Annual Information Form, is incorporated by reference herein. None of the services described above under “Principal Accountant Fees and Services” under the captions “Audit-Related Fees,” “Tax Fees” and “Other Fees” were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
OFF-BALANCE SHEET ARRANGEMENTS
The disclosure provided under “Off-Balance Sheet Arrangements” on page [y] of Exhibit 99.5 [Management’s Discussion and Analysis], is incorporated by reference herein.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The disclosure provided under “Contractual Obligations” on page [y] of Exhibit 99.5, [Management’s Discussion and Analysis], is incorporated by reference herein.
FORWARD-LOOKING INFORMATION
Certain statements in this annual report and the exhibits hereto are “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are not based on historical facts but, rather, on our current expectations and our projections about future events, including our current expectations regarding: the future demand for, and sales volumes of, our products; future production volumes, efficiencies and operating costs; increases or decreases in the prices of our products; the future availability and price of raw material needed to manufacture our products; our future stability and growth prospects; the success of measures to implement our business strategies and the benefits to be derived therefrom; our future profitability and capital needs, including capital expenditures; currency exchange rates; the outlook for and other developments in the industries in which we participate, as well as general economic and market conditions; and the effect on us of new accounting releases. These factors, many of which are beyond the control of the Registrant, include the Registrant’s ability to: effectively manage its operations during uncertain economic conditions; identify and capitalize on possible collaboration, strategic partnering or divestiture opportunities; obtain suitable financing to support its operations and clinical trials; manage its growth and the commercialization of its products; achieve operating efficiencies; successfully compete in its markets; realize the results it anticipates from the clinical trials of its products; succeed in finding and retaining joint venture and collaboration partners to assist it in the successful marketing, distribution and commercialization of its products; achieve regulatory clearances for its products; obtain on commercially reasonable terms adequate product liability insurance for its commercialized products; adequately protect its proprietary information and technology from competitors and avoid infringement of proprietary information and technology of its competitors; assure that its products, if successfully developed and commercialized following regulatory approval, are not rendered obsolete by products or technologies of competitors; and manage its relationships with third parties, including customers, suppliers and key personnel, upon whom it is dependent.
These forward-looking statements generally can be identified by the use of statements that include words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “likely”, “will”, “predicts”, “estimates”, “forecasts” or other similar words or phrases, although not all forward looking statements contain such words. Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from the future results expressed or implied by the forward-looking statements.
Any forward-looking statements made by us in this annual report and the exhibits hereto are subject to these factors. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report and the exhibits hereto may not occur. Actual results could differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also harm our future results.
Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this annual report and the exhibits hereto are made only as of the date of this annual report. We do not intend, and do not assume any obligation, to update these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should read this annual report and the exhibits hereto with the understanding that the actual future results may be materially different from what we expect. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements
IDENTIFICATION OF THE AUDIT COMMITTEE
The Registrant has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the Exchange Act. The Registrants audit committee is composed of the following directors: Michel Timperio, Ronald Denis, Daniel Perry and Michel Chartrand.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. Undertaking
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities in relation to which the obligation to file this annual report on Form 40-F arises; or transactions in said securities.
B. Consent to Service of Process
The Registrant has previously filed with the Commission a Form F-X in connection with the class of securities in relation to which the obligation to file this report arises.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.
NEPTUNE TECHNOLOGIES & BIORESSOURCES INC.
By: /s/ Henri
Harland
Name: Henri Harland
Title: President and Chief Executive Officer
Dated: May 30, 2011
EXHIBIT INDEX
Exhibit 99.1
ANNUAL INFORMATION FORM
Fiscal Year Ended February 28, 2011
May 27, 2011
TABLE OF CONTENTS
1. CORPORATE STRUCTURE | 4 |
|
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1.1 NAME, ADDRESS AND INCORPORATION |
4 |
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1.2 INTERCORPORATE RELATIONSHIPS |
4 |
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2. DESCRIPTION OF THE BUSINESS | 5 |
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2.1 GENERAL |
5 |
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2.3 THREE YEAR HISTORY |
6 |
2.3.1 Fiscal Year Ended February 28, 2009 |
6 |
2.3.2 Fiscal Year Ended February 28, 2010 |
8 |
2.3.3 Fiscal Year Ended February 28, 2011 |
9 |
|
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2.4 PRODUCTS AND BRANDS |
15 |
2.4.1 NKO® - Functional Food Grade |
15 |
2.4.2 OPA3TM - Optimal for Life |
15 |
2.4.3 NKO®- Neptune Krill Oil |
16 |
2.4.4 NKATM - Neptune Krill AquateinTM |
16 |
2.4.5 EKOTM ECOKRILL OIL |
16 |
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2.5 CLINICAL STUDIES |
16 |
2.5.1 Skin Cancer |
16 |
2.5.2 Premenstrual Syndrome |
16 |
2.5.3 Hyperlipidemia |
17 |
2.5.4 Chronic Inflammation and Osteoarthritis |
17 |
2.5.5 Attention Deficit Hyperactivity Disorder (ADHD) |
17 |
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2.6 DEVELOPMENT OF NEPTUNES AND SUBSIDIARIES PORTFOLIO PRODUCTS |
18 |
2.6.1 Research and Product Development Programs |
18 |
2.6.2 Internal Research, Subcontracted Research or Alliance Research |
18 |
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2.7 STRATEGIC BUSINESS DEVELOPMENT |
20 |
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2.8 PRODUCTION |
20 |
2.8.1 Neptune Krill Extraction Process Platform Family |
21 |
2.8.2 Plant |
21 |
2.8.3 Krill |
21 |
2.8.4 The Virtues of Krill |
22 |
2.8.5 Availability of Krill |
22 |
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2.9 INTANGIBLE ASSETS |
23 |
2.9.1 Exclusive License/Option |
23 |
2.9.2 IP Protection |
24 |
2.9.3 Economic Dependence/Litigation |
25 |
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2.10 EMPLOYEES |
26 |
2.10.1 Number |
26 |
2.10.2 Skill Knowledge |
26 |
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2.11 SALES/DISTRIBUTION |
27 |
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2.12 COMPETITION |
27 |
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2.13 COMPETITIVE ADVANTAGES |
28 |
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2.14 MARKETS |
30 |
2.14.1 Nutraceutical |
30 |
2.14.2 Pharmaceutical |
32 |
2
3. RISK FACTORS | 33 |
3.1 Risks related to Neptunes business |
33 |
3.2 Risks related to Neptunes Industry |
35 |
4. DIVIDENDS | 37 |
5. DESCRIPTION OF CAPITAL STRUCTURE | 37 |
5.1. COMMON SHARES |
37 |
5.2 PREFERRED SHARES |
38 |
6. MARKET FOR SECURITIES | 38 |
7. DIRECTORS AND OFFICERS | 39 |
8. CEASE TRADE ORDERS, BANKRUPTCIES, PENALTIES OR SANCTIONS | 42 |
9. LEGAL PROCEEDINGS AND REGULATORY ACTIONS | 43 |
10. INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS | 43 |
11. TRANSFER AGENTS AND REGISTRARS | 43 |
12. MATERIAL CONTRACTS | 43 |
13. INTEREST OF EXPERTS | 43 |
14. REPORT ON AUDIT COMMITTEE | 43 |
15. ADDITIONAL INFORMATION | 44 |
SCHEDULE A | 46 |
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As used in this annual information form, unless the context otherwise requires, the terms “we”, “us”, “our”, “Neptune” or the “Corporation”, mean or refer to Neptune Technologies & Bioressources Inc. and, unless the context otherwise requires, its subsidiaries, the terms “Acasti” or “Acasti Pharma” refer to Neptune’s subsidiary Acasti Pharma Inc. and the terms “Neuro”, “Neurobio”, “ NeuroBioPharm” refer to Neptune’s subsidiary NeuroBioPharm Inc .
Certain statements contained in this annual information form, other than statements of fact that are independently verifiable at the date hereof, may constitute forward-looking statements. When used in this annual information form the words “believe”, “anticipate”, “intend”, “estimate” and “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Such statements, based as they are on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown, many of which are beyond our control. For information identifying known risks and uncertainties relating to the Corporation, please refer to the heading Risk and Uncertainties in the Corporation’s Management’s Discussion and Analysis for the year ended February 28, 2011, which can be found at www.sedar.com. Consequently, actual results may differ materially from the anticipated results expressed in these forward-looking statements. The reader should not place undue reliance, if any, on the forward-looking statements included in this annual information form. These statements speak only as of the date made and we are under no obligation and disavow any intention to update or revise such statements as a result of any event, circumstances or otherwise, except as required under applicable law.
Unless otherwise noted, in this annual information form, all information is presented as of February 28, 2011. All references in this annual information form to “dollars” and “$” refer to Canadian dollars, unless otherwise expressly stated.
1. CORPORATE STRUCTURE
1.1 NAME, ADDRESS AND INCORPORATION
Neptune Technologies & Bioressources Inc. (“Neptune”) was incorporated on October 9, 1998 pursuant to a certificate of incorporation issued under Part 1A of the Companies Act (Quebec). On February 14, 2011, the Business Corporations Act (Quebec) came into effect and replaced the Companies Act (Quebec). Neptune is now governed by Business Corporations Act. On May 30, 2000 the articles of the Corporation were amended in order to proceed with the restructuring of the Corporation’s capital stock and to convert its then issued and outstanding shares into newly-created classes of shares. The Corporation’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000 the Corporation converted all its issued and outstanding Class A Shares into Class B Subordinate Shares. On September 25, 2000, the Corporation further amended its share capital to eliminate its Class A Shares and convert its Class B Subordinate Shares into Common Shares. On May 11, 2001 the Corporation amended its articles of incorporation to repeal the restrictions with respect to closed companies. It is anticipated that during over the course of the next few months, the Corporations articles of incorporation will be amended in order to increase the maximum of directors from seven (7) to ten (10) directors, to allow the directors to appoint additional directors to hold office for a term expiring not later than the close of the next annual shareholders meeting, and to allow the directors to be elected for a mandate that does not exceed three years
Neptune’s head office and registered office is located at 225 Promenade du Centropolis, Suite 200, Laval, Québec H7T 0B3. The Corporation’s website address is www.neptunebiotech.com. The Corporation is also the owner of the websites www.mynko.com and www.neptunekrilloil.com.
1.2 INTERCORPORATE RELATIONSHIPS
Neptune has one wholly-owned subsidiaries, and Neptune Technologies & Bioressources USA Inc. (“Neptune USA”) and two partially-owned subsidiaries, Acasti Pharma Inc. and NeuroBioPharm Inc.
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Neptune USA was incorporated on June 1, 2006 under the laws of the State of Delaware. Neptune USA does not carry on business at this time.
Acasti Pharma was incorporated on February 1, 2002 pursuant to a certificate of incorporation issued under Part IA of the Companies Act (Quebec), under the name 9113-0310 Québec Inc.
NeuroBioPharm was incorporated on October 15, 2008 pursuant to a certificate of incorporation issued under Part 1A of the Companies Act (Quebec), under the name NEUROVIMER PHARMA INC.
Corporate structure diagram
As of the date of this AIF, with the conversion of the Class B and Class C Shares into Class A Shares on a 1:1 basis which occurred on March 21, 2011, Neptune owns 38,617,733 Class A Shares, representing approximately 60% of Class A Shares issued and outstanding of Acasti Pharma. Acasti Pharma Class A shares are voting, participating, with no par value.
NeuroBioPharm Inc. (“NeuroBioPharm”), a company involved in the pharmaceutical industry, is 99% owned subsidiary by Neptune.
2. DESCRIPTION OF THE BUSINESS
2.1 GENERAL
Neptune is a biotechnology Corporation that researches and develops novel extraction technologies, potent biological therapeutics agents and intellectual property for highly prevalent chronic conditions still lacking safe and definitive treatment solutions. The main focus of the Corporation is:
Neptune, in the decade of 1990, initially identified krill as its first marine biomass resource to develop and exploit mainly because of its abundance, the nature of its components and its specific expected potent human health benefits.
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Since inception, Neptune has developed a family of extraction process platforms for krill (1998-2000), has built a production plant (2002) and has produced and commercialized Neptune Krill Oil (NKO®), a trademark within the OPA3TM brand portfolio, and Neptune Krill Aquatein (NKA™) (since 2003), while continually pursuing basic and clinical research efforts and intellectual property protection since 2000. In 2010, the Corporation launched ECOKRILL™, a new product within the Neptune Krill Oil family of products.
In August 2008, Neptune granted a license to Acasti Pharma relating to cardiovascular pharmaceutical applications for high-concentration products. Acasti Pharma is developing safe and effective pharmaceutical and medical applications with an initial focus on cardiovascular diseases by leveraging the intellectual property, clinical data and know-how developed by Neptune. Acasti Pharma is advancing a portfolio of bioactive ingredients of (proprietary novel) omega-3 phospholipids through the pharmaceutical development pathway which includes prescription medical foods, over-the-counter products and prescription drugs.
In October 2008, Neptune granted a license to NeuroBioPharm relating to cognitive and neurological pharmaceutical applications for high-concentration products. NeuroBioPharm researches and develops (novel proprietary active) pharmaceutical ingredients for cognitive and neurological conditions. The conditions range from brain development applications to various neurodegenerative diseases and include attention-deficit hyperactivity disorder, autism, Alzheimer ’s disease at its different stages and cognitive decline. NeuroBioPharm is advancing its product portfolio of bioactive ingredients through the pharmaceutical development pathway which includes prescription medical food, over-the-counter products and prescription drugs.
2.3 THREE YEAR HISTORY
2.3.1 Fiscal Year Ended February 28, 2009
Neptune’s financial year-end was modified from May 31 to February 28; therefore, Neptune’s fiscal period ended February 28, 2009 was for a period of nine months only.
During the nine-month fiscal period ended February 28, 2009, Neptune continued to pursue the commercialization in the American, European, Asian and Australian markets. In February 2009, the European Food Safety Authority (EFSA) approved NKO® as a Novel Food for commercialization in the European Union for dietary supplements and functional food. Neptune has already built substantial marketing visibility and recognition in Europe through its longstanding annual presence at Vitafoods International, the Global Nutraceutical Event, in Geneva, Switzerland, and Health and Food Ingredients in Paris, France. Based on these continuing marketing efforts, the proprietary status of its ingredients and the Novel Food approval, Neptune expects to accelerate market penetration and increase its market share of the omega-3 health ingredient market. Neptune also maintains its new commercial approach aimed at building strategic alliances with potential industrial partners as well as potential commercial partners in the nutraceutical and functional foods markets.
During the nine-month fiscal period, Neptune granted license rights to two of its subsidiaries, Acasti Pharma and NeuroBioPharm.
Acasti Pharma and the Exchange Offer
During the nine-month fiscal period ended February 28, 2009, the Corporation granted an exclusive worldwide license to its wholly-owned subsidiary, Acasti, to develop, validate health benefits by way of clinical studies and market new pharmaceutical products (OTC, medical food, Rx) that target the cardiovascular system using the Corporation’s technology and intellectual property. Acasti will finance its research and development activities as well as its clinical studies. The products developed by Acasti are expected to require the approval from the U.S. Food and Drug Administration before clinical studies are conducted as well as the approval from similar regulatory organizations before sales are allowed.
The Corporation has established Acasti in order to segregate its cardiovascular pharmaceutical activities from its nutraceuticals activities, which in the opinion of Corporation’s management will allow the financial community to differentiate Acasti’s cardiovascular pharmaceutical activities from the Corporation’s core nutraceuticals business and will also enable Neptune and Acasti to attract separately pharmaceutical and nutritional companies to enter into strategic alliances.
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On July 17, 2008, the Corporation’s Board of Directors declared a dividend to its shareholders. The Board of Directors approved a dividend of $0.00025 CDN per share on the outstanding common shares of the Corporation for payment to shareholders on record at the close of business on July 28, 2008. This dividend was paid on August 11, 2008 by the issuance of an aggregate of 9,380,355 transferable, non-convertible notes, each note having a principal value of $0.001, such notes maturing two years after the date of issue, bearing interest from the first anniversary date of their issuance at a rate of ten percent (10%) per annum, and being redeemable at all times by the Corporation, either in cash or in kind (the “Notes”).
On August 21, 2008, the Corporation’s and Acasti’s Boards of Directors approved an Exchange offer to be offered by Acasti to all of the holders of Notes, to purchase the Notes at a price equal to the Notes’ value, payable by the issuance by Acasti of a maximum of 9,380,355 units, being one Class A shares and one Series 2 warrants of Acasti (“Acasti Unit”). On August 25, 2008, Acasti proceeded with the exchange offer to Neptune’s Note holders, each Note holders had until October 3, 2008 to accept to exchange their Notes against Acasti units on a one for one basis. The approval for the Exchange offer by the Corporation’s shareholders was obtained on September 25, 2008.
On November 27, 2008, Acasti issued to Notes holders of 9,246,935 units in consideration of 9,246,935 Notes payable by Corporation following the choice by the shareholders on the exchange offer as well as the outstanding notes prepayment. A cash payment of $133 was made to Notes holders not qualifying for the prepayment in securities due to of regulatory issues.
NeuroBioPharm Inc.
On October 15, 2008, the Corporation granted an exclusive worldwide license to its renamed, on December 24, 2008, wholly-owned subsidiary NeuroBioPharm to develop, validate and commercialise new pharmaceutical products (OTC, medical food, Rx) that target cognitive and neurological pharmaceutical applications using the Corporation’s technology and intellectual property. Each product will be developed and financed by NeuroBioPharm. The products developed by NeuroBioPharm are expected to require the approval from the U.S. Food and Drug Administration before clinical studies are conducted as well as the approval from similar regulatory organizations before sales are allowed.
The Corporation established NeuroBioPharm in order to segregate its neurological pharmaceuticals activities from its nutraceuticals activities, which in the opinion of Corporation’s management will allow the financial community to differentiate NeuroBioPharm’s neurological pharmaceutical applications activities from the Corporation’s core nutraceuticals business and will also enable the Corporation and NeuroBioPharm to attract separately pharmaceutical and nutritional companies to enter into strategic alliances.
On October 15, 2008, the Corporation also transferred to NeuroBioPharm a development project and clinical study conducted under an agreement with a multinational Corporation. NeuroBioPharm substituted itself to Neptune in this new agreement signed in 2008 between Neptune and the multinational. The purpose of this agreement is to target applications as a medical food. The results of this clinical study should be known before the end of summer 2010.
During the nine-month fiscal period, Neptune obtained $6,500,000 in debt financing, of which $3,500,000 was allocated to the repayment of outstanding long-term debts, allowing Neptune substantial savings on financial expenses, and $3,000,000 to finance a 50% capacity increase in the production at its plant facilities. Neptune also obtained a credit facility of up to $2,000,000.
On October 9, 2008, the Corporation completed a private placement of $2,750,000 by the issuance of convertible debentures through tranches of $1,000, bearing interest at 8% per annum, payable annually in cash or in kind and expiring on October 9, 2011. Several financial instruments were attached to the debenture and various choices are offered to the debenture holder with respect to conversion in share capital of Neptune or Acasti.
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2.3.2 Fiscal Year Ended February 28, 2010
The Corporation continued to expand its customer base worldwide and is expecting revenue growth driven by repeat demand from existing customers and incoming demand from new customers from North America, Europe and Asia. Neptune also completed its plant expansion and the scaling up its production capacity at its Sherbrooke plant during the first and second quarter providing for more than 50% increase of yearly output from 60,000 kilograms to close to 100,000 kilograms. The integration of new technical equipment into the manufacturing line and the completion of the capacity expansion were completed on schedule, at the end of the first quarter. The ramp-up of the facility, which took place during the second quarter, impacted the financial results in the second quarter but the Corporation has managed to catch up with the production in the third and fourth quarter to surpass last year annualized revenues. During the third quarter and fourth quarter, the production plant ran at a steady rate of over 90,000 kg annually. In order to respond to increased demand and deliver on its volume commitments, Neptune is currently working to further expand its production capacity from 90,000 kg to an estimated 110,000 to 120,000 kg annually. This additional expansion is expected to take place during the first two quarters of fiscal 2011. This expansion should take place without production interruption and represents a marginal investment financed by cash flow from current operations. Neptune’s additional industrial plant project discussions are on schedule, with the target for the new industrial plant realization to take place during the course of calendar 2012.
During the first quarter, the Corporation signed an agreement with Bayer Heathcare LLC for the commercialization of Neptune proprietary products in the United States. Also in the first quarter, Neptune entered into a new distribution agreement with Inno-Vite, a Canadian leader in innovative health products focusing on research-proven ingredients. Inno-Vite launched Neptune Krill Oil NKO® under the brand name Inno-Krill™ in health food stores across Canada. During the second quarter, Weifa, a leading pharmaceutical Corporation also launched NKO® for the first time in the Norwegian market in drug stores for women’s health.
The Corporation presented novel innovative product opportunities customized for dietary supplements, functional and medical foods at Vitafoods International 2009. Neptune launched a new pipeline of novel formulations containing its proprietary marine omega-3 phospholipids enhanced with validated bioactive ingredients targeted to specific health applications. The Corporation is also testing the industry’s reception of a new biomass extract generated from Neptune’s research and development program targeting new vascular and affective health indications. The Corporation will also be presenting pilot commercial products for functional food applications including juice, fruit berries, fruit paste and protein bars.
The Corporation also sustained its clinical research initiatives. As a result, Neptune is able to leverage scientific results demonstrating health benefits specific to the proprietary composition of Neptune Krill Oil (NKO®) on prevalent human conditions, such as premenstrual syndrome, high cholesterol, inflammation, osteoarthritis and attention deficit hyperactivity disorder. Similarly, the clinical trials for functional food applications with the multinational corporations Nestlé and Yoplait are progressing in a satisfactory way.
During the second quarter, the Corporation received a complaint filed by Schiff Nutrition Group Inc. ("Schiff"), a former distributor of Neptune’s products, in the United States District Court for the District of Utah, Central division, alleging that Neptune failed to meet certain delivery thresholds. As a result, Schiff is seeking monetary damages in the minimum amount of US $1 million from Neptune.
After careful review of this complaint and having sought legal advice, The Corporation filed a response and counterclaims early in the third quarter to the Schiff complaint in federal district court in Utah. The Corporation denies all material allegations and the requested monetary compensation in the complaint and asserts federal and state law claims against Schiff, including that Schiff failed to pay the Corporation for shipments of NKO® accepted by Schiff, and that Schiff caused its contractor to encapsulate NKO® despite the Corporation’s objections that the resulting product would not meet specifications after encapsulation by Schiff’s contractor.
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Despite the Corporation’s warning to Schiff Nutrition Group Inc. to cease directly and indirectly using the Corporation trademarks including NKO® and clinical support, Schiff Nutrition Group Inc. continued to use the Corporation trademarks and claims, as it could be seen on websites of multiple Schiff Nutrition Group Inc. distributors.
In the third quarter, the Corporation announced that convertible debentures with a fair value of $2,250,000 were converted. Holders of $84,000 of debenture capital converted capital and accumulated interest into Neptune units resulting in the issuance of 69,783 common shares and 34,891 warrants of Neptune. Neptune warrants are exercisable until October 9, 2011 at various prices ranging from $2.15 to $2.25 depending on the market price of Neptune shares at their date of conversion. Holders of $2,166,000 of debenture capital chose to convert into Acasti units resulting in the transfer from Neptune to the former debenture holders of 9,455,867 Acasti shares and the issuance of 9,455,867 Acasti call options by Neptune. Acasti call options are exercisable at $0.50 and expire one year after their issuance. At as February 28, 2010, $496,000 of convertible debentures remains outstanding.
In the third quarter, Neptune also converted all of its 38,240,000 Acasti Class C shares into Acasti Class A shares as per the terms of the shares. After all conversions and transfers Neptune owned 28,784,133 Acasti Class A shares and 4,950,000 Acasti multi-voting Class B shares.
In regards to its intellectual property protection, the Corporation has always had a firm policy to protect its intellectual property rights including its patents, trademarks and trade secrets, with every legal means available. Recently, certain of Neptune’s competitors have been deceptively marketing, advertising and selling their finished krill-based products claiming benefits based on Neptune’s research or by infringing on patents for which Neptune has exclusive rights. Neptune, being determined to enforce its rights, has thus filed suits against some of those companies in order to protect its intellectual property.
The Corporation has also decided to exercise its right to appeal the decision of the European Patent Office regarding the European composition of phospholipids and use patent. The Corporation does not agree with the decision that states that Neptune’s Patent does not sufficiently disclose the invention. With the filing of an appeal, the decision to revoke the patent is suspended and until then the patent remains enforceable.
In the third quarter, the Corporation also filed a patent infringement lawsuit against Aker Biomarine ASA, Jedwards International, Inc., and Virgin Antarctic LLC. The complaint, which was filed in the U.S. District Court for the District of Massachusetts, alleges infringement of U.S. Patent No. 6,800,299. The patent is directed to a method of extracting total lipid fractions from krill.
2.3.3 Fiscal Year Ended February 28, 2011
The Corporation continued to expand its customer base worldwide and is expecting revenue growth driven by repeat demand from existing customers and incoming demand from new customers from North America, Europe and Asia. Following the rising demand, the Corporation managed to increase its original plant expansion from a maximum of 100,000 kilograms per year to a maximum of 130,000 kilograms per year, simply by optimizing the use of actual manufacturing equipments. Neptune’s additional industrial plant project discussions are on schedule, with the target for the realization of a new industrial plant to take place during the course of fiscal 2012.
During the first quarter, the Corporation was named as one of the TSX Venture 50, a ranking of strong performers listed on TSX Venture Exchange. Again in the first quarter, following a PCB contamination worldwide, the Corporation reassured its customers that it had been unaffected by the PCB contamination observed in marine oils and confirmed NKO®’s safety and quality. In addition to this comfort, Neptune was recognized by industry peers as the gold standard for krill oils.
During the first quarter, 1,068,000 Debenture warrants and 1,086,400 Debenture Call options of Neptune were exercised for total proceeds of $1,607,000.
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The Corporation presented novel innovative product opportunities customized for dietary supplements, functional and medical foods and introduced a new pipeline of novel formulations containing its proprietary marine omega-3 phospholipids enhanced with validated bioactive ingredients targeted to specific health applications. Neptune pre-launched its new product, ECOKRILL™ (“EKOTM”), a new member of Neptune Krill Oil’s family of products, to its clientele at Health Ingredient Europe 2010 in Madrid. The pre-launch was well received by the market. EKOTM is a product similar to NKO® with slightly lower specifications and a lower selling price. Moreover, EKOTM sells at a lower price than competing krill oil products and presents better specifications than these products. The Corporation is also testing the industry’s reception of a new biomass extract generated from Neptune’s research and development program targeting new cognitive health indications. The Corporation will also be presenting pilot commercial products for functional food applications including juice, fruit berries, fruit paste and protein bars.
The Corporation also sustained its clinical research initiatives. As a result, Neptune is able to leverage scientific results demonstrating health benefits specific to the proprietary composition of Neptune Krill Oil -NKO® on prevalent human conditions, such as premenstrual syndrome, high cholesterol, inflammation, osteoarthritis and attention deficit hyperactivity disorder. Similarly, the clinical trials for functional/medical food applications with the multinational corporations Yoplait and Nestlé are progressing and should conclude before the end of our 2012 fiscal year at the latest. In accordance with its scientific strategy, Health Canada approved, exclusively for NKO®, therapeutic and risk reduction claims, corroborating aspects of Neptune’s clinical research and substantiating NKO® safety and effectiveness on cardiovascular health, inflammation and women’s health.
During the second quarter, Neptune appointed two investor relation firms, The Howard Group and CEOcast, in order to increase Neptune’s visibility toward the investment community in Canada and the United States respectively. This increased awareness of Neptune combined with various determining factors has already translated into higher trading volume on NASDAQ and TSX-V.
During the third quarter, the Corporation realised a non-brokered private placement of $2,647,000 through the offering of common shares at a price of $1.85. Two important institutional investors participated in the financing. Also, toward the end of the third quarter, 2,418,481 Conversion Call Options, issued to debenture holders who had previously decided to convert their debenture into Acasti shares in accordance with the debenture terms and conditions, were exercised at $0.50, resulting in the transfer of 2,418,381 Class A shares of Acasti. As the carrying amount of the Acasti net assets, after accounting for the Corporation’s preference share, was negative at the time of the transaction, the cash collected on exercise of Conversion Call-Options in the amount of $1,209,000, as well as their ascribed value of $42,000, was recognized as a gain on dilution and no amount was allocated to non-controlling interest.
Also during the third quarter, after two years of rigorous review of NKO® safety and clinical research data, the Canadian Minister of Health has approved therapeutic and risk reduction claims exclusively for NKO®. In June 2009 Health Canada approved health claims for omega-3, among the strongest of which was the claim that products providing 1g - 3g EPA + DHA, per day (amounting to 3-10g of fish oil per day, or 6-20 softgels) help to reduce serum triglycerides, compared to 4 NKO® 500mg softgels recently approved for the same indication. Contrary to fish oil, Health Canada approved a stronger claim for NKO® for cholesterol with a decrease of LDL (bad cholesterol) and increase of HDL (good cholesterol) using only two softgels per day as well as an anti-inflammatory claim using only one softgel per day and a specific claim for premenstrual syndrome (PMS). All this information is available on www.mynko.com.
In regards to its intellectual property protection, the Corporation has always had a firm policy to protect its intellectual property rights including its patents, trademarks and trade secrets, with every legal means available. Since last
year, certain of Neptune’s competitors have been marketing, advertising and selling their finished krill-based products claiming benefits based on Neptune’s research or by infringing on patents for which Neptune has exclusive rights.
Neptune, being determined to enforce its rights, has thus taken action against some of those companies in order to protect its intellectual property.
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ABOUT THE SUBSIDIARIES
Acasti Pharma Inc.
Acasti is a Canadian-based biopharmaceutical, subsidiary of Neptune (NASDAQ: NEPT - TSX.V: NTB). Acasti is dedicated in the research, development and commercialization of proprietary active pharmaceutical ingredients (API) for the management of cardiometabolic disorders, from prevention to treatment. Acasti develops first-in-class and best-in-class anti-dyslipidemic prescription drugs (Rx), medical foods (MF) and over-the-counter (OTC) products.
In March 2011, Acasti completed its listing application on the TSX-Venture Exchange, as a result Acasti had its share listed on the TSX-Venture Exchange on March 31, 2011 under the symbol APO. In connection with the listing of Acasti’s shares, Acasti appointed to new directors: Mr. Marc Lebel, President of Glaciel, and Mr. Martin Godbout, Director of Methylgene, AmorChem, AngioChem, Asmacure, BioQuébec and the Ataxia Charlevoix Foundation. Both were appointed in March 2011 in replacement of Mr. Perry and Mr. Debard.
During 2011 fiscal year, Acasti has completed the development and launched its first medical food, “Onemia™”, on October 21, 2010 at the Cardiometabolic Health Congress in Boston as an initial introduction to health care practitioners. Onemia™ is an omega-3 phospholipid targeting omega-3 phospholipid deficiency related to cardiometabolic disorders, a multibillion dollar market. As a medical food, Onemia™ is regulated by the FDA and can only be administered under medical supervision. Onemia™ has been very well received by the medical community in the United States; the first distribution agreement was signed in March 2011 and the first purchase order received during the same time..
Acasti’s OTC product, Vectos™, is developed as a platform technology for fixed dose combinations with existing OTC products. The Vectos™ platform has been designed to improve drug activity and safety profile; ideal for co-development ventures and partnerships with a fast to market opportunity. The Corporation has advanced its negotiations to commercialize Vectos™ with potential partners.
The Corporation completed the non-clinical program required for the Clinical Trial Application (CTA) submission demonstrating that CaPre™, the Corporation’s prescription drug candidate, is safe and effective for the management of mixed dyslipidemia and cardiometabolic disorders by significantly increasing HDL, reducing triglycerides and LDL, and managing glucose intolerance.
The cardiometabolic effects of CaPre™ were also compared with prescription drug Lovaza®. The results of these comparative studies demonstrated a clear superiority of CaPre™ on a gram to gram omega-3 basis. According to IMS Health, global sales of Lovaza® topped $1 billion in 2009, with $758 million of those sales originating in the U.S. Moreover, in 2007, GlaxoSmithKline PLC (LSE/NYSE: GSK) acquired the USA rights to Lovaza® by its acquisition of Reliant Pharmaceuticals Inc. for $1.65 billion.
Moving forward towards the clinical stage with CaPre™, Acasti submitted to Health Canada a CTA for a Phase II clinical trial in October 2010, following a very positive pre-CTA meeting. The Chemistry Manufacturing and Control (CMC) section of the CTA has been completed. Acasti is looking forward to the acceptance of the CTA and the initiation of the clinical study within the near future.
Acasti expanded its Scientific Advisory Board (SAB) with four new members: Dr. Jean Davignon, Dr. Jacques Genest, Pr. Ruth McPherson and Pr. William Harris. Acasti has worked closely with its SAB members and other scientific and clinical advisors to finalize the design of the upcoming clinical trial by correlating preclinical data with efficacy in patients through an efficient clinical study design. The SAB has indicated their strong support of Acasti’s research and development efforts towards the next stage of development.
Increasing public and industry awareness, Acasti was a sponsor and presenter at the 7th Annual Alliance Management congress and the 2nd Annual Combination Drug Therapies Conference, both organized by the Cambridge Healthtech Institute (CHI) and the BioPharmaceutical Strategy Series held April 13-14, 2010 in Philadelphia, PA. Acasti presented its unique positioning in the field of Cardiometabolic disorders and its action plan for successful collaboration with worldwide pharmaceutical industry leaders. The Corporation was well received and multiple important leads were generated. On April 2010, Acasti presented its preclinical results at the council for Arteriosclerosis, Thrombosis and Vascular Biology (ATVB) 2010 Scientific Sessions Meeting of the American Heart Association held April 8-10 in San Francisco, CA.
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In accordance with the strategic plan initially established in 2008 for the development of Acasti, a total of 11,703,911 Acasti warrants have been exercised, during years ended February 28, 2011 and 2010, for total proceeds of $4,382,000 detailed as follows: 3,285,530 Series 2 Acasti warrants exercised at $0.40; 5,418,381 Series 3 Acasti warrants exercised at $0.40 and 3,000,000 Series 5 Acasti warrants exercised at $0.30. From the preceding transactions Neptune exercised 2,418,381 Series 3 Acasti warrants in order to deliver shares following the exercise of options it had issued on Acasti shares and exercised 3,000,000 Series 3 Acasti warrants and 2,970,000 Series 5 Acasti warrants. Following those transactions and the conversion of Class B and C shares in Class A shares, described in the subsequent events section of this document, Neptune has a 60% participation in Acasti.
Acasti’s goal is to obtain, maintain, and enforce patent protection for its products, formulations, methods and other proprietary technologies, preserve its trade secrets and operate without infringing on the proprietary rights of other parties, both in the United States and in other countries. Acasti will actively seek to obtain the broadest intellectual property protection possible for its product candidates in the United States and abroad
A number of preclinical studies have demonstrated the safety and efficacy of Acasti’s prescription drug (Rx), medical food (MF) and over-the-counter (OTC) products, starting from the early prevention and management to the treatment of dyslipidemia, glucose intolerance and metabolic disorders.
Acasti Products:
Acasti addresses the worldwide multi-billion dollar cardiometabolic and cardiovascular disease markets. Cardiometabolic disorders are considered among the leading health problems worldwide arising from the combined impact of obesity and cardiovascular disease. According to the American Heart Association 2006 to 2010 statistical fact sheets’ updates, 102 million Americans have been diagnosed with hyperlipidemia, 34 million with low HDL (good cholesterol), 17 million with coronary artery disease and 145 million are overweight or obese. Amongst others, these cardiometabolic risk factors lead to 1.2 million new myocardial infarctions diagnosed each year of which only 1 of 3 survive. According to the 2009 Heart Disease and Stroke Statistics Update, the estimated direct and indirect costs of cardiovascular disease and stroke in the United States totaled USD 475 billion of which, USD 52 billion was spent only on medications1.
Acasti develops highly concentrated phospholipids (principle constituents of HDL) which carry and functionalize EPA and DHA stabilized by potent antioxidant esters and which are customized to respond to the physiological pathway of HDL production and cholesterol excretion. Evidence has shown that an increase in HDL-C of 0.026mmol/L equates with a 2% relative risk reduction in the incidence of coronary events in men and 3% in women2.
Recent studies indicated that the prime component of HDL modulating cholesterol efflux was HDL-phospholipids and not necessarily apolipoprotein apoA-1. The reduced efficiency in cholesterol efflux in rats expressing high concentrations of human apoA-I has been shown to be due to a marked decrease in the HDL-Phospholipid:apoA-I ratio in the serum.
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1. American Heart Association, 2006 to 2010 statistical fact sheets’ updates
2. T. Gordon, W.P. Castelli, M.C. Hjortland, W.B. Kannel And T.R. Dawber, High Density Lipoprotein As A Protective Factor Against Coronary Heart Disease. The Framingham Study, Am J Med 62 (1977), Pp. 707–714.
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Vectos™: platform technology for the development of OTC pipelines
Vectos has an intrinsic biological activity on triglycerides and LDL-cholesterol allowing the formulation of a variety of active principle ingredients (API) needing to be accentuated or complemented to improve either the APIs activity or safety profile.
The Vectos platform enables the combination of active ingredients addressing therapeutic gaps and allowing the development of new OTC products or product lines. The features below summarize the commercial advantages of Vectos:
Low Daily Recommended Intake
Solubilizing properties improving pharmacokinetics
High stability
Onemia: medical food product
Medical Foods (MF) are at the intersection of food/functional food (FF) and prescription products (Rx). MF are regulated by FDA-CFSAN [Sect 5b 21 USC 360ee(b)(3)] and intended for specific dietary management of a disease with distinctive nutritional requirements. Under the supervision of a physician, the MF contains ingredients that are generally recognized as safe (GRAS). Onemia was designed and intended for the dietary management of omega-3 phospholipid deficiency in metabolic disorders and illnesses associated with cell membrane disturbance. The consequence of this deficiency leads to a variety of conditions such as hyperlipidemia, atherosclerosis, diabetes, rheumatoid arthritis, gastroenterology disorders. Onemia is an original and a proprietary formulation with clinically proven ingredients Neptune krill oil being the main ingredient but 25% and 200% more concentrated in omega-3 and astaxanthin, respectively. Preclinical research has proven the superior bioavailability and efficacy of Onemia as compared to the leading prescription omega-3 Lovaza®. The animal study demonstrated that 0.5g of Onemia achieve similar lipid triglyceride lowering as 4g of Lovaza® thus increasing compliance and reducing the probability of side effects. The following are the milestones met so far by Onemia:
CaPre Prescription Drug:
CaPre has been tested in several preclinical models, such as mice (4 sub-species) and rats (2 sub-species). Various daily doses and durations of treatment were administered orally to assess the safety and efficacy of given compositions and to determine the pharmacokinetic profile.
Data has demonstrated that CaPre dose-dependently and significantly reduced the blood concentration of triglycerides and simultaneously elevated HDL while normalizing glucose intolerance in some animal models. Most importantly, these effects were achieved without the common side-effect of other traditional treatments, such as an increase in LDL.
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Such studies were reviewed by Pr. Daniel Rader, M.D. (Professor of Medicine, Pharmacology, and Pathology and Laboratory Medicine, University of Pennsylvania School of Medicine and Director, Preventive Cardiovascular Medicine and Lipid Clinic) toward defining the safety, efficacy and the mechanisms of action of CaPre™.
In October 2010 Acasti submitted to Health Canada a CTA for a Phase II clinical trial, following a very positive pre-CTA meeting. The first part, CMC section, has been completed successfully.
From a business development, Acasti showcased its platform and products to a variety of pharmaceutical companies through international business development meetings (Annual Alliance Management congress and Annual Combination Drug Therapies Conference, both organized by the Cambridge Healthtech Institute (CHI) and the BioPharmaceutical Strategy Series). Acasti presented its unique positioning in the field of Cardiometabolic disorders and its action plan for successful collaboration with worldwide pharmaceutical industry leaders and its strategy for implementation. Acasti intensified its position on its corporate strategy in seeking alliances for its new product lines, while providing opportunities for in/out licensing agreements. Acasti is establishing itself with international and strategic industrial partners who are seeking the next best product to manage the complexity of mixed dyslipidemia associated with the ever-increasing problems of obesity and diabetes.
NeuroBioPharm Inc. (“NeuroBioPharm”)
During 2011 fiscal year, the Corporation made significant progress in its scientific research and development programs. NeuroBioPharm announced the results of preclinical research performed by NeuroCode AG, (Wetzlar, Germany), a team of recognized experts dedicated to specific profiling of active pharmaceutical ingredients by means of electroencephalographic (EEG) power spectra of conscious free moving rats. Three different preparations were tested on a rat model for the purpose of understanding their dose and time dependent effects on the electrical brain activity recorder on an electropharmacogram over four brain areas. According to analysis, the NeuroBioPharm APIs were projected in close neighbourhood to stimulatory and cognition enhancing drugs like Ginkgo extract and metanicotine, a potential treatment for senile dementia, and methylphenidate (MPD) or Ritalin, a drug used for treatment of attention deficit hyperactivity disorder (ADHD) in children. Furthermore, the Corporation has completed initial non-GLP preclinical toxicity and pharmacokinetic studies and has initiated a preclinical efficacy evaluation of the two new preparations.
The clinical trial evaluating the effect of the medical food in early stage Alzheimer disease has now completed the treatment phase. The trial was conducted in multiple sites in different provinces in Canada. The purpose of this study is to evaluate the efficacy of NKO™ softgels in reducing decline of global cognitive function as measured by the Neuropsychological Test Battery (NTB), in patients diagnosed with early stage Alzheimer's disease when compared to fish oil and a placebo after 24 weeks of treatment. The primary outcome measure is the change in Neurological Test Battery (NTB) between baseline and 24 weeks of treatment. Secondary outcome measures include the change in Disability Assessment in Dementia (DAD) at 24 weeks of treatment, the change in GDS NTB, DAD, and MMSE at 12 weeks. Safety and tolerability was assessed by the incidence of treatment emergent adverse events.
NeuroBioPharm is establishing itself with international and strategic industrial partners who are seeking safe and effective products for the maintenance of cognitive health for the OTC market, the clinical dietary management of cognitive decline and neurodevelopmental problems as medical foods and finally, prescription drugs for the treatment of neurodevelopmental and neurodegenerative disorders. In relation to the latter, upon receipt of the final clinical report for the Alzheimer study, NeuroBioharm intends to negotiate the terms of a License Agreement with the multinational Corporation transferred to NeuroBioPharm by Neptune. The terms to be negotiated will include the agreed commercialization deal defining milestone payments and minimum annual royalty conditions.
On February 28, 2011 NeuroBioPharm proceeded with the recapitalization of its share capital through a Reverse-Split and consolidation. On April 12, 2011, following the Reverse-Split, NeuroBioPharm purchased by mutual agreement the resulting Class A Shares payable by the issuance of new Class A Shares, of class H Shares and Series 2011-1 Warrants. This transaction was carried out in accordance with the rollover provisions allowed under tax legislation and based on an independent appraisal prepared for the Corporation. On the same date, following the Reverse-Split, NeuroBioPharm exchanged, by mutual agreement, the resulting Class C Shares, the Series 4 Warrants and the Series 5 Warrants paid by the issuance of Class G Shares, Series 2011-2 Warrants and Series 2011-3 Warrants.
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The number of exchanged warrants was adjusted in accordance with the clauses of adjustment of the warrants according to the percentage of dilution so that the Corporation would not more, or less, be diluted following the exercise of warrants, before and after the reorganization and the rollover. Moreover, following all the exercises of the warrants, the potential financial contribution of said warrants, proportional to the full value, remains the same after the reorganization and the rollover, and this, by making sure that the market value calculated for these new warrants by using the method of evaluation Black & Scholes, remains lower for the holder after reorganization and post rollover, when compared to its commercial value pre-reorganization and rollover.
In 2011, NeuroBioPharm intends on proceeding with the filing of a prospectus with the Securities Regulatory Authorities in each province and territory in Canada in order to allow NeuroBioPharm to become a reporting issuer.
2.4 PRODUCTS AND BRANDS
2.4.1 NKO® - Functional Food Grade
In 2011, Neptune continued to achieve major advancements in the research and development of Neptune Krill Oil (NKO®) suitable for incorporation into functional foods of different matrixes by masking and/or eliminating the characteristic krill odour and taste of the original oil.
a) |
Continues working with a new functional bar manufacturer. The new bars provide Neptune more flexibility and better market positioning since they can be produced at lower minimum quantities and are produced with all natural ingredients and have no artificial additives. This is more in line with the product positioning Neptune is targeting. Three new excellent bar flavours were developed (Cherry Chocolate, Chocolate Nut Pie and Chewy Ginger). |
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b) |
The new healthy functional bars including a full therapeutic dose of NKO® (300mg and 500mg) per bar continue to be displayed in all the major industry international tradeshows that Neptune has participated in. |
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c) |
New options of functional fruit juices and functional bars are still in development. |
2.4.2 OPA3TM - Optimal for Life
In 2011, Neptune continued the marketing of the new OPA3 ™ brand and established it as the trademark for the Corporation’s growing family of products. This new brand represents products composed of three essential elements (omega-3s, phospholipids and antioxidants) and effectively illustrates Neptune’s product portfolio strategy and positioning of its initial dietary supplement - NKO®. This unique patent composition allows long-term stability while it delivers increased bioavailability ensuring improved effectiveness in smaller doses. The OPA3 ™ brand will allow Neptune to better communicate its distinct advantage and to create a new class of ingredients for the functional food and biopharmaceutical markets. NKO® and two new formulations of the OPA3 ™ brand were evaluated and proven effective for neurological disorders in animal models.
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2.4.3 NKO®- Neptune Krill Oil
A marine oil extracted from Antartic Krill (Euphasia superba) that provides a unique blend of nutritional elements; the first product in the OPA3TM family to be developed and commercialized. NKO® pioneered the use of omega-3 phospholipids and krill oil for human health, opening the door of today’s krill industry. Its elevated content in phospholipids rich in omega-3 and omega-9 and antioxidants such as astaxanthin, vitamin A and vitamin E and flavonoid, offer a proprietary safe and effective product free of preservatives with exceptional health benefits and superior stability. In 2009, NKO® further distinguished itself by proving it superior bioavailability in a clinical study comparing the most commonly known formats of omega-3 on the market.
2.4.4 NKATM - Neptune Krill AquateinTM
Neptune Krill Aquatein (krill protein concentrate) is a product that features the complete range of marine amino acids, including the eight essential amino acids. This protein concentrate contains pre-digested proteins that are an important source of short-chain amino acids in the form of peptides that facilitate digestion by more effective assimilation. New market trends searching for new and unique amino acid profiles increased the potential value of NKATM. More complete analyses of the composition of NKATM were performed and different methods for improving quality and efficiency of production were also investigated. NKATM is being positioned to be sold for both human and animal nutrition.
2.4.5 EKOTM – ECOKRILL™ OIL
In 2010, Neptune pre-launched its new product, ECOKRILL™Oil (“EKOTM”), a member of the Neptune Krill Oil family of products, to its clientele at Health Ingredient Europe in Madrid. The pre-launch was well received by the market. EKOTM is a product similar to NKO® with slightly lower specifications and a lower selling price in line with the needs of the commodity market. Moreover, EKOTM sells at a lower price than competing krill oil products and presents better specifications than these products.
2.5 CLINICAL STUDIES
Neptune is continuously investing in medical research aimed at demonstrating the benefits of its products on human health. In 2010, Neptune entered into new medical research and clinical trials in the field of joint care with strategic partners, the results of which are still pending. It is anticipated that preliminary results for these studies will be available in late 2012 and should be completed in 2013. The final results should enable Neptune to further its reputation as a leader in the krill oil industry, and should also allow Neptune to obtain new claims and approvals in various jurisdictions.
In 2009, Neptune completed a clinical trial entitled “Evaluation of the bioavailability and steady state assessment of EPA and DHA of Neptune Krill Oil compared to pharmaceutical grade EPA & DHA esters, combination of bioactive ingredients simulating NKO® and fish oil”.
2.5.1 Skin Cancer
The results of a pre-clinical animal study on the effects of NKO® on the prevention of skin cancer caused by UV radiation indicate that NKO® can prevent skin damage caused by chronic exposure to UV radiation.
2.5.2 Premenstrual Syndrome
The results of a double blind clinical study on assessing the effects of NKO® on the management of premenstrual syndrome (PMS) were published in May 2003 in a peer review medical journal - the Alternative Medicine Review – (Sampalis et al., 2003; 8(2): 171-179), The study demonstrates with high degree of certainty, that NKO® can significantly reduce both the physical and emotional symptoms associated with PMS (premenstrual syndrome), and that it is significantly more effective than fish oil (omega-3 18:12) in the management of physical and emotional dysmenorrheal symptoms.
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2.5.3 Hyperlipidemia
The results of a double blind clinical study on the effects of NKO® on hyperlipidemia (high cholesterol) demonstrate with high degree of certainty that:
Cardiovascular Risk Modification Analysis
Health Economics Analysis
2.5.4 Chronic Inflammation and Osteoarthritis
A Phase II clinical study on the effects of NKO® on conditions relating to chronic inflammation and osteoarthritis, published in May 2007 in the peer-reviewed medical journal - Journal of the American College of Nutrition - demonstrated that NKO® within a short treatment period can significantly reduce the C-reactive protein and osteoarthritic symptoms in patients diagnosed with a chronic inflammatory disease.
2.5.5 Attention Deficit Hyperactivity Disorder (ADHD)
The clinical results obtained during an open label pilot study demonstrated that NKO® may significantly improve cognitive function (among others concentration, planning skills and focus) of adults suffering from ADHD. The recorded observations were indicative of the neurological advantages of using Neptune Krill Oil over a controlled period of time. These results corroborate the short-term direction of the Corporation in terms of its clinical research initiatives.
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2.6 DEVELOPMENT OF NEPTUNES AND SUBSIDIARIES PORTFOLIO PRODUCTS
2.6.1 Research and Product Development Programs
2.6.2 Internal Research, Subcontracted Research or Alliance Research
Neptune and its Subsidiaries - Funded Internal Research
ONEMIA™: a series of preclinical testing was initiated in the fiscal period ended February 28, 2009. Study results from initial toxicity, pharmacokinetics and efficacy testing Demonstrated the safety and efficacy of ONEMIA™ allowing the further development of the product as a medical food.
For NeuroBioPharm, a medical candidate and a drug candidate for non-GLP development and chemical analyses were initiated in fiscal period ended February 28, 2009. Initial medical candidate batches were standardized within allowed deviation limits. Preclinical testing has been initiated evaluating toxicity and pharmacokinetics.
NPK-D organoleptic management of NKO® for implementation of NKO® in daily functional food and specialized medical food. Incorporation of a functional NKO® dose in 100g yogurts has been successfully and the functional food is evaluated in a clinical study.
CaPre™: non-GLP development and analytical testing in multiple batches has been completed successfully within the allowed standardization of active pharmaceutical ingredients. GLP production has been initiated. Nonclinical testing required for the CTA has been completed demonstrating the safety, bioavailability and efficacy of CaPre™ allowing its progression into the clinical phase.
Acasti completed nonclinical research designed to evaluate the safety and efficacy of its first Active Pharmaceutical Ingredient (API) drug candidate, CaPre™. The efficacy of CaPre™ on dyslipidemia was evaluated on Zucker Diabetic Fatty, a diseased rat phenotype, characterized with established type 2 diabetes, glucose intolerance and severe dyslipidemia, particularly elevated triglycerides and cholesterol. After 4, 8 and 12 weeks of chronic daily treatment with human equivalent daily dosing of 500mg and 2,500mg, CaPre™ was shown to significantly increase High Density Lipoprotein Cholesterol (HDL-C or “good cholesterol”) by 40% at the lower dose and by up to 61% at higher dose after 3 months treatment in those severely affected rats. These results show that CaPre™ could be effectively used in patients with metabolic syndrome and /or lipid disorders which remain a currently unmet medical need.
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Neptune Funded Subcontracted Research
Alliance Funded Research
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2.7 STRATEGIC BUSINESS DEVELOPMENT
Neptune has successfully established a strong track record of entering and maintaining business-to-business relationships with its partners and continues to strongly support its strategic business development plan by forming partnerships and alliances with worldwide leaders in the nutritional and pharmaceutical industries. Today, these industries are converging into a new consumer health marketplace driven by increasing consumer standards and market power in disease prevention and health management including cardiovascular, bone and joint, and neurological disease. Nutritional and pharmaceutical companies are seeking to penetrate and gain market share in this promising consumer health market place by developing value-added products including dietary supplements and functional food products with specific health claims at therapeutic doses.
Neptune’s business development strategy continues to be focused on developing and commercializing value-added premium products supported by clinical evidence and regulatory approvals in partnership with multinational companies. Our partners, including Nestlé and Yoplait, are investing with us the time and resources into conducting clinical research to demonstrate clinical benefits with the objective of obtaining product-specific health claims, which will ultimately allow them to secure much larger market shares. The investment reward into research and development by our multinational partners is enhanced by Neptune’s strong intellectual property protection with worldwide patents which also creates a real strong market entry barrier to any potential competitor.
General physician acceptance and their willingness to recommend premium products showing clinical evidence, such as Neptune’s products, combined with medical and consumer media responding with massive educational programs accelerate consumer market acceptance, demand and growth. Other nutritional and pharmaceutical companies should likely become attracted by the opportunities provided by Neptune’s growing premium product portfolio and more strategic alliances are being confidentially developed.
Through Neptune’s strategic business development, Neptune anticipates its market share will continue to increase worldwide. In that perspective, Neptune increased its in-house production capacity which was completed in the summer of 2009. In addition, the Corporation is continuously negotiating alliances with multinational industrial partners for high-scale manufacturing to respond to increased demand supported by NKO® Novel Food approval in Europe, Asia, Australia and South America, as well as new incoming customers and raised by growing market penetration generated by already actively committed customers.
On target with its business development strategy and pharmaceutical business plan, Neptune structured its pharmaceutical operations into its pharmaceutical subsidiaries Acasti for cardiovascular applications and NeuroBioPharm for neurological applications in order to fully benefit from the dynamics of the new consumer health market place. Both companies develop products that respond to the changing customer needs in the medical food and over-the-counter markets providing near-term revenue opportunities.
NeuroBioPharm is already conducting a clinical study for a medical food product with a multinational partner. In addition, Acasti Pharma and NeuroBioPharm are developing prescription drug candidates and an investigational drug approval (IND) submission to conduct pivotal clinical trials is currently in progress. The business development strategy is to carry out advanced clinical development and commercialization with multinational pharmaceutical partners.
2.8 PRODUCTION
The Corporation produces all Neptune products at its plan located in Sherbrooke, Quebec (the “Sherbrooke Plant”).
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2.8.1 Neptune Krill Extraction Process Platform Family
Description
Neptune OceanExtractTM is a cold extraction process platform family including the Neptune krill extraction process platforms which enable the extraction of omega-3 polyunsaturated oil, protein concentrates and amino acid concentrates from marine biomasses such as krill, and other constituents of marine biomass. NKO® is extracted from the raw material, i.e. utilizing the Neptune krill extraction process platforms.
Advantages of the Neptune Extraction Process Platforms for Krill
To Neptune’s knowledge, no other industrial krill oil extraction process can currently compete with the Corporation’s extraction process platforms and performance applied to krill. It is the only process platform family, protected by industrial secrets, producing a complete lipid extract of long-chain omega-3 fatty acids (EPA and DHA) functionalized by phospholipid carriers maintaining the antioxidant esters responsible for its long-term stability and antioxidant potency. None of the stages in the transformation process involve heating the raw material. Neptune extraction process platforms for krill preserve the biological activities of the krill substances, the properties of which are widely sought after by the nutraceutical, cosmetics and pharmaceutical industries.
The heat treatment (e.g., pasteurization) used in the agrifood processing industry is often designed to destroy bacteria, thus preserving food safety and product shelf life, and protecting consumer safety. The particular aspects of the Neptune extraction process platforms also allow to destroy bacteria, resulting in products that are safe and healthy for human consumption and with a long shelf life which is important for commercialization.
Compared with the traditional animal or vegetable oil extraction processes generally used in the industry, the Neptune extraction process platforms preserve and enhance the intrinsic food qualities of krill. The conditions governing storage, handling and the extraction processes are such that lipidic alterations over long-term storage are minimal.
The advantages inherent to the Neptune extraction process platforms enable high extraction performance, recycling and salvage of extraction byproducts. The processes thus enable full use of the biomass and bacterial destruction of the extracts obtained. It is also characterized by the absence of preservative use and the stability of long-chain polyunsaturated fatty acids.
The Neptune extraction process platforms from the Neptune Ocean ExtractTM family allows the extraction of high-end products currently sought after by the nutraceutical, cosmetics and pharmaceutical markets.
2.8.2 Plant
The Sherbrooke Plant received a favourable outcome of a GMP (Good Manufacturing Practices) audit performed by Health Canada, Natural Health Product Directorate (NHPD). The Sherbrooke Plant has increased its annual production capacity from 100,000kg for NKO® to 130,000kg, and from 400,000kg to more than 500,000kg for NKA™.
2.8.3 Krill
Krill is a generic term of Norwegian origin designating 86 species of deep and cold water pelagic marine planktonic animal (zooplankton) constituent of the global marine biomass.3, 4
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3 |
Bernadette Casanova. “Ordre des Euphausiacea Dana, 1852. Crustaceana 76(9): 1083-1121. |
4 |
Tony J. Pitcher, Series Foreword, page vi in Inigo Everson editor, “Krill: biology, ecology, and fisheries”, Fish and aquatic resources series 6, Blackwell Science Ltd, 2000. |
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Krill looks like miniature shrimp. The smallest species of krill, found in the Pacific Ocean, measures approximately 1 cm.5 The larger Antarctic krill (Euphausia superba) can grow up to 6cm. Krill is the most abundant animal biomass on the planet and is found in schools that can sometimes cover several square kilometres of ocean.6
2.8.4 The Virtues of Krill
In the opinion of the Corporation, the virtues of krill are being increasingly recognized by the world scientific community.7
Because the krill used by the Corporation feeds on phytoplankton, namely diatoms and dinoflagellates8, its lipid content is a major source of polyunsaturated fatty acids, mainly docosahexaenoic acid (DHA) and eicosapentaenoic acid (EPA), the two major types of essential marine omega-3 fatty acids. Krill also contains proteins offering the complete range of amino acids and very efficient digestive enzymes. In addition, it contains powerful antioxidants (liposoluble A and E vitamins and provitamins, beta-carotene, trans-retinol, astaxanthin, co-enzyme Q10 as well as a unique flavonoid of animal source). Krill contains phospholipids, amino acids and minerals providing numerous benefits in terms of the absorption and digestion of nutrients with proven benefits for human and animal health.9
The organic components that can be obtained from krill are part of the categories of substances actively sought after by the nutraceutical, cosmetics and pharmaceutical industries.10
One major advantage of Neptune’s proprietary knowledge of krill processing lies in the fact that EPA and DHA contained in Neptune Krill Oil are carried on phospholipids and associated with potent antioxidants (vitamins A and E, beta-carotene, trans-retinols, astaxanthin, co-enzyme Q10 and a flavonoid) making them highly bioavailable and resistant to oxidation. The absence of oxidation results from the high natural content of powerful antioxidants in krill oil, namely.
Due to its high stability even at significantly higher temperatures than other omega-3 marine oils, Neptune phospholipid extracts are suitable for integration in various pharmaceutical carriers like hard and gelatin capsules, transdermal patches, and food carriers like fruit beverages, dairy products including yogurt, milk, and spreads, dry matrixes such as fruit nuggets, cereal and nutritional bars.
2.8.5 Availability of Krill
There are two primary ocean regions where krill is harvested: the Southern Ocean (Antarctic krill) and the North Pacific Ocean (Pacific krill, mainly off the coasts of Japan and Canada). The total quantity of krill in these two oceans is conservatively estimated to be at least 500,000,000 metric tonnes (mt).9 From these two oceans, up to 271,000 mt of both krill species is harvested annually.11, 12 Of that total from 1997/98 until 2009/10, between 90,000-211,180mt originated from the Southern Ocean (Antarctic krill Euphausia superba)10, 13 and an average annual catch of 60,000 mt from the Pacific (Pacific krill Euphausia pacifica).14 The catches represent less than 0.1% of the existing resource. In 2010/11 the main countries that will harvest krill are China, Japan, Norway, and South Korea. From 2008/09 to 2010/11, annual quotas for Antarctic Krill have increased by 33%.10 Annual allowable quotas of 6.555 million tons for 2009/10 have been increased to 8.695 million tons for 2010/1110 . The above data supports the following facts: the resource is abundant, accessible and there is a potential for long-term sustainable exploitation12, 15 with adequate traceability measures. The average market price for whole frozen krill is around $900/mt. Neptune maintained successful negotiations with major krill suppliers to ensure long-term supply, quality and competitive prices.
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5 |
R.D. Kathman et al., “Identification Manual to the Mysidacea and Euphausiacea of the Northeast Pacific”, Canadian Special Publication and Aquatic Sciences 93, 1986, p. 269. |
6 |
Stephen Nicol, “Time to Krill?”, Australian Antarctic Division, 1995, pages 2-3. |
7 |
Stephen Nicol, Ian Forster & John Spence, Chapter 10. Products Derived from Krill in Inigo Everson editor, “Krill: biology, ecology, fisheries”, Fish and aquatic resources series 6, Blackwell Science Ltd, 2000, pp. 262-283. |
8 |
Stig Falk-Petersen, Wilhelm Hagen, Gerhard Kattner, Andrew Clarke, & John Sargent, 2000, Lipids, trophic relationships, and biodiversity in Arctic and Antarctic krill. Canadian Journal of Fisheries and Aquatic Sciences, Volume 57 (Suppl. 3), pp. 178-191. Charles F. Phleger, Matthew M. Nelson, Ben D. Mooney & Peter D. Nichols, 2002, Interannual and between species comparison of the lipids, fatty acids and sterols of Antarctic krill from the US AMLR Elephant Island survey area, Comparative Biochemistry and Physiology Part B, Volume 131, pp. 733-747. |
9 |
Stephen Nicol, Ian Forster & Jonh Spence, 2000, op. cit. |
10 |
Molyneaux, M. & C.M. Lee, “Food Technology”, The U.S. Market for Marine Nutraceutical Products, June 1998, 52:6, pages 56-57; Stephen Nicol, Ian Forster & John Spence, 2000, op. cit. |
11 |
World Health Organization (WHO), “Nutritional Value of Antarctic Krill”, 1995, Bulletin 73; S. Nicol & Y Endo. Krill fisheries: Development, management and ecosystem implications. Aquatic Living Resources 12(2), 105-120. 1999; R. Shotton, B17. Southern Ocean FAO Statistical Areas 48, 58 and 88, Review of the state of world marine fishery resources, FAO, Marine Resources Service, Fishery Resources Division, Fisheries Technical Paper 457, pp. 158-162, 2005. V. Siegel . Distribution and population dynamics of Euphausia superba: summary of recent findings. Polar Biology 29: 1-22, 2005. A. Atkinson, V. Siegel et al. A re-appraisal of the total biomass and annual production of Antarctic krill. Deep-Sea Research I 56: 727-740, 2009. |
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2.9 INTANGIBLE ASSETS
It is an important part of our business to obtain intellectual property protection for our technology, products, applications and processes and/or to maintain trade secrets. Our success depends, in part, on our ability to obtain, license and enforce patents, protect our proprietary information and maintain trade secret protection without infringing the proprietary rights of third parties. Our strategic approach is to file and/or license patent applications whenever possible to obtain patent protection. We also rely on trade secrets, proprietary unpatented information, trademarks to protect our technology and enhance our competitive position. We have confidence in our patent and will continue to take all appropriate actions needed to protect our intellectual property rights in the United States and elsewhere as required. As the pioneers of krill omega-3 phospholipids for human health, we have worked very hard over the last 11 years to substantiate our claims, obtain multinational regulatory approvals, establish our brand and protect our intellectual property
2.9.1 Exclusive License/Option
Even though the Corporation uses, for its production, its own process technology, which is protected by trade secrets, the Corporation also strategically exploits, within its intellectual property portfolio, an exclusive, irrevocable worldwide license on a patent related to an extraction process belonging to the University of Sherbrooke, province of Quebec (the “University”). The License Agreement applies to the process of oil extracted from krill and from other marine and/or aquatic biomasses.
The License Agreement clearly stipulates that the Corporation shall remain the sole owner of any improvement and/or modification and/or enhancement of the extraction process done and/or paid by the Corporation. This clause is significantly important. The License Agreement also stipulates that the University shall remain the sole owner of any improvement and/or modification and/or enhancement of the extraction process done and/or paid by the University. Thus, the Corporation, for a period of 24 months following any such improvement and/or modification and/or enhancement by the University, has the right to enter into an exclusive license agreement with the University with respect to any such improvement and/or modification and/or enhancement. No such improvement and/or modification and/or enhancement have been, to this date, reported to the Corporation by the University.
The License Agreement may be terminated (i) by way of agreement between the University and the Corporation; (ii) in the event of a default by the Corporation or the University; (iii) in the event of the insolvency or bankruptcy of the Corporation; or (iv) if the Corporation ceases to carry on its activities in the normal course of business.
12 Commission for the Conservation of Antarctic Marine Living Resources / CCAMLR, “Understanding CCAMLR’s Approach to Management”, May 15, 2000; SC-CCAMLR-XXV Report of the twenty-fifth meeting of the Scientific Committee, October 2006; CCAMLR. Schedule of conservation measures in force 2010/11 Season, 2010. CCAMLR, Statistical Bulletin, Volume 20 (1998-2007) CCAMLR-SB/0820, 2008; SC-CAMLR-XXIX, Report of the Twenty-Ninth Meeting of the Scientific Committee, October 2010 (pre-release version);T. Ichii, Krill Arvesting, 9.3 Japanese northeastern coastal waters Euphausia pacifica Chapter 9, in Krill: Biology, Ecology and Fisheries, Fish and aquatic resources series 6, Blackwell Science Ltd, 2000 13 CCAMLR op. cit.
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14 T. Ichii, op. cit.
15 WHO, “Nutritional Value of Antarctic Krill”, 1995, Bulletin 73, page 551.
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The Corporation also benefits from a right of first refusal with respect to any research project for the development of a process to extract and purify oils originating from marine and freshwater biomasses like krill among others and from an option to purchase the intellectual property rights with respect to the results of the research, as it relates to krill, or other crustaceans, conducted by the University. The exercise price for this purchase option has been set at $275,000 by mutual agreement between the University and the Corporation, this price was contested by the researcher but has remained the same based on the decision of the Quebec Court of appeal rendered in January 2010 (see section 2.9.3 entitled Economic Dependence/Litigation).
The Corporation has undertaken to pay an annual commission to a corporation controlled by Mr. Henri Harland for services rendered as well as for the transfer in February 2001 to the Corporation of the license rights with the University, including the right of first refusal and of the option to purchase the intellectual property rights. This royalty of 1% on any sales and on other income of the Corporation is for an indeterminate period of time and it shall be paid semi-annually and disbursement of such royalty payment per year will not be superior to the Corporations net earnings before interest, taxes, depreciation and amortization (EBITDA).
2.9.2 IP Protection
Brand names and trademarks
Neptune has registered the trademarks OPA3TM and NKO® in over thirty countries. Neptune OceanExtractTM and NKATM are other trademarks of Neptune, while a trade-mark application has been filed in Canada for ECOKRILL OIL.
Acasti has applied for worldwide trademark protection of CaPre (name given to its prescription drug candidate), as well as for the trade-marks ONEMIA and VECTOS, and is the owner of the trade-marks BREAKING DOWN THE WALLS OF CHOLESTEROL in Canada, the United States and the European Community. The trademark CaPreTM is now registered is some jurisdictions.
Patents
Neptune has the following patent portfolio:
|
Countries | ||||||||
Category |
Description | Issued | Pending | ||||||
Novel Phospholipid/ Flavonoid |
Composition of Matter | 24 | 3 | ||||||
Cardiovascular Neurological health |
Method of Use | 20 | 0 | ||||||
Health Applications |
Method of use | - | 30 | ||||||
Extraction Process |
Process | 34 | 1 |
Acasti has initiated its patent portfolio with the first application as a USA provisional of a composition and use patent.
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Trade Secrets
Neptune protects its optimization and extraction processes through industrial trade secrets.
Regulatory approvals
Neptune has obtained the following regulatory approvals, permits and authorizations:
2.9.3 Economic Dependence/Litigation
The Corporation sources its krill used in the manufacturing of its products from three suppliers. The Corporation considers that its relationship with its suppliers is good and that it is not dependent upon these suppliers, as alternative sources of supply are available.
The Corporation is no longer dependent on the license agreement mentioned in section 2.9.1 hereof entitled “Exclusive License/Option” as the Corporation has developed and now manufactures its products with its own proprietary technology process platform “Neptune Ocean Extract”.
As for the exclusive “License/Option”, on August 18, 2004, the Corporation notified the University of its intention to exercise its $275,000 purchase option relating to the intellectual property (see section 2.9.1. hereof entitled “Exclusive License/Option”). As per the licensing agreement reached between the University and the Corporation, the terms of payment are as follows: $100,000 on the transfer date of the intellectual property, $50,000 on the first anniversary date of the transfer, $50,000 on the second anniversary and $75,000 on the third anniversary.
On August 23, 2004, university researchers filed an injunction against the Corporation and the Canadian university demanding cancellation of the purchase option of the intellectual property granted to the Corporation by the Canadian university.
In December 2008, a ruling was rendered against the Corporation. The judge determined that the Corporation had not exercised its option to purchase the intellectual property in August 2004, as claimed by the Corporation, and it had to pay additional royalties in the amount of $1,031,134 in addition to $145,000 in fees. The judge furthermore set at $1,776,000 the purchase price for the intellectual property, although it had been previously established at $275,000. Under the judgment, the Corporation had 45 days to exercise its option and it had to pay $275,000 immediately.
Following the December 2008 ruling, the Corporation appealed the ruling and requested an immediate stay of its execution. The Corporation did not agree with the findings of the ruling and believed that its own arguments were well founded.
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In January 2010, the court of appeal ruled in favor of the Corporation confirming in its ruling the Corporation’s rights to exercise its purchase option relating to the intellectual property at a purchase price of $275,000 plus interests of $36,000, for a total of $311,000. The court also confirmed that the Corporation had exercised its option in August 18, 2004 and rejected all royalty claims to the exception of $36,000 plus interests of $11,000, for a total of $47,000.
In 2010, the Corporation received a complaint filed by Schiff Nutrition Group Inc. ("Schiff"), a former distributor of Neptune’s products, in the United States District Court for the District of Utah, Central division, alleging that Neptune failed to meet certain delivery thresholds. As a result, Schiff is seeking monetary damages in the minimum amount of US $1 million from Neptune.
The Corporation denies all material allegations and the requested monetary compensation in the complaint and asserts federal and state law claims against Schiff, including that Schiff failed to pay the Corporation for shipments of NKO® accepted by Schiff, and that Schiff caused its contractor to encapsulate NKO® despite the Corporation’s objections that the resulting product would not meet specifications after encapsulation by Schiff’s contractor. Despite the Corporation’s warning to Schiff to cease directly and indirectly using the Corporation trademarks including NKO® and clinical support, Schiff continued to use the Corporation trademarks and claims, as it could be seen on websites of multiple Schiff’s distributors. As of the date of this AIF, the case is still pending before the federal district court in Utah.
In 2009, Neptune filed a patent infringement lawsuit against Aker BioMarine ASA, Jedwards International, Inc and Virgin Antartic LLC, in defence of its U.S. method of extraction of total lipids fractions from Krill. Neptune alleges that the Defendants have used solvents for the extraction of their krill oil, which are covered by the patent (US6,800,299) licensed to Neptune. As of the date of this AIF, the case is still pending before the federal district court in Massachusetts.
In 2010, Neptune and Acasti filed a complaint with the Quebec Superior Court claiming inter alia, damages and co-ownership in the applications filed by Valensa. Although Valensa has challenged the jurisdiction of the Quebec Superior Court over this matter, the case is proceeding.
In 2009, Valensa, submitted without Neptune's preapproval, a patent application and refused to add Neptune's name as co-owner of this patent. This was in breach of agreement to file with Neptune for a joint patent protection. Furthermore, Valensa failed to submit its action plan and volume commitments on the agreed upon deadline. For those reasons, Neptune refused to send samples to Valensa until Valensa complies with the terms of the signed agreement. This led to Valensa unilaterally terminating the agreement.
2.10 EMPLOYEES
2.10.1 Number
As at February 28, 2011, Neptune, along with Acasti and NeuroBioPharm, has a total 82 employees, working at its business offices in Laval and Sherbrooke plant.
2.10.2 Skill Knowledge
Neptune employees possess specialized skills and knowledge in the following fields:
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which are valuable assets of the Corporation.
2.11 SALES/DISTRIBUTION
Neptune manufactures its products at its Sherbrooke plant and sells NKO® in bulk oil or in capsules to its distributors who commercialize under their private label in multiple market segments including health food stores, mass (food and drug), direct sales (MLM, internet, catalogue, radio) and via healthcare professional recommendation. The NKO® encapsulation is subcontracted by third parties in Canada, USA, Asia and Europe. 100% of Neptune NKO® sales revenues during the fiscal year ended February 28, 2011 were derived from independent companies. Sales of NKO® for the fiscal year ended February 28, 2011 amounted to $16,685,000, from $12,605,587 for the fiscal year ended February 28, 2010. Sales are not cyclical.
During the fiscal year ended February 28, 2011, more than 98% of the Corporation’s sales were made to customers based outside Canada. The Corporation enters into hedging instruments from time to time to partly offset currency risks.
2.12 COMPETITION
The nutraceutical and pharmaceutical markets have continuously grown and are highly competitive. Many companies now carry out research, development and commercialization activities and programs with applications for human health similar to those of the Corporation. Many competitors are also developing new nutraceutical products which are today focusing on pharmaceutical applications based on the specific properties of their products. Some of these companies have greater financial resources, research and development capabilities as well as manufacturing and marketing facilities than those of the Corporation, while others have limited resources but are trying to benefit from the research and promotion done by the major players. Moreover, teaching institutions, government and environmental agencies and other research bodies are conducting research in similar sectors as the Corporation. They are also capable of marketing products, either by their own means or by cooperation agreements.
The Corporation is aware of rising competition in both the nutraceutical and the pharmaceutical markets and is actively monitoring the industry. Biomedical and biotechnology companies, as well as large pharmaceutical companies, are not only active in the same field of nutraceutical-based therapeutics as the Corporation, but are also trying to develop new niche markets. However, the Corporation believes that in its specific field of activity, it maintains certain definitive advantages.
Even though the Corporation is no longer the only manufacturer of marine phospholipids, it remains amongst the market leader due to its exceptional richness in long-chain polyunsaturated fatty acids and antioxidants. In addition, Neptune’s marine phospholipids continue to be the most stable and sought after products for implementation into pharmaceuticals and/or nutraceuticals (dietary supplement, functional food) for human consumption. Knowledgeable consumers are fully aware of the Corporation’s credibility and the quality of the extensive research conducted. Furthermore, the Corporation has demonstrated the positive health benefits proven with all its clinical studies, an achievement yet to be met by its competitors.
2.12.1 COMPETITORS
The Corporation is aware that other companies are developing, have commercialized, and are preparing to commercialize competitive products. Neptune’s advantage is that it remains the only Corporation, within the krill oil manufacturer market, with an ingredient with human health benefits, which has obtained regulatory approvals in countries around the world and achieved worldwide market recognition.
Aker BioMarine ASA, a Norway-based Corporation, is in the business of harvesting and commercializing marine ingredients. Aker BioMarine ASA is serving the aquaculture and animal feed markets with krill derived products, such as oil and meal registered as Qrill™. Aker BioMarine ASA merged with Natural ASA to enter the dietary supplement and functional food markets. Aker BioMarine ASA launched, in Norway, a krill oil product under the brand name SuperbaTM in 2009. Since then, Aker has published several clinical studies most of which were animal studies. The few human studies published demonstrated inferior health benefits than the human clinical studies published by Neptune. Furthermore, Aker has yet to publish any human clinical benefits in cognitive, joint and womens health.
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Enzymotec Ltd. is an Israel-based biotechnology Corporation developing biofunctional ingredients for human health applications. They claim to have a proprietary complex of marine-derived DHA and EPA -delivered as triglycerides or attached to phospholipids and astaxanthin. In the past, the Corporation has raised awareness about the true nature of those oil which, as per their disclosure, are not derived entirely from Antarctic krill (Euphasia Superba) but a blend of different marine ingredients combined to mimic the composition of NKO®.
Aquasource Products Inc, a Canadian Corporation, also commercialises an artificially enhanced krill oil without any studies, nor regulatory approvals to support their position on the market.
Poissons Tropicaux Gryd Inc., a Canadian Corporation, is commercializing Krilex® which contains a powder preparation composed of the entire krill itself, composed mainly of krill protein with very little omega-3 and antioxidants.
OTHERS
2.13 COMPETITIVE ADVANTAGES
NKO® Competitive Profile
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The NKO®-statin combination was significantly more effective than statin monotherapy in relation to HDL increase. The treatment with NKO® alone or in combination with a statin provides a cost effective choice for the management of these patients with persistent hyperlipidemia even after treatment with a statin;
NKO® can significantly reduce both the physical and the emotional symptoms of premenstrual syndrome and has been shown to be significantly more effective for the complete management of premenstrual symptoms compared to omega-3 fish oils;
In as quickly as 7 days, NKO® significantly reduced CRP (an important inflammatory biomarker). Furthermore, volunteers in the NKO® group of the study reported significant improvement in all scores of the WOMAC;
NKO® demonstrated a significant improvement in ADHD patients’ focus, concentration and planning skills;
Low daily dose well tolerated for chronic intake;
NKO® has been certified as Halal, which allows it to be commercialised in all Muslim countries. This is not the case for Superba™ which contains ethanol and thus cannot be Halal certified; and
Neptune’s marine derived products within its Neptune Krill Oil family of products (NKO® and EKO™) successfully completed an extensive and rigorous review of key environmental claims by NSF International. NSF is an independent, world-wide recognized not-for-profit organization committed to protecting and improving public health and the environment.
Strategic Position
more cost effective
of highest quality
assured extraction and production yield
patent protected use
clearly differentiated from competitive products
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Continued progress in strategic alliances with strategic corporate partners such as Nestle and Yoplait;
Strategic alliances with manufacturers are currently being discussed;
A new alliance with Bayer and Bayer Australia was formed to commercialise a Neptune proprietary product in the United States, Australia and New Zealand. This represented another important milestone in the execution of Neptune’s strategic vision; and
Establishing USP-FCC and USP-NF Krill Oil Monographs that will provide temporary barriers of entry for low grade kill oil competition.
2.14 MARKETS
Neptune is pursuing market opportunities in the nutraceutical market (including dietary supplements and functional foods) and, through its two subsidiaries Acasti Pharma and NeuroBioPharm, the pharmaceutical market (including medical food, over-the-counter and prescription drugs) for all its products.
2.14.1 Nutraceutical
Overview
Neptune’s products are currently sold in the nutraceutical market. The nutraceutical market encompasses functional foods and dietary supplements, the latter include a wide range of nutrients such as vitamins, minerals, fatty acids, amino acids and herbal supplements. Functional food is a growing field in food and medical science and includes foods designed with health benefits beyond their usual nutritional value and which may be enriched with health promoting additives such as vitamins, probiotics or omega-3.
The nutraceutical market is growing rapidly driven by the health demands of an aging population. Within the next twenty years, the number of Americans 65 and older will double from 35 million to 70 million then representing 20% of the population.16 Similar demographical changes can be observed in other countries resulting in a global trend. Beyond weight management, health issues such as cholesterol, heart health, cognitive function, brain performance and joint health are driving the market expansion. Functional foods such as probiotic yogurt and yogurt drinks, cereals bars and soya milk are experiencing explosive growth.17
Other additional factors have been identified as growth drivers in the nutraceutical markets including:
Dietary Supplements
The world retail market for dietary supplements is highly fragmented, composed of a large numbers of products and many small manufacturers and estimated at more than $50 billion in annual sales.18 The United States dietary supplement sales amount to approximately $23 billion.19 Europe is capturing approximately one third of this market with sales beyond $15 billion. In Japan, dietary supplement sales of $6 billion have been reported.20 Specialty supplements such as probiotics and omega-3 will be experiencing the most sales growth over the next five years and health issues such as cholesterol, heart health and mental health engender a major impact. Dietary supplements continued to be the largest consumer of marine omega-3 oils in the global market in 2009 with a 59.7 % share. Animal feed and foods and beverages are the next largest consumers of marine oil omega-3 with 23.8 % and 11.2 % shares, respectively.
_____________________________
16 Demographic Trends in the 20th Century. Census 2000 Special Reports. November 2002.
17 Baby Boomers and the U.S. Food and Beverage Industry: Packaged Facts, 12/1/2005
18 Industry Canada. International Market
Research: Dietary Supplements.
19 Idem 14.
20 Idem 2.
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North American market revenues for marine and algae EPA and DHA omega-3 ingredients market were $562.8 million in 2009. The market is likely to grow at a combined annual growth rate (CAGR) of 11.8 % from 2010 to 2015. Global unit shipments were measured at 33,999 metric tons in 2009 and are likely to grow at a CAGR of 11.0 % from 2010 to 2015.
Functional Food
The main functional food categories include dairy products (i.e. milk, yogurt and cheese), confectionary products (i.e. bars, chocolate, snacks), various cereal products and functional beverages. It is difficult to estimate the potential market size of the functional food market and it is probably safe to assume that the market size is underestimated. The total U.S. retail food market amounted to $457 billion in 2004.21 Assuming that 25% of this food market may be used, in the future, for nutraceutical reasons, the functional food market may amount to more than $100 billion in the US alone. Assuming a similar market size in Europe, total combined market potential reaches $200 billion, an enormous foundation for the functional food market.
Calcium, probiotics and omega-3 products are getting the most attention and will be playing a major role in the expanding dairy product category projected to reach more than $15 billion by 2011 in the US.22 Omega-3 is also playing a major role in the $23-billion breakfast cereal segment23 and heart-healthy products command more than $19 billion in sales today.24
Poly-Unsaturated Fatty Acids (PUFA)
The polyunsaturated fatty acid (PUFA) market which includes predominantly omega-3 and 6 fatty acids is growing at a very fast pace and the most predominant omega-3 fatty acids are docosahexaenoic (DHA) and eicosapentaenoic acid (EPA) derived from plant and marine sources. Omega-3 sourced from marine oils are the fastest growing sector in the PUFA ingredient market which is a direct result of the media attention pertaining to omega-3 health benefits and the growing need for alternative treatment for a variety of chronic disorders including the heart and the brain.
Extensive research, including Neptune’s clinical trial work, has demonstrated their clinical benefits. Omega-3 fatty acids reduce inflammation and prevent risk factors associated with chronic diseases such as heart disease and arthritis and appear to be particularly important for cognitive (memory and concentration) and behavioural function.
Neptune’s omega-3’s are sourced from krill, a zooplankton, with the advantage that the omega-3 fatty acids are carried by phospholipids and not triglycerides such as in fish oil. Phospholipids, a major component of biological membranes, are more easily digested resulting in a higher bioavailability of Neptune’s products.
The market space is growing with the FDA having issued a qualified heart health claim enabling manufacturers to label products containing omega-3 EPA and DHA as being heart healthy. The market is waiting for additional health claims such as effects on high blood cholesterol and high blood pressure.
Omega-3 ingredient sales continue to increase driven by demand as dietary supplements, functional foods and beverages and pharmaceutical applications. Based on the trends reported in the 2005 Frost & Sullivan market report25, the worldwide omega-3 market will be reaching more than $1.4 billion in annual ingredient sales within the next five years. Higher quality and higher performance omega-3’s providing high amounts of omega-3 are gaining a larger market share of the marine oils industry in terms of revenues, because of their improved safety and health benefits. Omega-3 fortified food launches more than doubled in 2006 to 250 from 120 in 2005, according to Mintel.26 Most product introductions have been in beverages, spreads, dairy products (i.e., yogurt), eggs, nutrition bars and baked goods.
_____________________________
21 |
Progressive Grocers 72nd Annual Report of the Grocery Industry. |
22 |
Cultured Dairy Products in the U.S. Packaged Facts, Oct 1, 2006. |
23 |
Euromonitor. http://www.euromonitor.com/Cereal_Partners_Worldwide_exploits_developing_markets |
24 |
http://www.marketresearch.com/map/prod/1164892.html |
25 |
End-user Analysis of the Global Omega-3 PUFA Market, FO23-88. Frosst & Sullivan. |
31
Nutricosmeceutical and “beauty from within” Trend
Nutricosmeceuticals are defined as oral nutritional supplements with cosmetic applications and are commercialized in foods, beverages and dietary supplements. This “beauty from within” trend is spreading into the American and European markets. For example, Nestlé® and L'Oréal®, the world's largest companies in food and cosmetics, respectively, created Innéov®, a developer of nutritional supplements with cosmetic applications. Coca-Cola® commercializes a milk-based beverage to be drunk at night to promote beauty during sleep. New and scientifically validated ingredients are entering the market and consumer uptake is driven by the demand to turn back the negative physiological processes associated with aging.
2.14.2 Pharmaceutical
Acasti and NeuroBioPharm were formed to develop and commercialize the Corporation’s Products in the pharmaceutical market.
Cardiovascular Disease
Cardiovascular disease includes a wide range of conditions and treatment is focused on reducing cardiovascular risk factors to prevent an acute cardiovascular event and on preventing or delaying the onset of chronic cardiovascular disease. Important risk factors for cardiovascular disease are abnormal levels of lipids and/or lipoproteins such as triglycerides and cholesterol. Increased serum levels of low density lipoprotein (LDL - "bad cholesterol") and low levels of high density lipoprotein (HDL - "good cholesterol"), the latter being recognized as the most important risk factor for the development of cardiovascular disease, are known as dyslipidemia. Dyslipidemia promotes plaque formation and narrowing of the arteries atherosclerosis leading to myocardial infarction (heart attack), stroke and peripheral vascular and neurodegenerative disease. Over 750,000 Americans die every year due to atherosclerosis related cardiovascular complications.27 Statins, including medications such as Lipitor®, Zocor® and Crestor®28, are used to decrease LDL, but are little effective on raising HDL creating an unmet treatment gap. It is estimated that over 100 million American adults have total blood cholesterol values considered borderline-high (200 to 240 mg/dL) or high (above 240 mg/dL) potentially eligible for a cholesterol lowering agent.29 Even though statins are widely prescribed creating a worldwide $30 billion market, they have less effect than fibrates or niacin in reducing triglycerides and raising HDL-cholesterol ("good cholesterol").30 This unmet medical need creates a growing billion dollar market space for safe monotherapies as well as combination products therapeutics containing a statin and an HDL raising agent.
Cognitive Dysfunction and Neurodegenerative Disease
Neurodegenerative disease includes a large number of disorders such as Alzheimer’s disease, Parkinson disease and Multiple Sclerosis. Deteriorating nerve cells are responsible for the loss of brain function and today only few therapies are available for the wide range of neurodegenerative diseases creating an immense unmet medical need. In the United States, over 5 million patients are suffering from Alzheimer’s disease and 1.5 million patients from Parkinson disease.31 Worldwide, it is estimated that over 24 million people have dementia due to Alzheimer’s disease.32 The neurodegenerative market is estimated at 15 billion dollars and growing at a double digit rate.33
_____________________________
26 Mintel: www.marketresearch.com
27 Atherosclerosis Research Unit. University of Southern California. http://www.usc.edu/schools/medicine/research/centers_programs/aru/elite.html
28 CNN Money. http://money.cnn.com/2005/09/19/news/fortune500/cancerdrugs/index.htm
29 Centers for disease control and prevention, CDC. http://www.cdc.gov/nccdphp/publications/AAG/dhdsp.htm
30 Nature Reviews Drug Discovery 5, 813-814 (October 2006) | doi:10.1038/nrd2156. Life after statin patent expiries. Jane Kidd
31 Institute for Neurodegenerative Disease, IND, University of California.
http://ind.universityofcalifornia.edu/diseases/
32
Attention-deficit hyperactivity disorder is a cognitive dysfunction caused mainly by the malfunction of the dopamine transporter system. The most commonly used medication is methylphenidate such as Ritalin®, Ritalin-SR®, Ritalin LA® or Concerta® and Metadate®. Annual sales of Novartis’ Ritalin® product family amounted to $US 440 million in 2008 and are growing at a rate of 17%.34
Chronic Inflammation and Arthritis
Many forms of arthritis such as osteoarthritis and rheumatoid arthritis are inflammatory disorders; and patients suffer from pain, stiffness, swelling and functional impairment. Osteoarthritis is the most common form of arthritis affecting over 20 million people in the United States. 35 It is caused by the breakdown and eventual loss of the cartilage between the bones of the joints. 36 Non-surgical treatment options for osteoarthritis include analgesic and anti-inflammatory pain medications, nutritional supplementation, physical therapy, exercise, and weight loss. Common types of medications used to reduce pain in osteoarthritis include acetaminophen (Tylenol®) and non-steroidal anti-inflammatory drugs NSAIDS (e.g. Motrin®, Advil®, Aleve®). It is estimated that in the U.S. medical expenditures (direct costs) for arthritis and other rheumatic conditions in 2003 were 80.8 billion dollars.37
3. RISK FACTORS
The business conducted by the Corporation involves numerous risks and uncertainties. The main risk factors and uncertainties facing the Corporation are disclosed below and in the “Risk and Uncertainties” section of the Corporation’s Annual Report for the fiscal year ended February 28, 2011, which is incorporated herein by reference, as supplemented from time to time in the “Risk Factors and Uncertainties” section of the Corporation’s quarterly reports to shareholders. These risks and uncertainties should be considered in conjunction with the other information included in this Annual Information Form. The Corporation’s annual and quarterly reports are filed on SEDAR at www.sedar.com.
3.1 Risks related to Neptune’s business
Prior Losses
Since commencement of its activities, the Corporation had recorded losses each year. It is expected that the Corporation will continue to generate loss until product sales and licensing rights income generate sufficient revenues to fund Neptune’s and its subsidiaries’ continuing operations, including research and product development. Quarterly fluctuations are also anticipated in respect of earnings, expenses and losses.
Reliance on Key Personnel
The Corporation relies on certain members of its management and scientific staff, and the loss of the services of one or more of these individuals could adversely affect the Corporation. The Corporation will be required to continue to implement and improve its management systems and to recruit and train qualified employees. Although the Corporation has in the past been successful in attracting and retaining skilled and experienced personnel, there can be no assurance that the Corporation will continue to do so in the future.
Patents and Proprietary Technology
The Corporation's success depends in part on its ability to obtain patents, protect its trade secrets and operate without infringing third-party exclusive rights or without others infringing the Corporation's exclusive rights or those granted to it under license. The Corporation has filed patent applications in Canada, the United States, Europe and elsewhere in the world and is actively pursuing these matters. The patent position of pharmaceutical firms is generally uncertain and involves complex legal, factual and scientific issues, several of which remain unresolved. The Corporation does not know whether all of its pending patent applications will be granted and whether the Corporation will be able to develop other patentable proprietary technology and/or products. Furthermore, the Corporation does not have the certainty whether its existing or future patents provide a definitive and competitive advantage or afford protection against competitors with similar technology. Furthermore, the Corporation cannot give any assurance that such patents will not be challenged or circumvented by others using alternative technology or whether existing third-party patents will prevent the Corporation from marketing its products. In addition, competitors or potential competitors may independently develop, or have independently developed products as effective as those of the Corporation or invent or have invented other products based on the Corporation's patented products.
_____________________________
32 Alzheimer’s Disease International. http://www.alz.co.uk/media/dementia.html
33 Arrowhead Publishers. Leaders in Business Intelligence and Market Research.
http://www.arrowheadpublishers.com/news/archives/2007/02/new-website.php
34 Novartis Annual Report 2008.
35 http://www.medicinenet.com/osteoarthritis/article.htm
36 National Center for Chronic Disease Prevention and Health Promotion. USA.
37 Morbidity and Mortality Weekly Report. Centers for Disease Control and Prevention. MMWR 2007;56(01):4-7.
33
If third-party licenses are required, there can be no formal assurance that the Corporation will be able to obtain such licenses, or if obtainable, that it would be available on reasonable terms. Furthermore, there can be no assurance that the Corporation could develop or obtain alternative technologies related to third-party patents that may inadvertently cover its products. Inability to obtain such licenses or alternative technologies could delay the market launch of certain Neptune products, or even prevent the Corporation from developing, manufacturing or selling certain products. In addition, the Corporation could incur significant costs in defending itself in patent infringement proceedings initiated against it or in bringing infringement proceedings against others.
The Corporation cannot determine with any certainty if it has priority of invention in relation to any new product or new process covered by a patent application or if it was the first to file a patent application for any such new invention. Furthermore, in the event of patent litigation there can be no assurance that the Corporation's patents, if issued, would be held valid or enforceable by a court of competent jurisdiction or that a court would rule that the competitor's products or technologies constitute patent infringement.
Moreover, a significant part of the Corporation's technological know-how constitutes trade secrets. The Corporation, therefore, requires that its employees, consultants, advisers and collaborators sign confidentiality agreements. However, there can be no assurance that such agreements provide adequate protection in the event of unauthorized use or disclosure of the Corporation's trade secrets, know-how or other proprietary information.
Additional Funding Requirements and Access to Capital
The Corporation may require substantial additional funds to increase production capacity and/or for further research and development, scheduled clinical testing, regulatory approvals and the commercialization of its products. Neptune may seek additional funding for these purposes through public or private equity or debt financing, collaborative arrangements with other pharmaceutical companies and/or from other sources. There can be no assurance that additional funding will be available on acceptable terms to permit successful commercialization of the Corporation’s products. Should the Corporation fail to obtain the necessary capital, it may be required to delay, reduce or eliminate one or more of its various research programs or seek financial support from one of its corporate partners or from third-parties who may require that the Corporation waive significant rights regarding protection of its proprietary technologies or offer it financial support on less favourable terms than those normally acceptable to the Corporation.
Hazardous Materials and Environmental Matters
The Corporation’s research and development processes involve the use of certain hazardous materials. The Corporation is subject to federal, provincial, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. The Corporation believes that its safety procedures comply with such regulatory requirements, and that it has sufficient insurance coverage in place against this risk; however, the risk of accidental contamination or injury cannot be completely eliminated. In the event of an accident, the Corporation could be held liable for damages, which could exceed the resources of the Corporation. Although the Corporation believes that it complies in all material respects with the applicable environmental legislation and regulations, and currently has no immediate plans for major capital expenditures in respect of environmental protection installations, there can be no assurance that the Corporation will not be required to incur significant costs to comply with regulatory requirements in the future, or that the operations, business or assets of the Corporation will not be materially adversely affected by current or future legislative or regulatory requirements.
34
Availability and Sources of Raw Materials
The Corporation depends on third parties for the sourcing of components for its various products. The Corporation believes that alternative sources of supply for its various raw materials exist. However, any change in the Corporation in its suppliers of components for its technology could have a significant impact on the Corporation 's capacity to complete certain of its current research and development projects and, accordingly, would affect its projected commercial and financial growth. While other potential alternative suppliers of raw material have been identified and are in the process of being approached, they must first pass intensive validation tests to ensure their compliance with product specifications. No assurance can be given regarding the successful outcomes of such tests or the ability of Neptune to secure alternate sources of supply at competitive pricing and upon fair and reasonable contractual terms and conditions.
Foreign Currency Fluctuations
The Corporation is exposed to the financial risk related to the fluctuation of foreign exchange rates and the degrees of volatility of those rates. Foreign currency risk is limited to the portion of the Corporation's business transactions denominated in currencies other than the Canadian dollar. From time to time, the Corporation uses derivative financial instruments to reduce its foreign exchange exposure. Fluctuations related to foreign exchange rates could cause unforeseen fluctuations in the Corporation's operating results.
Approximately 65% of the Corporation’s revenues are in US dollars, and 31% are in Euros. A small portion of the purchases, except for the purchase of raw materials, are made in foreign currencies. There is a financial risk involved related to the fluctuation in the value of the US dollar and the Euro in relation to the Canadian dollar.
The Corporation enters into currency forwards to purchase or sell amounts of foreign currency in the future at predetermined exchange rates. The purpose of these currency forwards is to fix the risk of fluctuations in future exchange rates. Significant fluctuations in the rate of exchange could adversely affect the Corporation's financial performance. There is a risk of loss arising from an eventual weakening of the United States dollar or Canadian dollar.
Value of Intangible Assets
The Corporation is required to review the carrying value of its intangible assets for impairment annually or when events change. Intangible assets include net book value of product rights, trademarks and process know-how covered by certain patented and non-patented information. Management reviews the carrying value based on projected future results. If events such as generic competition or inability to manufacture or obtain supply of product occur that may cause sales of the related products to decline, the Corporation adjusts the projected results accordingly. Any impairment in the carrying value results in a write-down of the intangible asset that is charged to income during the period in which the impairment is determined. The write-down of intangible assets may have a material adverse effect on the results of operations in the period in which the write-down occurs.
Litigation
Any unfavourable court judgment following the cases disclosed in this document or other cases could affect the Corporation’s cash flow.
3.2 Risks related to Neptune’s Industry
Pharmaceutical Sector
The pharmaceutical sector must contend with dramatic scientific and technological developments and regulatory requirements that may, within a relatively short timeframe, render the products and processes developed or planned by the Corporation obsolete.
35
Government Regulations
The development, production and commercialization of pharmaceutical products is generally subject to comprehensive regulations under Health Canada's Therapeutic Products Program and other regulatory bodies in Canada and various regional, national and local regulatory bodies, including the Food and Drug Administration in the United States. No assurance can be given that the Corporation or its clients and partners will not encounter difficulties or will not incur excessive costs in obtaining the necessary approvals or permits, which could delay or prevent the commercialization and production of its new products.
Distribution of the Corporation's products outside Canada and the United States is also subject to comprehensive government regulation. Regulations, specifically requirements in respect of product releases on the market and the time involved in respect of regulatory assessment and the sanctions imposed in the event of infringement vary from country to country. No assurance can be given that the Corporation will obtain the requisite approvals in the relevant countries or that it will not incur significant expense in obtaining regulatory approvals or maintaining them in effect. Failure to obtain the necessary regulatory approvals, the suspension or revocation of current approvals or any failure to comply with regulatory requirements may have a material adverse effect on the Corporation's operations, its financial situation and its operating results.
Rapid Technological Change
The Corporation operates in a sector that is subject to rapid and substantial change. There can be no assurance that products developed by others will not render the Corporation’s products or technologies non-competitive or that the Corporation will be able to keep pace with technological developments. Competitors may have developed or may be in the process of developing technologies that could be the basis for competitive products. Some of these products may prove more effective and less costly than products developed by the Corporation.
Competition
Competition in the pharmaceutical sector is extremely intense. The Corporation competes with companies that produce similar or identical pharmaceutical products or that proposes different approaches to the separation or purification of components of Krill. Certain of those companies have greater resources than the Corporation. Accordingly, no assurance can be given that products developed by these other companies or that their equivalent technology in the area of separation or purification of components of krill will not affect the Corporation's competitiveness.
Uncertainty Regarding the Outcome of Clinical Studies
In most countries, the use and sale of therapeutic products is regulated by governmental or regulatory agencies to ensure their safety and efficacy. To obtain approval of such agencies for the use, distribution, marketing and sale of such products and to demonstrate their safety and efficacy, pre-clinical and clinical tests must be carried out. There is no assurance that any such study relating to any product will provide satisfactory results. If results are not satisfactory, the Corporation could abandon its commitment to the relevant product or research program.
Potential Product Liability
The development of human therapeutic products involves an inherent risk of product liability claims and associated adverse publicity. Product liability insurance is costly, often limited in scope, and could be unavailable or only available on terms unacceptable to the Corporation. There can be no assurance that the Corporation will be able to obtain or maintain insurance on reasonable terms or to otherwise protect itself against potential product liability claims that could impede or prevent commercialization of the Corporation's future products. A product liability claim against the Corporation or the withdrawal of a product from the market could have a materially adverse effect on the Corporation’s business or its financial condition. The Company has secured a $5,000,000 product liability insurance policy, renewable on an annual basis, to cover civil liability relating to its products. The Company also maintains a quality-assurance process that is QMP certified by the Canadian Food Inspection Agency (CFIA). Additionally, the Company has obtained Good Manufacturing Practices accreditation from Health Canada.
36
Uncertain Market
The Corporation believes that products based on its core technology will have numerous applications and that there is a growing market for the products that it has developed. However, there can be no assurance that these assumptions will prove justified, particularly considering competition from existing or new products and considering the uncertain commercial viability of the Corporation's products.
Volatility of Share Price
Market prices for securities in general, and that of pharmaceutical companies in particular, tend to fluctuate. Factors such as the announcement to the public or in various scientific or industry forums of technological innovations, new commercial products, patents, exclusive rights obtained by the Corporation or others, results of pre-clinical and clinical studies by the Corporation or others, a change of regulations, publications, financial results, public concerns over the risks of pharmaceutical products such as blood and plasma filtration products for the removal of pathogens or over the safety of blood collection systems, future sales of securities by the Corporation or its shareholders and many other factors could have considerable effects on the price of the Corporation’s securities.
4. DIVIDENDS
In April 2011, the Board of Directors of the Company and NeuroBioPharm approved plans for NeuroBioPharm to prepare to file a non-offering prospectus to become a reporting issuer under Canadian securities regulation and as a result allow the Company to declare a dividend payable with a number of shares of NeuroBioPharm that would represent a minority interest. Neither the filing of the prospectus nor the declaration of dividend has occurred prior to the approval of these consolidated financial statements.
The Corporation does not anticipate paying any cash dividend on its common shares in the foreseeable future. We presently intend to retain future earnings to finance the expansion and growth of our business. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements and other factors the Board of Directors deems relevant. In addition, the terms of any future debt or credit facility may preclude the Corporation from paying dividends.
5. DESCRIPTION OF CAPITAL STRUCTURE
The Corporation’s authorized capital consists of an unlimited number of no par value common shares and an unlimited number of no par value preferred shares (the “Preferred Shares”), issuable in one or more series. By way of by-law, in accordance with its articles of incorporation, the Corporation created the series A Preferred Shares. Currently, only 48,275,900 common shares have been issued and are outstanding as at February 28, 2011. No preferred shares have been issued.
The following is a brief description of the rights, privileges, conditions and restrictions attaching to the common shares and preferred shares of the Corporation:
5.1. COMMON SHARES
Voting Rights
Each Common Share entitles its holder to receive notice of, and to attend and vote at, all annual or special meetings of the shareholders of the Corporation. Each Common Share entitles its holder to one vote at any meeting of the shareholders, other than meetings at which only the holders of a particular class or series of shares are entitled to vote due to statutory provisions or the specific attributes of this class or series.
Dividends
Subject to the prior rights of the holders of Preferred Shares ranking before the Common Shares as to dividends, the holders of Common Shares are entitled to receive dividends as declared by the Board of Directors of the Corporation from the Corporation’s funds that are duly available for the payment of dividends.
37
Winding-up and Dissolution
In the event of the Corporation’s voluntary or involuntary winding-up or dissolution, or any other distribution of the Corporation’s assets among its shareholders for the purposes of winding up its affairs, the holders of Common Shares shall be entitled to receive, after payment by the Corporation to the holders of Preferred Shares ranking prior to Common Shares regarding the distribution of the Corporation’s assets in the case of winding-up or dissolution, share for share, the remainder of the property of the Corporation, with neither preference nor distinction.
5.2 PREFERRED SHARES
The Preferred Shares carry no voting rights. Preferred Shares may be issued at any time, in one or more series. The Corporation’s Board of Directors has the power to set the number of Preferred Shares and the consideration per share, as well as to determine the provisions attaching to each series of Preferred Shares (including dividends, redemption rights and conversion rights, where applicable). The shares in each series of Preferred Shares rank prior to the Common Shares of the Corporation with regard to payment of dividends, reimbursement of capital and division of assets in the event of the Corporation’s winding-up or dissolution. The holders of Preferred Shares shall not be entitled to receive notice of, or to attend or vote at the meetings of the shareholders, except: (i) in the event of a separate meeting or vote by class or by series as specified by law, (ii) where entitled to vote by class or series on amendments to the attributes attaching to the class or series, or (iii) where applicable, in the event of the Corporation’s omission to pay the number of periodical dividends, whether consecutive or not, as applicable to any series.
The Board of Directors of the Corporation has passed a by-law creating the Series A Preferred Shares. Series A Preferred Shares may be issued only as part of an acquisition by the Corporation of other companies or material assets. Series A Preferred Shares are non-voting, and entitle holders thereof to a fixed, preferential and non-cumulative annual dividend of 5% of the amount paid for the said shares.
6. MARKET FOR SECURITIES
On March 31st, 2011, Acasti completed its listing application on the TSX-Venture Exchange, as a result Acasti had its share listed on the TSX-Venture Exchange on March 31, 2011 under the symbol APO. In connection with the listing of Acasti’s shares, The authorised share capital of Acasti is composed of an unlimited number of Class “A”, “B”, “C”, “D” and “E” shares (individually, “Share”; collectively “Shares”). Each holder of Class “A” and Class “B” Shares has the right to vote at any meeting of the shareholders of Acasti.
As at May 17, 2011, there were 64,434,444 issued and outstanding Class A Shares of Acasti, each share entitling its holder to one (1) vote per Class “A” Share. As at the same date, there were no issued and outstanding Class “B” Shares or Class “C Shares of Acasti. All Class “B” Shares and Class “C” Shares of Acasti were converted into Class A Shares on a 1 for 1 basis on March 21, 2011.
Neptune’s common shares are currently listed and posted for trading on the TSX Venture under symbol “NTB” and have been listed and posted on the NASDAQ under the symbol “NEPT” since August 6, 2007.
38
Trading Prices and Volumes
Period |
TSX (CDN$) | NASDAQ (US$) | ||||||||||||||||
|
High | Low | Volume | High | Low | Volume | ||||||||||||
|
(daily average) | (daily average) | ||||||||||||||||
February 2011 |
2.65 | 2.05 | 126 500 | 2.68 | 2.02 | 32 800 | ||||||||||||
January 2011 |
2.60 | 2.01 | 330 000 | 2.80 | 2.01 | 31 400 | ||||||||||||
December 2010 |
2.45 | 2.08 | 31 800 | 3.10 | 2.11 | 30 400 | ||||||||||||
November 2010 |
2.41 | 1.92 | 71 000 | 2.27 | 1.80 | 37 300 | ||||||||||||
October 2010 |
2.20 | 1.92 | 40 600 | 2.16 | 1.81 | 27 500 | ||||||||||||
September 2010 |
2.20 | 1.30 | 57 000 | 2.12 | 1.23 | 30 500 | ||||||||||||
August 2010 |
1.44 | 1.16 | 19 800 | 1.42 | 1.09 | 5 500 | ||||||||||||
July 2010 |
1,47 | 1.02 | 31 700 | 1.43 | 0.91 | 10 600 | ||||||||||||
June 2010 |
1.85 | 1.20 | 38 800 | 1.73 | 1.11 | 16 800 | ||||||||||||
May 2010 |
2.15 | 1.52 | 43 300 | 2.30 | 1.41 | 18 900 | ||||||||||||
April 2010 |
2.38 | 2.00 | 58 000 | 2.39 | 1.98 | 17 100 | ||||||||||||
March 2010 |
2.18 | 2.00 | 43 300 | 2.11 | 1.93 | 12 200 |
7. DIRECTORS AND OFFICERS
Name, Occupation and Security Holding of Directors
The following table sets forth each proposed director and executive officers name, province and country of residence, his/her principal occupation, including the committees of the Board, the year in which he or she first became a director. All members of the Board of Directors herein below will hold their positions until the next annual meeting of shareholders of the Corporation.
39
Name and Province and Country of Residence |
Principal Occupation |
Position Within the Corporation |
Year of Nomination as a Director of the Corporation |
Henri Harland (4)(5)
|
President and Chief Executive Officer of the Corporation |
Director, President and Chief Executive Officer of the Corporation |
1998 |
Ronald Denis (1)(2)(3)(4)
|
Chief of Surgery at Hôpital du Sacré-Coeur, Montréal |
Director and Chairman of the Board of the Corporation |
2000 |
Daniel Perry (1)(2)(3)
|
General Manager of Société du Vivier des Landes |
Director of the Corporation |
2000 |
Jean-Claude Debard (1)(2)(3)
|
President of Hyundai Automobile |
Director of the Corporation |
2009 |
Michel Chartrand(1)(2)(3)(4) |
Vice-President, Retail Partners Solutions of McKesson Canada |
Director of the Corporation |
2006 |
Tina Sampalis, M.D., Ph.D.(5) |
Chief Scientific Officer of the Corporation and President of Acasti |
Chief Scientific Officer of the Corporation |
- |
André Godin (5)(6)
|
Vice-President, Administration and Finance of the Corporation |
Vice-President, Administration and Finance of the Corporation |
- |
Martin Godbout(8)
|
Director, Methylgene, AmorChem, AngioChem, Asmacure, BioQuébec and the Ataxia Charlevoix Foundation |
Director of Acasti Pharma |
2011 |
Marc Lebel(8) |
President, Production Glaciel |
Director of Acasti Pharma |
2011 |
Pierre Lemieux(5)
|
Chief Operating Officer of Acasti |
Chief Operating Officer of Acasti Pharma |
2010 |
Xavier Harland(5) (7)
|
Chief Financial Officer of Acasti Pharma |
Chief Financial Officer of Acasti Pharma |
2011 |
(1) |
Member of the Audit Committee of the Corporation |
(2) |
Member of the Compensation Committee of the Corporation |
(3) |
Member of the Corporate Governance Committee of the Corporation |
(4) |
Director of Acasti Pharma and NeuroBioPharm |
(5) |
Officer of Acasti Pharma and NeuroBioPharm |
(6) |
Chief Financial Officer of Acasti Pharma until March 20, 2011 |
(7) |
Chief Financial Officer of Acasti Pharma since March 21, 2011 |
(8) |
Director of Acasti Pharma |
As of February 28, 2011, the directors and executive officers of the Corporation, as a group, beneficially owned or exercised control or direction over approximately 3,893,577(8%) of the outstanding common shares of Neptune.
In Neptunes and Acastis Management Proxy Circular dated May 27, 2011, all of the above listed directors were nominated by management for election and/or re-election.
Following are brief biographies of Neptunes directors and executive officers:
Mr. Henri Harland
Mr. Henri Harland has been a director and the President and Chief Executive Officer of the Corporation since its incorporation on October 9, 1998. He is the Founder of the Corporation and has been involved in the krill research project since 1991. For more than ten years he has also held the position of President and Chief Executive Officer of Groupe Conseil Harland Inc., a financial engineering group. Previously, he acted has an independent financial consultant guiding companies from different industrial sectors in both North America and Europe in their capital restructure, financing and business development.
40
Dr. Ronald Denis
Dr. Ronald Denis is currently Chief of Surgery and Co-Director of the Trauma Program at Hôpital du Sacré-Coeur in Montréal. Also, since 1987, Dr. Denis has been medical co-director of the Canadian Formula 1 Grand Prix. Dr. Denis sits on several scientific boards and management committees.
Mr. Daniel Perry
Since March 1993, Mr. Perry is General Manager of a Corporation operating a recreation/tourism complex in France. Also, Mr. Perry is a specialist and consultant in the marketing of new products on the European continent.
Mr. Michel Chartrand
Since July 2009, Michel Chartrand is the Vice-President of Retail Partner Solutions at McKesson Canada. From 2004 to 2009 Mr. Chartrand was the President and Chief Executive Officer of Groupe PharmEssor inc. which includes, due to a merger, Gestion Santé Services Obonsoins inc. and Groupe Essaim inc., two important Quebec pharmacy franchisors in Quebec. From 1998 to 2004, Mr. Chartrand was the Executive Vice President of Gestion Santé Services Obonsoins inc.
Mr. Jean-Claude Debard
Mr. Debard has been President of Hyundai Automobile France and FEA Services as well as an officer of Frey Accessories and Parts since 1999 and most recently Executive President of Group Emil Frey France since 2008. Since 1999, Mr. Debard has seated on Surveillance Committees of Holding (SERGESA), SsangYong France and Hyundai Finances.
Dr. Tina Sampalis M.D., Ph.D.
Dr. Tina Sampalis is an Oncology Surgeon, trained in Physiology at McGill University, Medicine at the University of Patras (Greece), Dermatology at Göttingen University (Germany) and Marselisborg University (Denmark), Pediatric, General and Oncology Surgery at the University of Athens (Greece), graduate training (PhD) in Surgical Research at the University of Athens and a second PhD in Epidemiology and Experimental Surgery at McGill University. She has received several international scholarships and awards for her work on the clinical implementation of retinols skin and breast cancer and for her work on Scintimammography. U.S. and Canadian patent applications have been filed for the development and implementation of innovative micro-invasive and stereotactic robotic surgical techniques for breast cancer. Between May 2000 and June 2007, she has held the position of Vice-President of Research and Business Development and since June 2007 the position of Chief Scientific Officer of the Corporation.
Mr. André Godin
Mr. André Godin, C.A., has a Bachelor in Administration and is has been a Member of the Canadian Institute of Chartered Accountants since 1988. He has more than 10 years experience in the Biotech/Pharma industry as former President of a Dietary Supplement Corporation and as a Corporate Controller for a pharmaceutical Corporation in OTC products. Mr. Godin has been Vice-President, Administration and Finance for Neptune since 2003.
Pierre Lemieux Ph.D.
Mr Lemieux holds a post-doctoral degree in Oncology from the Health Science Center, University of Texas, USA, and a PhD in biochemistry from Laval University, Canada, jointly with University of Nottingham, England. Mr. Lemieux joined Neptune’s subsidiary Acasti as the Chief Operating Officer on April 12, 2010. Prior to joining Acasti, Mr. Lemieux was the President, CEO and the Chairman of the Board as well as being the founder of Technologie Biolactis Inc., a late-stage biotechnology Corporation specialized in the valorization of proteins to better serve the nutraceutical, the cosmetical and pharmaceutical industries.
Xavier Harland
Xavier Harland recently joined Acasti Pharma as Chief Financial Officer. He graduated from Laval University in Actuarial Science in 2003. He is also a CFA charter holder since 2007 and FRM holder since 2006. Xavier Harland has been working as Director of Finance for Neptune since 2004. Mr. Harland works full time for the Neptune group, which includes Acasti and NeuroBioPharm.
41
Marc Lebel
Marc LeBel is the holder of a Pharmacy Doctor (Pharm.D.) and the founder of Anapharm Inc. At present, he is president of Production Glaciel. He acted as the Executive Vice-president of Pharmanet, company owning Anapharm. Since its inception in 1994 with 8 employees, Anapharm grew to 960 employees in 2007, with business sites in Montreal, Trois-Rivières, Toronto and headquarters in Quebec City. Mr. LeBel was or is currently, a Board member of Université Laval, Festival du cinema des 3 Amériques, SiliCycle, Sinergia, Virocell, TGN Biotech and BCM Biotech. He is the author of 120 publications and 130 communications. He received the following honors: Excelsia 2006 Bio-Quebec, Grand diplômé Université Laval, and leadership from Canadian Society for Pharmaceutical Sciences.
Martin Godbout
Mr. Martin Godbout holds a B.Sc. in Biochemistry (1979) and a doctorate in physiology and molecular endocrinology from Laval University. From 1985 to 1990, he received a postdoctoral fellowship from the Medical Research Council of Canada (MRC) and went to San Diego, California, where he continued research work in molecular neurobiology at the Scripps Research Institute. From May 1994 to May 1997, he was chairman and CEO of Innovatech Quebec, a technology investment fund of 60 million dollars. In May 1997, he became Vice-President of the Company BioCapital, a Canadian venture specialized in private financing of start-up companies demonstrating strong potential in the areas of health and biotechnology. Since 2004, Mr. Godbout is a director of MethylGene, a public company listed on the TSX Exchange. Mr. Godbout is currently a director on several boards of high technology companies, foundations and scientific organizations such as AmorChem, AngioChem, Asmacure, BioQuébec and the Ataxia Charlevoix Foundation.
8. CEASE TRADE ORDERS, BANKRUPTCIES, PENALTIES OR SANCTIONS
To the knowledge of Neptune, none of the directors or executive officers of the Corporation:
(a) |
is, or has been, within the last ten years, a director, chief executive officer or chief financial officer of any Corporation that: |
||
(i) |
was subject to a cease trade order, an order similar to a cease trade order, or an order that denied the relevant Corporation access to any exemption under applicable securities legislation, that was in effect for a period of more than 30 consecutive days (an “Order”), which Order was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or |
||
(ii) |
was subject to an Order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer; or |
To the knowledge of Neptune, no director or executive officer of the Corporation, or shareholder holding a sufficient number of securities of the Corporation to affect materially the control of the Corporation:
(a) |
is, or has been, within the last ten years, a director or executive officer of any Corporation that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver manager or trustee appointed to hold its assets; or |
|
(b) |
has, within the last ten years, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold his or its assets of the proposed director. |
42
To the knowledge of Neptune, no director, executive officer or shareholder holding a sufficient number of securities of the Corporation to affect materially the control of the Corporation has been subject to:
(a) |
any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or |
|
(b) |
any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable security holder in deciding whether to vote for a proposed director. |
9. LEGAL PROCEEDINGS AND REGULATORY ACTIONS
The Corporation is not aware of any legal proceedings or regulatory actions in which it is involved and no such proceedings or regulatory actions are known by the Corporation to be contemplated, except in regards of what is mentioned in section 2.9.3 hereof entitled “Economic Dependence/Litigation”.
10. INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Except for what is stated below, none of the insiders of the Corporation, the Directors, or any of their respective associates or affiliates, has or has had any material interest, direct or indirect, in any material transaction whether proposed or concluded, since the beginning of the Corporation’s most recently completed financial year and for the three (3) last completed financial years.
The Corporation entered into an agreement with a corporation controlled by Mr. Henri Harland, as of February 23, 2001, calling for royalties to be paid in semi-annual installments equal to 1% of the Corporation’s annual revenues, for an unlimited period. Each year disbursement of royalties cannot exceed net annual earnings before interest, taxes and amortization. (See section 2.9.1. hereof “Exclusive License/Option”.)
11. TRANSFER AGENTS AND REGISTRARS
Computershare Trust Company of Canada, at its offices in Montreal, is the transfer agent and registrar for our Common Shares.
12. MATERIAL CONTRACTS
The Corporation has not entered into any material contract, other than those entered into in the normal course of business, within the most recently completed financial year, or before the most recently completed financial year, which is still in effect except for Technology License Agreement with Acasti Pharma Inc. on August 7, 2008 and Technology License Agreement with NeuroBioPharm Inc. on October 15, 2008. (See section 2.3.3. )
13. INTEREST OF EXPERTS
KPMG LLP, Chartered Accountants (“KPMG”), has audited our consolidated financial statements as at February 28, 2011. KPMG are independent with respect to Neptune Technologies & Bioressources Inc. and Acasti Pharma Inc. within the meaning of the Rules of Professional Conduct/Code of Ethics of the Quebec Order of Chartered Accountants. (See section 2.3.3. )
43
14. REPORT ON AUDIT COMMITTEE
Audit Committee’s Charter
The Charter of the Audit Committee is annexed to this circular as Schedule A. The Charter was adopted by the Board of Directors on June 6, 2007.
Composition of the Audit Committee
The Audit Committee is composed of four (4) members of the Board of Directors. Dr. Ronald Denis, Mr. Daniel Perry, Mr. Michel Chartrand and Mr. Jean-Claude Debard are the proposed directors to seat on the Audit Committee. From the experience set forth below, the Corporation believes that these persons have sufficient knowledge and background to actively participate on the Audit Committee.
Under Multilateral Instrument 52-110 Audit Committees (“MI 52-110”), a director of an Audit Committee is “independent” if he or she has no direct or indirect material relationship with the issuer, that is, a relationship which could, in the view of the Board of Directors, reasonably interfere with the exercise of the member’s independent judgment.
The following describes the relevant education and experience of each member of the Audit Committee of the Corporation that provides him or her with (a) an understanding of the accounting principles used by the Corporation to prepare its financial statements, (b) the ability to assess the general application of such accounting principles, (c) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to those that can reasonably be expected to be raised by the Corporation’s financial statements or experience actively supervising one or more persons engaged in such activities and (d) an understanding of internal controls and procedures for financial reporting.
Ronald Denis – Dr. Ronald Denis has been Chief of Surgery and Director of the Trauma Program at Hôpital du Sacré-Coeur since 1997. In his duties, Dr. Denis has to manage Hôpital du Sacré-Coeur Trauma Program budget and staff, also has had to regularly review and analyze financial statements. Dr. Denis’ experience required and contributed to the development of his ability to analyze financial statements and understand GAAP.
Daniel Perry – Since March 1993, Mr. Daniel Perry is General Manager of a Corporation operating a recreation/tourism complex in France. Also, Mr. Perry is a specialist and consultant in the marketing of new products on the European continent Mr. Perry’s experience required and contributed to the development of his ability to analyze financial statements and understand GAAP.
Michel Chartrand – Since July 2009, Michel Chartrand is the Vice-President of Retail Partner Solutions at McKesson Canada. From 2004 to 2009, Mr. Chartrand was the President and Chief Executive Officer of Groupe PharmEssor Inc. From 1998 to 2004, Mr. Chartrand was the Executive Vice President of Gestion Santé Services Obonsoins Inc. Mr. Michel Chartrand is also a member of the Board of Directors of Eureka Lightning. Mr. Chartrand also holds a bachelor degree in Business Administration. His experience required and contributed to the development of his ability to analyze financial statements and understand GAAP.
Jean-Claude Debard – Mr. Debard has been President of Hyundai Automobile France and FEA Services as well as an officer of Frey Accessories and Parts since 1999 and most recently Executive President of Group Emil Frey France since 2008. Since 1999, Mr. Debard has seated on Surveillance Committees of Holding (SERGESA), SsangYong France and Hyundai Finances. Mr. Debard also is a graduate degree in Management and Strategic Management. Mr. Debard’s experience required and contributed to the development of his ability to analyze financial statements and understand GAAP.
EXTERNAL AUDITOR FEES
(a) Audit Fees
“Audit fees” consist of fees for professional services for the audit of the Corporation’s annual financial statements, help for establishing interim financial statements and related matters. For the fiscal year ended February 28, 2011, KPMG LLP, chartered accountants of Montréal, the Corporation’s external auditors, billed $290,225 to the Corporation, respectively $188 225 for Neptune and $102,000 for Acasti Pharma, for audit fees. For the fiscal year ended February 28, 2010, these fees were $204,446 to the Corporation, respectively $172,446 for Neptune and $31,000 for Acasti Pharma
44
(b) Audit-Related Fees
“Audit-related fees” consist of fees for professional services that are reasonably related to the performance of the audit or review of the Company’s financial statements and which are not reported under “Audit Fees” above. The Corporation’s external auditor, billed no fees as to this matter the fiscal years ended February 28, 2011.
(c) Tax Fees
“Tax fees” consist of fees for professional services for tax compliance, tax advice and tax planning. KPMG LLP, chartered accountants, of Montréal, the Corporation’s external auditors, billed a total of $63,814 to the Corporation, respectively $48,151 for Neptune and $15,663 for Acasti Pharma, for tax fees for fiscal year ended February 28, 2011 and a total of $18,800 to the Corporation, respectively $12,800 for Neptune and $6,000 for Acasti Pharma the fiscal period ended February 28, 2010. Tax fees include, but are not limited to, preparation of tax returns.
(d) All Other Fees
The “other fees” include all other fees billed for professional services other than those mentioned hereinabove. KPMG LLP, chartered accountants, of Montréal, the Corporation’s external auditors, billed no fees as to this matter the fiscal years ended February 28, 2011 and February 28, 2010.
15. ADDITIONAL INFORMATION
Additional information relating to the Corporation may also be found on the SEDAR website at www.sedar.com, and on EDGAR at www.sec.gov.
Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of our securities, options to purchase securities and interests of informed persons in material transactions, if applicable, is contained in Neptune’s Management Proxy Circular dated May 27, 2011 and available on SEDAR. Additional financial information is also provided in our financial statements and MD&A for the most recently completed financial year.
45
SCHEDULE “A”
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors assists the Board in fulfilling its oversight responsibilities relating to the quality and integrity of the accounting, auditing and reporting practices of the Corporation and such other duties as directed by the Board of Directors or imposed by legislative authorities or stock exchanges.
Structure and Organization
1. |
The membership of the Committee will consist of at least three independent members of the Board of Directors, the majority of whom will not be employees, controlling shareholders or executives of the Corporation or of any associates or affiliates of the Corporation. Committee members and the Committee Chairman shall be designated by and serve at the pleasure of the Board of Directors. All members must be financially literate and at least one member must have accounting or related financial management expertise, in each case in the judgment of the Board of Directors. |
2. |
The Committee shall meet at least four times per year or more frequently as circumstances require. The Committee may ask members of management or others to attend meetings and provide pertinent information as necessary. The required quorum for the Committee will be the majority of the members forming the Committee. |
3. |
The Committee is expected to maintain free and open communication with management and the external auditors. |
4. |
The Committee has the authority to investigate any matter brought to its attention and to retain outside counsel for this purpose if, in its judgment, that is appropriate. |
General Responsibilities
The Committee shall:
1. |
Meet periodically with representatives of the external auditors, the internal audit manager and management in separate sessions to discuss any matters that the Committee or these groups believe should be discussed privately with the Committee. Provide sufficient opportunity for the external auditors to meet with the internal auditors as appropriate without members of management being present. |
2. |
Prepare the minutes of all Committee meetings and report of such meetings to the Board of Directors. |
3. |
Review and reassess the adequacy of this Charter annually. |
Responsibilities for Engaging External Auditors
The Committee shall:
1. |
Recommend for approval by the Board of Directors and ratification by the shareholders the selection and retention of an independent firm of chartered accountants as external auditors, approve compensation of the external auditors, and review and approve in advance the discharge of the external auditors. |
2. |
Review the independence of the external auditors. In considering the independence of the external auditors, the Committee will review the nature of the services provided by the external auditors and the fees charged, and such other matters as the Committee deems appropriate. |
46
3. |
Ensure that the external auditors are in good standing with the Canadian Public Accountability Board (CPAB) and that the CPAB has not imposed any sanction on them. The Audit Committee is also responsible for ensuring that the external auditors comply with the rotation requirements with respect to partners and staff involved in the audit of the Corporation. |
|
4. |
Arrange for the external auditors to be available to the Board of Directors at least annually to help provide a basis for the Board’s approval of the external auditors’ appointment. |
|
5. |
Approve all allowable non-audit related services to be provided to the Corporation or one of its subsidiaries by the Corporation’s external auditors if applicable. |
|
6. |
Non-audit services of minimal satisfy the pre-approval requirement on the following conditions: |
|
a) |
that he aggregate amount of all non-audit services that were not pre-approved is reasonably expected to constitute no more than five per cent of the total amount of fees paid by the Corporation and its subsidiaries to the Corporation’s external auditors during the fiscal year in which the services are provided; |
|
b) |
that the Corporation or its subsidiaries, as the case may be, did not recognize the services as non-audit services at the time of the engagement; and |
|
c) |
that the services are promptly brought to the attention of the Audit Committee and approved, prior the completion of the audit, by the Audit Committee or by one or more of its members to whom authority to grant such approvals had been delegated by the Audit Committee. |
Responsibilities for Oversight of the Quality and Integrity of Accounting, Auditing and Reporting Practices of the Corporation.
The Committee shall:
1. |
Directly review the work of the external auditors engaged for the purpose of preparing or issuing an auditor’s report or performing other audit, review or attestation services for the Corporation. The Committee shall be directly responsible of the resolution of disagreements between management and the external auditors regarding financial reporting. |
2. |
Review the Corporation’s financial statements, management’s discussion and analysis (MD&A) and annual and interim earnings press releases together with management and the external auditors before the Corporation publicly discloses this information. This review should cover the quality of the financial reporting and such other matters as the Committee deems appropriate. |
3. |
Review with the external auditors and management the audit plan of the external auditors for the current year and the following year. |
4. |
Review with the external auditors and financial and accounting personnel, the adequacy and effectiveness of the accounting, financial, and computerized information systems controls of the Corporation. |
5. |
Establish procedures for the receipt, retention and treatment of complaints received regarding accounting, internal accounting controls or auditing matters. Such complaints are to be treated confidentially and anonymously. |
6. |
Review and approve all related party transactions undertaken by the Corporation. |
47
Periodic Responsibilities
The Committee shall:
1. |
Review periodically with management any legal and regulatory matters that may have a material impact on the Corporation’s financial statements, compliance policies and compliance programs. |
2. |
Review with management and approve transactions involving management and/or members of the Board of Directors, which would require disclosure under TSX Venture Exchange rules. |
3. |
Supervise the corporate compliance program and periodically review whether any improvements should be made thereto and make appropriate recommendations to management. |
4. |
Perform such other functions assigned by law, the Corporation’s Articles or bylaws, or by the Board of Directors. |
5. |
Review services and related fees for work done by the external auditors as well as an updated projection of the total costs for the fiscal year. |
6. |
Review and approve the engagement policy of the Corporation with respect to partners, employees, former partners and employees of the current and previous external auditors of the Corporation. |
7. |
Implement a process for the identification of the principal business risks and monitor the implementation of appropriate methods of risk management. This process will require consultation with management in order to determine how risks are handled and to solicit the opinion of the internal audit department with respect to the effectiveness of the risk limitation strategies. |
Authority of the Audit Committee
The Committee shall have the authority to:
1. |
Engage independent counsel and other advisors as it determines necessary to carry out its duties. |
2. |
Pay the compensation for any advisors employed by the Committee. The Committee shall notify the Board of Directors on the extent of the financing required to pay for the compensation of the independent expert advisors retained to advise the Committee. |
3. |
Communicate directly with the internal and external auditors. |
48
Exhibit 99.2
Consolidated Financial Statements of
NEPTUNE
TECHNOLOGIES &
BIORESSOURCES INC.
Years ended February 28, 2011 and 2010
![]() |
KPMG LLP | Telephone (514) 840-2100 |
Chartered Accountants | Fax (514) 840-2187 | |
600 de Maisonneuve Blvd. West | Internet www.kpmg.ca | |
Suite 1500 | ||
Tour KPMG | ||
Montréal (Québec) H3A 03A |
INDEPENDENT AUDITORS REPORT
To the Shareholders of Neptune Technologies & Bioressources Inc.
We have audited the accompanying consolidated financial statements of Neptune Technologies & Bioressources Inc., which comprise the consolidated balance sheets as at February 28, 2011 and 2010, the consolidated statements of earnings and comprehensive income, shareholders equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.
Managements Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
KPMG LLP is a Canadian limited
liability partnership and a member firm of the KPMG
network of independent
member firms affiliated with KPMG International Cooperative
("KPMG
International"), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
Page 2
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Neptune Technologies & Bioressources Inc. as at February 28, 2011 and 2010, and its consolidated results of operations and its consolidated cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
May 17, 2011
Montréal, Canada
*CA Auditor permit no 14114
NEPTUNE TECHNOLOGIES
&
BIORESSOURCES INC.
Consolidated Financial Statements
Years ended February 28, 2011 and 2010
Financial Statements | ||
Consolidated Balance Sheets | 1 | |
Consolidated Statements of Earnings and Comprehensive Income | 2 | |
Consolidated Statements of Shareholders Equity | 3 | |
Consolidated Statements of Cash Flows | 4 | |
Notes to Consolidated Financial Statements | 5 |
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Consolidated Balance Sheets |
February 28, 2011 and 2010 |
2011 | 2010 | |||||
Assets | ||||||
Current assets: | ||||||
Cash | $ | | $ | 1,093,194 | ||
Short-term investments (note 22 (f)) | 3,512,858 | 1,001,011 | ||||
Accounts receivable (note 10) | 5,627,191 | 3,290,654 | ||||
Tax credits receivable | 644,753 | 664,131 | ||||
Inventories (note 11) | 4,544,917 | 2,645,752 | ||||
Prepaid expenses | 968,530 | 99,859 | ||||
15,298,249 | 8,794,601 | |||||
Government grant receivable (note 12) | 150,000 | 150,000 | ||||
Property, plant and equipment (note 13) | 7,023,842 | 7,398,231 | ||||
Intangible assets (note 14) | 1,268,867 | 1,223,309 | ||||
$ | 23,740,958 | $ | 17,566,141 | |||
Liabilities and Shareholders' Equity | ||||||
Current liabilities: | ||||||
Bank overdraft | $ | 39,533 | $ | | ||
Bank loan (note 16) | 630,000 | | ||||
Accounts payable and accrued liabilities: | ||||||
Company controlled by an officer and director (note 5) | 177,758 | 175,177 | ||||
Other | 3,080,279 | 2,241,236 | ||||
Advance payments (note 4) | 823,639 | 878,814 | ||||
Current portion of long-term debt (note 15) | 985,491 | 1,002,337 | ||||
5,736,700 | 4,297,564 | |||||
Long-term debt (note 15) | 3,799,831 | 4,805,024 | ||||
Convertible debentures (note 16) | | 467,864 | ||||
9,536,531 | 9,570,452 | |||||
Shareholders' equity: | ||||||
Capital stock, warrants and rights (note 17) | 31,291,533 | 25,530,162 | ||||
Contributed surplus and subsidiary options | 9,393,431 | 9,278,767 | ||||
Deficit | (26,480,537 | ) | (26,813,240 | ) | ||
14,204,427 | 7,995,689 | |||||
Commitments and contingencies (note 23) | ||||||
Subsequent events (note 26) | ||||||
$ | 23,740,958 | $ | 17,566,141 |
See accompanying notes to consolidated financial statements.
On behalf of the Board: | |
/s/ Ronald Denis | /s/ Michel Chartrand |
Dr. Ronald Denis | Michel Chartrand |
Chairman of the Board | Director |
1
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Consolidated Statements of Earnings and Comprehensive Income |
Years ended February 28, 2011 and 2010 |
2011 | 2010 | |||||
Revenue from sales and research contracts | $ | 16,685,383 | $ | 12,664,462 | ||
Cost of sales and operating expenses (excluding amortization and stock-based compensation) | 13,901,693 | 11,156,493 | ||||
Research and development expenses (note 6) | 2,535,156 | 2,743,519 | ||||
Amortization (note 7 (a)) | 922,566 | 768,319 | ||||
Stock-based compensation (note 19) | 719,823 | 484,606 | ||||
Foreign exchange loss | 196,042 | 635,735 | ||||
Loss from sale of property, plant and equipment | 99,337 | | ||||
Impairment of property, plant and equipment (note 13) | 139,306 | | ||||
18,513,923 | 15,788,672 | |||||
Loss before undernoted items | (1,828,540 | ) | (3,124,210 | ) | ||
Interest income | 22,381 | 45,478 | ||||
Financial expenses (note 8) | (442,953 | ) | (678,396 | ) | ||
Gain on dilution (note 7 (b)) | 2,765,029 | 2,221,930 | ||||
Net income (loss) and comprehensive income (loss) | $ | 515,917 | $ | (1,535,198 | ) | |
Basic earnings (loss) per share | $ | 0.01 | $ | (0.04 | ) | |
Diluted earnings (loss) per share | 0.01 | (0.04 | ) | |||
Basic weighted average number of shares outstanding | 40,463,967 | 37,913,163 | ||||
Diluted weighted average number of shares outstanding | 41,123,597 | 37,913,163 |
See accompanying notes to consolidated financial statements.
2
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Consolidated Statements of Shareholders' Equity |
Years ended February 28, 2011 and 2010 |
Common shares | Warrants | Subsidiary options | Contributed | ||||||||||||||||||||||||
Number | Dollars | Number | Dollars | Number | Dollars | surplus | Deficit | Total | |||||||||||||||||||
Balance, February 28, 2010 |
38,234,745 | $ | 25,237,122 | 1,106,598 | $ | 293,040 | 29,908,009 | $ | 163,006 | $ | 9,115,761 | $ | (26,813,240 | ) | $ | 7,995,689 | |||||||||||
|
|||||||||||||||||||||||||||
Exercise of stock options: |
|||||||||||||||||||||||||||
Cash |
1,320,000 | 667,500 | | | | | | | 667,500 | ||||||||||||||||||
Ascribed value |
| 482,856 | | | | | (482,856 | ) | | | |||||||||||||||||
|
|||||||||||||||||||||||||||
Exercise of warrants: |
|||||||||||||||||||||||||||
Cash |
1,068,000 | 1,335,000 | (1,068,000 | ) | | | | | | 1,335,000 | |||||||||||||||||
Ascribed value |
| 272,024 | | (272,024 | ) | (3,112,139 | ) | | | | | ||||||||||||||||
|
|||||||||||||||||||||||||||
Expiry of warrants |
| | (2,000 | ) | (510 | ) | (5,945,003 | ) | | 510 | | | |||||||||||||||
|
|||||||||||||||||||||||||||
Conversion of convertible debentures (note 16) |
437,589 | 550,963 | 218,794 | 60,676 | | | (80,431 | ) | | 531,208 | |||||||||||||||||
|
|||||||||||||||||||||||||||
Exercise and expiry of Debenture Call Options |
| | | | (1,100,000 | ) | | | | | |||||||||||||||||
|
|||||||||||||||||||||||||||
Exercise and expiry of Conversion Call Options |
| | | | (9,455,867 | ) | (163,006 | ) | 120,624 | | (42,382 | ) | |||||||||||||||
|
|||||||||||||||||||||||||||
Private placement (note 17 (b)) |
1,430,540 | 2,646,500 | 54,527 | 18,386 | | | | (183,214 | ) | 2,481,672 | |||||||||||||||||
|
|||||||||||||||||||||||||||
Stock-based compensation |
| | | | 2,207,500 | 109,434 | 610,389 | | 719,823 | ||||||||||||||||||
|
|||||||||||||||||||||||||||
Net income |
| | | | | | | 515,917 | 515,917 | ||||||||||||||||||
|
|||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||
Balance, February 28, 2011 |
42,490,874 | $ | 31,191,965 | 309,919 | $ | 99,568 | 12,502,500 | $ | 109,434 | $ | 9,283,997 | $ | (26,480,537 | ) | $ | 14,204,427 | |||||||||||
|
|||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||
Balance, February 28, 2009, as previously reported |
37,683,422 | $ | 24,953,096 | 1,100,000 | $ | 280,175 | 21,695,533 | $ | | $ | 9,047,034 | $ | (25,131,127 | ) | $ | 9,149,178 | |||||||||||
|
|||||||||||||||||||||||||||
Adjustment to reflect change in accounting policy for intangible assets (note 2 (a)) |
| | | | | | | (146,915 | ) | (146,915 | ) | ||||||||||||||||
|
|||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||
Balance, February 28, 2009, as recast |
37,683,422 | 24,953,096 | 1,100,000 | 280,175 | 21,695,533 | | 9,047,034 | (25,278,042 | ) | 9,002,263 | |||||||||||||||||
|
|||||||||||||||||||||||||||
Conversion of convertible debentures (note 16) |
73,198 | 72,485 | 36,598 | 20,506 | 9,455,867 | 163,006 | (365,510 | ) | | (109,513 | ) | ||||||||||||||||
|
|||||||||||||||||||||||||||
Exercise of stock options |
|||||||||||||||||||||||||||
Cash |
448,125 | 116,031 | | | | | | | 116,031 | ||||||||||||||||||
Ascribed value |
| 50,369 | | | | | (50,369 | ) | | | |||||||||||||||||
|
|||||||||||||||||||||||||||
Exercise of warrants |
30,000 | 45,141 | (30,000 | ) | (7,641 | ) | (203,391 | ) | | | | 37,500 | |||||||||||||||
|
|||||||||||||||||||||||||||
Stock-based compensation |
| | | | (1,040,000 | ) | | 484,606 | | 484,606 | |||||||||||||||||
|
|||||||||||||||||||||||||||
Net loss |
| | | | | | | (1,535,198 | ) | (1,535,198 | ) | ||||||||||||||||
|
|||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||
Balance, February 28, 2010 |
38,234,745 | $ | 25,237,122 | 1,106,598 | $ | 293,040 | 29,908,009 | $ | 163,006 | $ | 9,115,761 | $ | (26,813,240 | ) | $ | 7,995,689 |
See accompanying notes to consolidated financial statements.
3
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Consolidated Statements of Cash Flows |
Years ended February 28, 2011 and 2010 |
2011 | 2010 | |||||
Cash flows from operating activities: | ||||||
Net income (loss) | $ | 515,917 | $ | (1,535,198 | ) | |
Non-cash items: | ||||||
Amortization of property, plant and equipment | 890,047 | 719,666 | ||||
Amortization of intangible assets | 32,519 | 48,653 | ||||
Stock-based compensation | 719,823 | 484,606 | ||||
Accretion of the liability component of the convertible debentures (note 16) | 34,540 | 158,906 | ||||
Accrued interest on convertible debentures (note 16) | 28,804 | 173,636 | ||||
Loss from sale of property, plant and equipment | 99,337 | | ||||
Impairment of property, plant and equipment | 139,306 | | ||||
Unrealized foreign exchange loss (gain) on advance payments | 38,981 | (85,550 | ) | |||
Gain on dilution (note 7 (b)) | (2,765,029 | ) | (2,221,930 | ) | ||
Foreign exchange loss on cash and short-term investments | 65,677 | 369,653 | ||||
Net change in operating assets and liabilities (note 9) | (4,345,090 | ) | 1,380,927 | |||
(4,545,168 | ) | (506,631 | ) | |||
Cash flows from investing activities: | ||||||
Additions to property, plant and equipment | (995,441 | ) | (3,580,536 | ) | ||
Additions to intangible assets | (38,099 | ) | (76,597 | ) | ||
(Purchases) maturity of short-term investments | (2,511,847 | ) | 2,317,243 | |||
Sale of property, plant and equipment | 229,028 | | ||||
(3,316,359 | ) | (1,339,890 | ) | |||
Cash flows from financing activities: | ||||||
Increase in bank loan | 630,000 | | ||||
Increase in long-term debt | | 2,999,999 | ||||
Repayment of long-term debt | (1,042,342 | ) | (761,290 | ) | ||
Issue of share capital on private placement | 2,646,500 | | ||||
Share issue expenses | (164,828 | ) | | |||
Exercise of Call Options | 1,480,791 | | ||||
Exercise of subsidiary warrants | 1,241,856 | 81,356 | ||||
Issue of share capital on exercise of options | 667,500 | 116,031 | ||||
Issue of share capital on exercise of warrants | 1,335,000 | 37,500 | ||||
6,794,477 | 2,473,596 | |||||
Foreign exchange loss on cash held in foreign currencies | (65,677 | ) | (369,653 | ) | ||
Net (decrease) increase in cash | (1,132,727 | ) | 257,422 | |||
Cash, beginning of year | 1,093,194 | 835,772 | ||||
(Bank overdraft) cash, end of year | $ | (39,533 | ) | $ | 1,093,194 |
Supplemental cash flow disclosures (note 9)
See accompanying notes to consolidated financial statements.
4
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
1. | Nature of operations: | |
Neptune Technologies & Bioressources Inc. (the ''Company'') was incorporated under Part 1A of the Companies Act (Québec) on October 9, 1998. | ||
The Company focuses on the research, development and commercialization of products derived from marine biomasses for the nutraceutical, pharmaceutical and cosmetic industries. During the period ended February 28, 2009, the Company transferred certain rights to its subsidiaries, Acasti Pharma Inc. and NeuroBioPharm Inc., in order to develop pharmaceutical products in the fields of cardiovascular and neurological diseases, respectively. | ||
The Company develops proprietary and potent health ingredients from underexploited marine biomasses, such as krill, with its patented extraction process Neptune OceanExtract. The Company develops and industrializes its extraction process and markets its marine oil Neptune Krill Oil - NKO® and ECO Krill Oil - EKO, as well as its protein concentrated Neptune Krill Aquatein - NKA. Its products are aimed at the nutraceutical, biopharmaceutical, cosmetics and pet food markets. The Company's profitability in the future relies on various factors, such as: successful completion of its clinical studies, obtaining product regulatory approval from health authorities and the ability of the Company to commercialize and market its products with success. | ||
2. | Changes to accounting policies: | |
(a) | New accounting policies adopted in 2010: | |
On March 1, 2009, the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants (CICA): | ||
Goodwill and Intangible Assets: | ||
The CICA issued Handbook Section 3064, Goodwill and Intangible
Assets, which replaced Section 3062, Goodwill and Other Intangible
Assets, and Section 3450, Research and Development Costs. The
new standard provides guidance on the recognition of intangible assets in
accordance with the definition of an asset and the criteria for asset
recognition, as well as clarifying the application of the concept of
matching revenues and expenses, whether these assets are separately acquired
or internally developed. This standard applies to interim and annual
financial statements relating to fiscal years beginning on or after October
1, 2008.
As a result of this standard, direct costs incurred to secure patents related to internally- generated assets in the research phase will no longer be capitalized by the Company. The Company applied this standard on a retrospective basis. The impact of adopting this standard was to increase the opening deficit and reduce intangible assets as at March 1, 2009 by $146,915, for such assets capitalized prior to the date of commercialization, May 31, 2002. |
5
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
2. | Changes to accounting policies (continued): | |
(a) | New accounting policies adopted in 2010 (continued): | |
Financial Instruments: | ||
Effective September 1, 2009, the Company has adopted an amendment to CICA Handbook Section 3862, Financial Instruments - Disclosures, which requires additional disclosures about fair value and liquidity risk. The amendments introduce a ''fair value hierarchy'' for disclosures which intends to provide information to financial statement users about the relative reliability of fair value measurements. The new standard relates to disclosure only and did not impact the financial results of the Company. See note 22 (d). | ||
(b) | Future accounting changes: | |
International Financial Reporting Standards: | ||
In February 2008, Canadas Accounting Standards Board confirmed that Canadian generally accepted accounting principles ("GAAP"), as used by publicly accountable enterprises, would be replaced by International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board ("IASB"). The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Therefore, the Company will be required to report under IFRS for its fiscal 2012 interim and annual financial statements with comparative figures for the previous period, beginning with the interim period ending May 31, 2011. | ||
3. | Significant accounting policies: | |
These consolidated financial statements have been prepared in accordance with Canadian GAAP. Significant accounting policies are described below: | ||
(a) | Principles of consolidation: | |
The consolidated financial statements include the accounts of the Company and its subsidiaries, Acasti Pharma Inc., NeuroBioPharm Inc. and Neptune Technologies & Bioressources USA Inc. All significant intercompany balances and transactions have been eliminated on consolidation. |
6 |
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
3. | Significant accounting policies (continued): | |
(b) | Use of estimates: | |
The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the recorded amount of assets and liabilities and the reported amount of contingent assets and liabilities at the date of the financial statements, as well as the recorded amounts of earnings and expenses during the year. Significant areas of the financial statements requiring the use of management estimates include estimating the useful life and recoverability of long-lived assets, including property, plant and equipment and intangible assets, determining the fair value of financial instruments and estimating the fair value of stock-based awards, assessing the recognition and measurement of contingent liabilities, as well as assessing the recoverability of research tax credit receivable and future income tax assets and the collectibility of trade receivables. Consequently, actual results could differ from those estimates. | ||
(c) | Revenue recognition: | |
Revenues from sales are recognized when persuasive evidence of an arrangement exists, the product has been delivered and the significant risks and advantages related to ownership are transferred, the consideration is fixed or determinable and collection is reasonably assured. | ||
Revenue from research contracts is recognized when services to be provided are rendered and all conditions under the terms of the underlying agreement are met. | ||
Payments received under partnership agreements may include upfront payments and milestone payments, which require the Companys ongoing involvement. Upfront payments are deferred and recognized as revenue on a systematic basis over the period during which the related products or services are delivered and all obligations are performed. Milestone payments based on product development, for which the Company has no future involvement or obligations to perform related to that specified element of the arrangement, are recognized into income upon the achievement of the specified milestones, and collectibility is reasonably assured. Contract payments received in advance that are potentially refundable are recorded as ''advance payments'' on the consolidated balance sheet. | ||
(d) | Cash and cash equivalents: | |
Cash and cash equivalents consist of highly liquid investments purchased three months or less from maturity. | ||
(e) | Short-term investments: | |
Short-term investments consist of investments with maturities of less than one year. |
7 |
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
3. | Significant accounting policies (continued): | |
(f) | Inventories: | |
Raw materials are valued at the lower of cost and net realizable value, with cost being determined by the average cost method. Finished goods and work in process are valued at the lower of cost and net realizable value; cost is determined per project and includes direct and indirect costs related to production (monthly average cost). Each project corresponds to one month of production. Net realizable value is the estimated selling price in the ordinary course of business, less the selling costs. | ||
The Company provides for obsolete products based on turnover. As at February 28, 2011 and 2010, turnover of the Company's principal products is such that no provision for obsolescence is required. | ||
Spare part inventories are valued at lower of cost and net realizable value. | ||
(g) | Tax credits and government grants: | |
Tax credits and government grants are accounted for using the cost reduction method. Under this method, tax credits and government grants related to eligible expenses or property, plant and equipment are accounted for as a reduction of related costs in the year during which the expenses or costs are incurred as long as there is reasonable assurance of their realization. | ||
(h) | Property, plant and equipment: | |
Property, plant and equipment are initially recorded at cost less
related tax credits and government assistance. Assets acquired under
capital leases are initially recorded at cost, being the present value of
the minimum lease payments after deduction of executory costs. Amortization of property, plant and equipment and assets acquired under capital leases are calculated over their estimated useful lives using the following methods, rates and periods: |
Property, plant and equipment | Method | Rate/period | |
Plant | Straight-line | 40 years | |
Processing equipment | Straight-line | 10 years | |
Laboratory equipment | Straight-line | 5 years | |
Furniture and fixtures | Diminishing balance | 20% | |
Office equipment | Diminishing balance | 30% | |
Computer equipment and software | Straight-line | 2 to 4 years |
8
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
3. | Significant accounting policies (continued): | |
(i) | Research and development expenses: | |
Research expenses are charged to income in the year of expenditure less related tax credits. Development costs, net of related tax credits, are charged to income as incurred unless a development project meets generally accepted accounting criteria for deferral and amortization. During 2011, expenses of $23,728 (2010 - $11,324) have been deferred and presented as intangible assets. The costs are mainly related to the deodorization of Neptune Krill Oil - NKO® as part of partnership and collaboration agreements. No amortization has been recorded during the years ended February 28, 2011 and 2010 for those costs since commercial production or use of the product or process has not begun. | ||
(j) | Intangible assets: | |
Intangible assets consist of patents, trademarks and license rights. | ||
Patents for technologies that are no longer in the research phase are recorded at cost and amortized using the straight-line method over their remaining expected life over a maximum period of 20 years. The patent costs include legal fees to obtain patents and patent application fees. When the technology is still in the research phase, those costs are expensed as incurred. | ||
Trademarks and licenses are recorded at cost and are not amortized, since the Company considers they have an indefinite life given they can be renewed at a minimal cost. | ||
Deferred development costs are amortized beginning in the year of commercial production or use of the product or process over a maximum period of 5 years. | ||
(k) | Impairment and disposal of long-lived assets: | |
Long-lived assets, including property, plant and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the difference between the carrying amount and the fair value. Quoted market values are used whenever available to estimate fair value. When quoted market values are unavailable, the fair value of the long-lived asset is generally based on estimates of discounted expected net cash flows. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or the fair value less selling costs, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the balance sheet. |
9 |
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
3. | Significant accounting policies (continued): | |
(k) | Impairment and disposal of long-lived assets (continued): | |
Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset may be impaired. The impairment test compares the carrying amount of the intangible asset with its fair value, and an impairment loss is recognized in income for the excess, if any. | ||
(l) | Foreign currency translation: | |
The Companys and all of its subsidiaries functional
currency is the Canadian dollar.
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the year-end exchange rate, non-monetary assets and liabilities are translated at the historical exchange rate, and revenue and expense items are translated in Canadian dollars at rates of exchange in effect at the related transaction dates. Exchange gains and losses arising from these transactions are included in income during the period. | ||
(m) | Foreign currency forwards: | |
The Company enters into foreign currency forward contracts to protect itself against foreign exchange rate fluctuations. The Company does not hold or use derivative instruments for speculative purposes. In addition, the Company does not use hedge accounting; accordingly, the foreign currency forward contracts are recognized at fair value on the balance sheet and changes in fair value are recognized in earnings for the period. | ||
(n) | Income (loss) per share: | |
Income (loss) per common share is calculated on the weighted average number of common shares outstanding during the year. The Company uses the treasury stock method to determine the dilutive effect of options and warrants. Under this method, a number of additional shares, if they are dilutive, are calculated assuming that the outstanding stock options and warrants are exercised, and that the proceeds from the transactions are used to purchase common shares at the average market price during the period. | ||
The dilutive effect of the convertible debentures is reflected in diluted earnings per share by application of the if-converted method, if dilutive. Under the if-converted method, convertible debentures are assumed to have been converted at the beginning of the period (or at the time of issuance, if later) and the resulting common shares are included in the denominator for purposes of calculating diluted earnings per share. | ||
Dilutive warrants, dilutive stock options and convertible debentures described in notes 16, 17 and 19 were included in the calculation of diluted earnings per share in 2011. All outstanding warrants and stock options could have an effect on the calculation in the future. |
10 |
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
3. | Significant accounting policies (continued): | |
(n) | Income (loss) per share (continued): | |
Warrants, stock options and convertible debentures described in notes 16, 17 and 19 were not included in the calculation of diluted earnings per share in 2010 because the Company sustained losses and their inclusion would have been anti-dilutive. | ||
(o) | Financial instruments: | |
Financial instruments are initially recognized at fair value and classified into one of the following five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. Subsequently, financial instruments are measured in accordance with the measurement provision of the category to which they have been initially classified. Transaction costs are expensed as incurred for financial instruments classified as held-for-trading. For other financial instruments, transaction costs are presented as a reduction of the underlying financial instruments and expensed using the effective interest rate method. Financial assets and financial liabilities held for trading are measured at fair value with changes recognized in income. Available-for-sale financial assets are measured at fair value with changes recorded in comprehensive income. Financial assets held to maturity, loans and receivables, and other financial liabilities are measured at amortized cost. | ||
The Company has designated its cash and its short-term investments as held-for-trading financial assets. The Company has also classified its receivables and other receivables as loans and receivables, and all other financial liabilities as other financial liabilities, and they are measured at amortized cost. | ||
Financial instruments that comprise a liability component and equity components are classified separately on the balance sheet on initial recognition in accordance with the substance of the contractual agreement. | ||
Interest income on investments is recognized using the effective interest method. |
11
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
3. | Significant accounting policies (continued): | |
(p) | Stock-based compensation: | |
The Company has stock-based compensation plans which are described in note 19. The Company accounts for stock options granted to employees and non-employees based on the fair value method using the Black-Scholes model. For stock options granted to non- employees, the Company measures the cost using either the fair value of the equity instruments granted or the fair value of the goods or services rendered, whichever is more reliably measured. Under the fair value method, compensation cost is measured at fair value at date of grant for employee awards and when service is provided for non-employee award, and is expensed over the period during which services necessary for the award to vest are being provided, with a corresponding increase in contributed surplus. The Company does not estimate forfeitures as of the grant date and accounts for their impact on expense as they occur. | ||
(q) | Income taxes: | |
The Company follows the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on the differences between the carrying value and tax bases of assets and liabilities, and are measured using substantively enacted tax rates and laws that are expected to be in effect in the periods in which the future tax assets or liabilities are expected to be realized or settled. A valuation allowance is provided to the extent that it is more likely than not that future income tax assets will not be realized. | ||
4. | Partnership and collaboration agreements: | |
In 2008, the Company received a first payment of €500,000 out of several payments scheduled under the terms of a partnership agreement. The agreement foresees the Companys commitment of developing a clinical research program and the development of products incorporating Neptune Krill Oil - NKO® in a dietary matrix. An amount of 62.5% of the initial payment is refundable only if the parties fail to meet certain developmental milestones, prior to the release of the products on the market. In addition, during the year ended February 28, 2011, the Company received a non-refundable amount of €100,000 which was conditional on the Company receiving the Novel Food status as well as meeting positive organoleptic results, as defined in an amendment to the partnership agreement between the two parties. No revenues have been recognized by the Company under the agreement, because the payments are to be charged against royalties in the future, should the parties reach an agreement to commercialize the products being developed. The amount received, $823,639, is included in ''Advance payments'' in the consolidated balance sheet (February 28, 2010 - $862,620). |
12
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
4. | Partnership and collaboration agreements (continued): |
The Company also entered into a collaboration agreement under which it can receive $299,860. Under the terms of the agreement, the Company will conduct a clinical research project on the effects of Neptune Krill Oil - NKO® and its concentrates on certain human health conditions. The agreement includes a period of exclusivity on the rights by the partner to the use of the clinical study results. At February 28, 2011, the Company has received $199,860 under the agreement with the final amount of $100,000 to be received at the conclusion of the research project. For the year ended February 28, 2011, revenues of $102,629 (February 28, 2010 - $58,875) were recognized in the consolidated statement of earnings on the basis of progress towards completion of the clinical study. As of February 28, 2011, the difference between the payments received of $199,860 and cumulative revenues recognized to that date of $286,295 amounts to $86,435 and is included in ''Accounts receivable'' in the consolidated balance sheet (February 28, 2010 - $16,194 included in Advance payments). | |
5. | Related party transactions: |
Under the terms of an agreement entered into with a company controlled by an officer and director (which is also a shareholder of the Company), the Company is committed to pay royalties of 1% of its revenues in semi-annual instalments, for an unlimited period. The annual amount disbursed cannot exceed net earnings before interest, taxes and amortization of the Company on a non-consolidated basis. For the year ended February 28, 2011, total royalties included in operating expenses amounted to $164,129 (2010 - $120,328). As at February 28, 2011, the balance due to this company under this agreement amounts to $177,758 (2010 - $175,177). This amount is presented in the consolidated balance sheet under Accounts payable and accrued liabilities. | |
These transactions are measured at the exchange amount, which is the amount of consideration determined and accepted by the parties involved. |
13
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
6. | Research and development expenses: |
The costs incurred for research and development projects in process are: |
2011 | 2010 | ||||||
Salaries and employee benefits | $ | 1,521,556 | $ | 1,725,876 | |||
Subcontracting | 716,347 | 892,906 | |||||
General and study expenses | 506,368 | 380,049 | |||||
Travel expenses | 57,561 | 61,185 | |||||
2,801,832 | 3,060,016 | ||||||
Research and development tax credits | (266,676 | ) | (316,497 | ) | |||
$ | 2,535,156 | $ | 2,743,519 |
Research tax credits recorded by the Company are subject to audit by the tax authorities; accordingly, amounts ultimately received may differ from those recorded.
7. | Information included in the consolidated statement of earnings: |
(a) | Amortization: |
2011 | 2010 | ||||||
Property, plant and equipment | $ | 890,047 | $ | 719,666 | |||
Intangible assets | 32,519 | 48,653 | |||||
$ | 922,566 | $ | 768,319 |
Amortization of property, plant and equipment includes amortization of asset under capital lease of $37,444 (2010 - $37,325).
(b) | Gain on dilution: |
2011 | 2010 | ||||||
Conversion into Acasti units (note 18 (f)) | $ | − | $ | 2,140,574 | |||
Exercise of Acasti warrants (note 18 (b) and (g)) | 1,241,856 | 81,356 | |||||
Exercise of Debenture Call Options (note 18 (a)) | 271,600 | − | |||||
Exercise of Conversion Call Options (note 18 (c)) | 1,251,573 | − | |||||
$ | 2,765,029 | $ | 2,221,930 |
14
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
8. | Financial expenses: |
2011 | 2010 | ||||||
Bank charges and changes in fair value of forward contracts | $ | 53,819 | $ | 74,133 | |||
Interest - operating line of credit | 15,247 | 11,856 | |||||
Interest - long-term debt and convertible debentures | 373,887 | 592,407 | |||||
$ | 442,953 | $ | 678,396 |
9. | Supplemental cash flow disclosures: |
(a) Net changes in operating assets and liabilities are detailed as follows: |
2011 | 2010 | ||||||
Accounts receivable | $ | (2,336,537 | ) | $ | 1,766,776 | ||
Tax credits receivable | 19,378 | 62,379 | |||||
Inventories | (1,899,165 | ) | (872,189 | ) | |||
Prepaid expenses | (868,671 | ) | 174,663 | ||||
Accounts payable and accrued liabilities | 834,061 | 164,403 | |||||
Advance payments | (94,156 | ) | 84,895 | ||||
$ | (4,345,090 | ) | $ | 1,380,927 |
(b) Non-cash transactions: |
2011 | 2010 | ||||||
Acquired property, plant and equipment included in accounts payable and accrued liabilities | $ | 175,871 | $ | 208,286 | |||
Intangible assets included in accounts payable and accrued liabilities | 39,978 | | |||||
Government grant affected to property, plant and equipment included in government grant receivable | | 200,000 | |||||
Property, plant and equipment acquired by way of capital leases | 20,303 | 4,138 | |||||
Conversion of convertible debentures | 531,208 | 2,031,062 | |||||
Issuance of warrants in connection with private placement of shares | 18,386 | |
15
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
9. | Supplemental cash flow disclosures (continued): |
(c) | Other: |
2011 | 2010 | ||||||
Interest paid | $ | 353,300 | $ | 260,539 |
10. | Accounts receivable: |
2011 | 2010 | ||||||
Trade accounts | $ | 5,194,296 | $ | 2,940,878 | |||
Sales taxes | 156,265 | 230,740 | |||||
Current portion of government grant receivable (note 12) | 50,000 | 50,000 | |||||
Accrued and other receivables | 226,630 | 69,036 | |||||
$ | 5,627,191 | $ | 3,290,654 |
11. | Inventories: |
2011 | 2010 | ||||||
Raw materials | $ | 1,684,953 | $ | 1,598,729 | |||
Work in process | 888,486 | 735,357 | |||||
Finished goods | 1,550,923 | 149,483 | |||||
Spare parts | 420,555 | 162,183 | |||||
$ | 4,544,917 | $ | 2,645,752 |
During the year ended February 28, 2011, $7,071,583 (2010 - $6,276,403) of inventories were recognized as cost of sales.
16
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
12. | Government grant receivable: |
In 2010, the Company entered into an agreement to receive a financial contribution of $200,000 under a government grant program for its investments in the plant expansion. The amount is to be received in annual equal installments of $50,000. Following unexpected delays, the Company will receive the first portion of $50,000 in the year ended February 29, 2012. |
2011 | 2010 | ||||||
Government grant receivable | $ | 200,000 | $ | 200,000 | |||
Less current portion (note 10) | (50,000 | ) | (50,000 | ) | |||
$ | 150,000 | $ | 150,000 |
13. | Property, plant and equipment: |
2011 | ||||||||||
Accumulated | Net book | |||||||||
Cost | amortization | value | ||||||||
Land | $ | 40,540 | $ | − | $ | 40,540 | ||||
Plant | 4,846,776 | 628,287 | 4,218,489 | |||||||
Processing equipment | 5,481,182 | 3,145,488 | 2,335,694 | |||||||
Laboratory equipment | 740,059 | 504,431 | 235,628 | |||||||
Furniture and fixtures | 135,835 | 98,735 | 37,100 | |||||||
Office equipment | 147,786 | 90,814 | 56,972 | |||||||
Computer equipment and software | 117,753 | 75,448 | 42,305 | |||||||
11,509,931 | 4,543,203 | 6,966,728 | ||||||||
Assets under capital leases: | ||||||||||
Processing equipment | 68,863 | 32,752 | 36,111 | |||||||
Office equipment | 47,889 | 32,384 | 15,505 | |||||||
Computer equipment | 90,069 | 84,571 | 5,498 | |||||||
206,821 | 149,707 | 57,114 | ||||||||
$ | 11,716,752 | $ | 4,692,910 | $ | 7,023,842 |
During the year ended February 28, 2011, the Company decided to terminate its enterprise resource planning (ERP) software implementation due to lack of functionality and the weak support from the software provider. As a result, the full carrying amount of $139,306 of the project in progress was written off.
17
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
13. | Property, plant and equipment (continued): |
2010 | ||||||||||
Accumulated | Net book | |||||||||
Cost | amortization | value | ||||||||
Land | $ | 40,540 | $ | | $ | 40,540 | ||||
Plant | 4,005,557 | 500,708 | 3,504,849 | |||||||
Processing equipment | 5,947,906 | 2,622,560 | 3,325,346 | |||||||
Laboratory equipment | 596,943 | 446,737 | 150,206 | |||||||
Furniture and fixtures | 116,573 | 91,509 | 25,064 | |||||||
Office equipment | 111,287 | 75,037 | 36,250 | |||||||
Computer equipment and software | 106,976 | 45,006 | 61,970 | |||||||
Computer equipment - project in progress | 179,750 | | 179,750 | |||||||
11,105,532 | 3,781,557 | 7,323,975 | ||||||||
Assets under capital leases: | ||||||||||
Processing equipment | 48,560 | 26,205 | 22,355 | |||||||
Office equipment | 47,889 | 28,507 | 19,382 | |||||||
Computer equipment | 90,069 | 57,550 | 32,519 | |||||||
186,518 | 112,262 | 74,256 | ||||||||
$ | 11,292,050 | $ | 3,893,819 | $ | 7,398,231 |
18
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
14. | Intangible assets: |
2011 | ||||||||||
Accumulated | Net book | |||||||||
Cost | amortization | value | ||||||||
Amortized intangible assets: | ||||||||||
Patents | $ | 705,108 | $ | 105,566 | $ | 599,542 | ||||
Development costs | 374,796 | − | 374,796 | |||||||
1,079,904 | 105,566 | 974,338 | ||||||||
Unamortized intangible assets: | ||||||||||
Licenses | 182,334 | − | 182,334 | |||||||
Trademarks | 112,195 | − | 112,195 | |||||||
294,529 | − | 294,529 | ||||||||
$ | 1,374,433 | $ | 105,566 | $ | 1,268,867 |
2010 | ||||||||||
Accumulated | Net book | |||||||||
Cost | amortization | value | ||||||||
Amortized intangible assets: | ||||||||||
Patents | $ | 652,347 | $ | 73,047 | $ | 579,300 | ||||
Development costs | 351,068 | | 351,068 | |||||||
1,003,415 | 73,047 | 930,368 | ||||||||
Unamortized intangible assets: | ||||||||||
Licenses | 182,334 | | 182,334 | |||||||
Trademarks | 110,607 | | 110,607 | |||||||
292,941 | | 292,941 | ||||||||
$ | 1,296,356 | $ | 73,047 | $ | 1,223,309 |
19
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
15. | Long-term debt: |
2011 | 2010 | ||||||
Mortgage loan, principal balance of $3,500,000, bearing interest at the prime rate plus 2%, partly secured (38.46%) by Investissement Québec (for an annual premium of 2.5% on the secured amount), through a savings guarantee from Neptune of $1,000,000, and through a first-ranking mortgage on the plant, a first-ranking mortgage on all movable assets (except for accounts receivable and inventories), current and future, corporeal and incorporeal, and tangible and intangible except for intellectual property (which is subject to a negative pledge agreement), and a second-ranking mortgage on all accounts receivable and inventories, reimbursable in monthly principal payments of $41,667 until November 2015. The amount recorded is net of related financial expenses. |
$ | 2,340,719 | $ | 2,833,502 | |||
|
|||||||
Mortgage loan, principal balance of $3,000,000, bearing interest at the prime rate plus 2%, secured as indicated above, reimbursable in monthly principal payments of $36,165 until August 2016 |
2,350,710 | 2,820,852 | |||||
|
|||||||
Obligations under capital leases, interest rates varying from 7.1% to 10.6%, payable in average monthly instalments of $2,589 ($4,123 as at February 28, 2010), maturing at different dates until 2014 |
41,964 | 68,551 | |||||
|
|||||||
Two refundable contributions obtained from a federal program available for small and medium-sized business, without collateral or interest, payable in semi-annual instalments of $9,701 until October 2012 and $6,562 until December 2011, respectively |
51,929 | 84,456 | |||||
|
4,785,322 | 5,807,361 | |||||
|
|||||||
Current portion of long-term debt |
985,491 | 1,002,337 | |||||
$ | 3,799,831 | $ | 4,805,024 |
20
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
15. | Long-term debt (continued): |
The instalments on long-term debt during the next five years without considering financing fees of $34,281 are detailed as follows: |
Obligations | |||||||
under capital | Other | ||||||
leases | loans | ||||||
2012 | $ | 28,834 | $ | 966,503 | |||
2013 | 9,155 | 953,379 | |||||
2014 | 5,479 | 933,977 | |||||
2015 | 2,436 | 933,977 | |||||
2016 and thereafter | | 989,801 | |||||
Total minimum lease payments | 45,904 | ||||||
Interest expense included in minimum lease payments | 3,940 | ||||||
$ | 41,964 |
Included in financial expenses in the consolidated statement of earnings and comprehensive loss is interest expense related to obligations under capital leases of $5,123 (2010 - $7,487).
Under the debt agreements totaling $6,500,000, the Company is subject to certain covenants requiring the maintenance of ratios. As at February 28, 2011, the Company was in compliance with those ratios.
Bank loan:
The Company also has an authorized operating line of credit of $1,000,000, bearing interest at the prime rate plus 2.50%, representing an effective interest rate of 5.50% (February 28, 2010 - 2.25% and 4.50%, respectively). The line of credit is guaranteed by a first-ranking movable mortgage on all accounts receivable and inventories, a second-ranking mortgage on the production plant and a third-ranking mortgage on all other movable assets, current and future, corporeal and incorporeal, and tangible and intangible except for intellectual property (which is subject to a negative pledge agreement). The Company has an authorized exchange line of credit of $200,000, bearing interest at the prime rate plus 1.75% . The exchange line of credit is to support risk content of forward contracts. The exchange line of credit bears the same conditions as the operating line of credit. As at February 28, 2011, an amount of $630,000 (nil as at February 28, 2010) was used under the operating and exchange line of credit.
21
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
16. | Convertible debentures: |
Accrued | ||||||||||
Debentures | interest | Total | ||||||||
Liability balance of convertible debentures as at February 28, 2009 (principal amount of $2,750,000) |
$ | 2,080,192 | $ | 86,191 | $ | 2,166,383 | ||||
|
||||||||||
Accrued interest |
| 173,636 | 173,636 | |||||||
Accretion of the liability component |
158,906 | | 158,906 | |||||||
Debentures converted into Neptune units |
(69,168 | ) | (9,552 | ) | (78,720 | ) | ||||
Debentures converted into Acasti units |
(1,755,452 | ) | (196,889 | ) | (1,952,341 | ) | ||||
|
||||||||||
Liability balance of convertible debentures as at February 28, 2010 (principal amount of $496,000) |
414,478 | 53,386 | 467,864 | |||||||
|
||||||||||
Accrued interest |
| 28,804 | 28,804 | |||||||
Accretion of the liability component |
34,540 | | 34,540 | |||||||
Debentures converted into Neptune units |
(449,018 | ) | (82,190 | ) | (531,208 | ) | ||||
|
||||||||||
Liability balance of convertible debentures as at February 28, 2011 |
$ | | $ | | $ | |
On October 9, 2008, the Company completed a financing transaction where an aggregate number of 2,750 units of convertible debenture with a nominal amount of $1,000 per unit were issued. Concurrently with the issuance of the convertible debenture units, the Company issued 1,100,000 options to acquire 1,100,000 Class A shares of Acasti Pharma held by the Company at a price per share equal to the lesser of $0.25 and the price per share from a new financing (the "Debenture Call Options") until April 30, 2010, and 1,100,000 warrants to purchase 1,100,000 common shares of the Company for $1.25 per share until April 30, 2010 (the "Debenture Warrants"). The consideration received by the Company for the convertible debenture, the Debenture Call Options and the Debenture Warrants amounted to $2,750,000.
22
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
16. | Convertible debentures (continued): |
The debentures bear interest at 8%, payable annually in cash or in kind at the Companys option and are further convertible at the holders option into Neptune or Acasti units (as defined below). The debentures mature on October 9, 2011. | |
Conversion Option in Neptune Units: | |
Convertible at the option of the holder before November 30, 2010 at a price of $1.25 per unit as to the principal and at market price of the shares of the Company at the date of conversion as to the unpaid interest. A unit is comprised of one common share and one-half warrant of the Company (the "Conversion Warrant"). Each Conversion Warrant entitles its holder to purchase one common share at the market price prevailing at the date of issuance until the earliest of (i) the debenture maturity date, (ii) two years after the issuance of the warrants or (iii) 30 days after the market price of the shares of the Company has reached a price equal to two times the market price prevailing at the date of issuance of the warrants for a period of three consecutive days. The Company can also require the conversion if the market price of the shares reaches $3.75 for three consecutive days. | |
Conversion Option in Acasti Units: | |
Convertible at the option of the holder before November 30, 2010 in units, each unit being comprised of one Class A share of Acasti Pharma held by the Company and one option to acquire from the Company one Class A share of Acasti Pharma (the "Conversion Call Options"). The base price (the ''Base Price'') for the conversion will be the lowest of $0.25 per unit and the price per share from an Acasti new financing. The conversion price varies as follows: |
Exercise price | |||||||
of Conversion | |||||||
Date of conversion | Conversion price | Call Options | |||||
Before November 30, 2009 | Base price | Base price plus $0.25 | |||||
December 1, 2009 to May 31, 2010 | Base price plus $0.25 | Base price plus $0.75 | |||||
June 1 to November 30, 2010 | Base price plus $0.75 | Base price plus $1.25 |
The Conversion Call Options expire after a period of twelve months from the date of issuance.
23
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
16. | Convertible debentures (continued): |
At the date of their issuance, the Company allocated the consideration received of $2,750,000 between the instruments issued as follows: |
Relative | ||||
fair value | ||||
1,100,000 Debenture Warrants | $ | 280,175 | ||
1,100,000 Debenture Call Options | | |||
Equity component | 445,940 | |||
Debentures | 2,023,885 | |||
$ | 2,750,000 |
The Company accretes the book value of the liability component of the convertible debentures to their par value through a charge to earnings in accordance with the effective interest rate method. The effective interest rate of the debenture is 20.7% .
|
(i) |
Conversions into Neptune units: |
|
|
|
|
During the year ended February 28, 2011, convertible debentures of a nominal amount of $496,000 plus $82,190 of accrued interest were converted into Neptune units. Each unit comprises one common share and one-half Conversion Warrant. | |
|
|
|
|
A total of 437,589 units have been issued corresponding to 437,589 common shares and 218,794 Conversion Warrants. Each Conversion Warrant allows its holder to buy one share of the Company until October 9, 2011 at various prices ranging from $2.00 to $2.19 depending on the market price of Neptune shares at their date of conversion. |
24
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
16. | Convertible debentures (continued): | |
(i) | Conversions into Neptune units (continued): | |
These transactions decreased the balance of convertible debentures and contributed surplus by $531,208 and by $80,431, respectively, and increased the capital stock and warrants by a total of $611,639. This value has been proportionately allocated to capital stock and Conversion Warrants based on their relative fair value at time of issuance. | ||
The fair value of the Conversion Warrants issued of $60,676 was determined by using a binomial method with the following assumptions: |
Risk-free interest rate | 1.18% to 1.38% | |||
Estimated life | 0.9 to 1 year | |||
Expected volatility | 60% to 62% |
During the year ended February 28, 2010, convertible debentures of a nominal amount of $88,000 plus $6,126 of accrued interest were converted into Neptune units. Each unit comprises one common share and one-half Conversion Warrant.
A total of 73,198 units have been issued corresponding to 73,198 common shares and 36,598 Conversion Warrants. Each Conversion Warrant allows its holder to buy one share of the Company until October 9, 2011 at various prices ranging from $2.05 to $2.25 depending on the market price of Neptune shares at their date of conversion.
These transactions decreased the balance of convertible debentures and contributed surplus by $78,720 and by $14,271, respectively, and increased the capital stock and warrants by a total of $92,991. This value has been proportionately allocated to capital stock and Conversion Warrants based on their relative fair value at time of issuance.
25
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements, Continued |
Years ended February 28, 2011 and 2010 |
16. | Convertible debentures (continued): | |
(i) | Conversions into Neptune units (continued): | |
The fair value of the Conversion Warrants issued of $20,506 was determined by using a binomial method with the following assumptions: |
Risk-free interest rate | 1.03% to 1.40% | |||
Estimated life | 1.7 to 2 years | |||
Expected volatility | 84% |
(ii) | Conversion into Acasti units: | |
On November 30, 2009, holders of debentures having a nominal value of $2,166,000 exercised their right to convert into Acasti units. The Company also decided to settle the related accrued interest of $196,889 by delivering Acasti units. As a result, 9,455,867 Acasti Class A shares held by the Company and as many Conversion Call Options were delivered to the debenture holders. | ||
The Company valued the Conversion Call Options by (i) estimating the fair value of Acasti subsidiary and (ii) using a binomial method with the following additional assumptions: |
Fair value of Class A shares | $ | 0.47 | ||
Risk-free interest rate | 1.41% | |||
Estimated life | 1 year | |||
Expected volatility | 25% | |||
Exercise price | $ | 0.50 |
As a result of the valuation, the fair value of the Conversion Call Options was determined to be $338,432 while the fair value of the Acasti Class A shares was determined to be $4,444,257. The allocated carrying value of the Conversion Call Options using the relative fair value method was determined to be $163,006 and was recorded as a component of equity.
26
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
16. | Convertible debentures (continued): | |
(ii) | Conversion into Acasti units (continued): | |
No amount was allocated to non-controlling interest for the Acasti Class A shares delivered, because the carrying amount of Acasti net assets after accounting for the Companys own preference shares is negative. As a result, the full difference between the carrying amount of the components, being extinguished of $2,303,580 (comprised of the proportionate shares of the equity component of the debentures and of the carrying amount of convertible debentures), and the fair value of the Conversion Call Options, in the amount of $163,006, was recorded as a gain on dilution. | ||
The model used to measure derivative components, including the Conversion Call Options, as well as the estimated fair value of Acasti Class A shares, comprises a number of subjective assumptions. Any changes to such assumptions would result in a significant variation of the estimated fair value of the components. |
17. | Capital stock and warrants: | |
(a) | Authorized capital stock: |
Unlimited number of shares without par value: | ||
- |
Common shares | |
Preferred shares, issuable in series, rights, privileges and restrictions determined at time of issuance: | ||
- |
Series A preferred shares, non-voting, non-participating, fixed, preferential and non- cumulative dividend of 5% of paid-up capital, exchangeable at the holder's option under certain conditions into common shares (none issued and outstanding) |
(b) | Private placement: | |
During the year ended February 28, 2011, the Company issued 1,430,540 common shares for aggregate proceeds of $2,646,500, before share issue costs of $183,214. Share issue expenses include 54,527 warrants, having an estimated fair value of $18,386, issued to agents. 27,027 warrants are exercisable at $2.15 and 27,500 at $2.50 per warrant until October 11, 2011 and October 12, 2011, respectively. |
27
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
17. |
Capital stock and warrants (continued): | |
(c) |
Warrants: | |
The warrants of the Company are composed of the following as at February 28, 2011 and 2010: |
2011 | 2010 | ||||||||||||
Number | Number | ||||||||||||
outstanding | Amount | outstanding | Amount | ||||||||||
Debenture warrants (note 16) | − | $ | − | 1,070,000 | $ | 272,534 | |||||||
Conversion warrants (note 16) | 255,392 | 81,182 | 36,598 | 20,506 | |||||||||
Private placement warrants (note 17 (b)) | 54,527 | 18,386 | − | − | |||||||||
309,919 | $ | 99,568 | 1,106,598 | $ | 293,040 |
28
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
17. |
Capital stock and warrants (continued): | |
(d) |
Subsidiary options: | |
Subsidiary options held by the Company are eliminated upon consolidation. Subsidiary options not held by the Company and Call Options on the Company's own subsidiary shares are detailed as follows as at February 28, 2011 and 2010: |
|
2011 | 2010 | |||||||||||
|
|||||||||||||
|
Number | Number | |||||||||||
outstanding | Amount | outstanding | Amount | ||||||||||
|
|||||||||||||
Acasti Pharma Inc.: |
|||||||||||||
Series 2 warrants |
| $ | | 9,027,142 | $ | | |||||||
Series 4 warrants |
5,852,500 | 83,932 | 4,755,000 | | |||||||||
Series 5 warrants |
| | 30,000 | | |||||||||
Options outstanding under stock-based compensation plan (note 19 (b)) |
800,000 | | 850,000 | | |||||||||
Debenture Call Options (note 16) |
| | 1,100,000 | | |||||||||
Conversion Call Options (note 16) |
| | 9,455,867 | 163,006 | |||||||||
|
6,652,500 | 83,932 | 25,218,009 | 163,006 | |||||||||
|
|||||||||||||
NeuroBioPharm Inc.: |
|||||||||||||
Series 4 warrants |
5,820,000 | 25,502 | 4,660,000 | | |||||||||
Series 5 warrants |
30,000 | | 30,000 | | |||||||||
|
5,850,000 | 25,502 | 4,690,000 | | |||||||||
|
|||||||||||||
12,502,500 | $ | 109,434 | 29,908,009 | $ | 163,006 |
29
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
17. |
Capital stock and warrants (continued): | |
(d) |
Subsidiary options (continued): | |
The characteristics of the Acasti subsidiary warrants are as follows: |
- | Series 2 allows the holder to purchase one Class A share for $0.40 per share until November 17, 2010. | |
- | Series 4 allows the holder to purchase one Class A share for $0.25 per share until October 8, 2013. | |
- | Series 5 allows the holder to purchase one Class A share for $0.30 per share until December 31, 2010. |
The characteristics of the NeuroBioPharm subsidiary warrants are as follows:
- | Series 4 allows the holder to purchase one Class A share for $0.10 per share until December 24, 2013. | |
- | Series 5 allows the holder to purchase one Class A share for $0.20 per share until December 24, 2011. | |
(e) |
Shareholder Rights Plan: | |
The Company held a special, annual shareholders' meeting on June 22, 2010 (the "Meeting"). At the Meeting, a majority of shareholders adopted the Shareholder Rights Plan (the "SRP"), which had been previously approved by the Board of Directors of the Company. The Board determined that the establishment of a SRP was in the best interest of the Company's shareholders to have more time to consider any significant takeover bid for the Company without undue pressure, to allow the Board to propose, if appropriate, other alternatives to maximize shareholder value and to allow additional time for competing bids to emerge. The rights issue pursuant to the SRP required the approval by a majority of shareholders, which was obtained at the Meeting. | ||
The SRP allows holders of common shares to purchase from the Company, for each common share held, an amount of common shares worth twice the market price on the date a triggering event occurs, at a price per common share equal to half the market price on the date of such triggering event. As defined in the SRP, a triggering event consists in a transaction that results in the acquisition by a person or group of persons (the "Acquirer") of 20% or more of the outstanding common shares of the Company through a transaction that is not considered a permitted bid. The Acquirer would not be entitled to exercise any right it may hold through such transaction. |
30
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
17. |
Capital stock and warrants (continued): | |
(e) |
Shareholder Rights Plan (continued): | |
The rights under the SRP are not triggered by the purchase of shares made pursuant to a permitted bid. A permitted bid is one that is open for not less than 60 days and that is made to all shareholders by way of a take-over circular prepared in compliance with applicable securities laws. It must also comply with certain other conditions set out in the agreement signed with Computershare Services Inc., acting as registrar and transfer agent for the Company, to implement the SRP. | ||
The Board retains discretion on the continuation of the SRP until its scheduled termination on June 22, 2013, and on the waiving of dilutive effects of the provisions on triggering events for acquirers. A copy of the SRP is available on SEDAR and EDGAR under the Company's filings. | ||
18. |
Non-controlling interest: | |
During 2010 and 2011, the Company changed, through various transactions, its participation in Acasti Pharma, as follows: | ||
(a) |
On April 30, 2010, various holders of Debenture Call Options exercised their right to purchase Class A shares of Acasti, resulting in the transfer of 1,086,400 shares from Neptune. As the carrying amount of the Acasti net assets, after accounting for the Companys preference share, was negative at the time of the transaction, the cash collected on exercise of Debenture Call Options in the amount of $271,600 was recognized as a gain on dilution and no amount was allocated to non-controlling interest. | |
(b) |
Throughout the year ended February 28, 2011, various holders of Acasti warrants exercised their right to purchase Class A shares of Acasti, resulting in the issuance of 3,112,139 shares by Acasti. As the carrying amount of the Acasti net assets, after accounting for the Companys preference share, was negative at the time of the transaction, the cash collected on exercise of warrants in the amount of $1,241,856 was recognized as a gain on dilution and no amount was allocated to non-controlling interest. | |
(c) |
Throughout the year ended February 28, 2011, various holders of Conversion Call Options exercised their right to acquire from the Company Class A shares of Acasti, resulting in the transfer of 2,418,381 shares. As the carrying amount of the Acasti net assets, after accounting for the Companys preference share, was negative at the time of the transaction, the cash collected on exercise of Conversion Call Options in the amount of $1,209,191, as well as their ascribed value of $42,382, was recognized as a gain on dilution and no amount was allocated to non-controlling interest. |
31
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
18. |
Non-controlling interest (continued): | |
(d) |
On November 30, 2010, the Company exercised 5,418,381 Series 3 Acasti warrants at a price of $0.40 and 2,970,000 Series 5 Acasti warrants at a price of $0.30, for a total investment of $3,058,352. As the carrying amount of non-controlling interest was nil at that time, no adjustment to non-controlling interest was effected and this investment was eliminated on consolidation. | |
(e) |
On November 2, 2009, the Company converted 38,240,000 Acasti Class C shares it owned into Class A shares. | |
(f) |
As described in note 16, on November 30, 2009, the Company distributed 9,455,867 Acasti Class A shares upon conversion of debentures and recorded a gain on dilution of $2,140,574 with no amount allocated to non-controlling interest. | |
(g) |
Throughout the year ended February 28, 2010, holders of Acasti warrants have exercised their right to purchase Class A shares of Acasti, resulting in the issuance of 203,391 shares by Acasti. As the carrying amount of the Acasti net assets, after accounting for the Companys preference share, was negative at the time of the transaction, the cash collected on exercise of warrants and options in the amount of $81,356 was recognized as a gain on dilution and no amount was allocated to non-controlling interest. |
32
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
18. |
Non-controlling interest (continued): |
The distribution of the shareholdings of issued and outstanding Acasti Pharmas capital stock between the Company and other shareholders as at February 28, 2011 and 2010 is detailed as follows: |
2011 | 2010 | ||||||||||||||||||
Other | Other | ||||||||||||||||||
Company | shareholders | Total | Company | shareholders | Total | ||||||||||||||
Class A shares | 33,667,733 | 25,506,711 | 59,174,444 | 28,784,133 | 18,889,791 | 47,673,924 | |||||||||||||
Class B shares | 4,950,000 | 50,000 | 5,000,000 | 4,950,000 | 50,000 | 5,000,000 | |||||||||||||
Class C shares | | 260,000 | 260,000 | | 260,000 | 260,000 | |||||||||||||
38,617,733 | 25,816,711 | 64,434,444 | 33,734,133 | 19,199,791 | 52,933,924 | ||||||||||||||
Votes | 76% | 24% | 100% | 80% | 20% | 100% | |||||||||||||
Participation | 57% | 43% | 100% | 60% | 40% | 100% |
As noted in note 26, all Class B and Class C shares of Acasti outstanding were converted into Class A shares of Acasti subsequent to February 28, 2011.
The characteristics of Acasti Pharma's issued and outstanding classes of capital stock are detailed as follows:
- | Class A shares, voting (one vote per share), participating and without par value. | |
- | Class B shares, voting (ten votes per share), non-participating, without par value and maximum annual non-cumulative dividend of 5% on the amount paid for said shares. Class B shares are convertible, at the holder's discretion, into Class A shares, on a one- for-one basis, and Class B shares are redeemable at the holder's discretion for $0.80 per share, subject to certain conditions. | |
- | Class C shares, non-voting, non-participating, without par value and maximum annual non-cumulative dividend of 5% on the amount paid for said shares. Class C shares are convertible, at the holder's discretion, into Class A shares, on a one-for-one basis, and Class C shares are redeemable at the holder's discretion for $0.20 per share, subject to certain conditions. |
33
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
18. |
Non-controlling interest (continued): | |
Throughout the years ended February 28, 2011 and 2010, the Company owned 99% of NeuroBioPharms issued and outstanding capital stock. | ||
Under Canadian GAAP, upon consolidation, losses of the subsidiaries cannot be allocated to non-controlling interests in excess of their carrying amount. Consequently, all of the subsidiaries losses have been allocated to the Company during the years ended February 28, 2011 and 2010. | ||
19. |
Stock-based compensation plans: | |
(a) |
Company stock-based compensation plan: | |
The Company has established a stock-based compensation plan for administrators, officers, employees and consultants. The plan provides for the granting of common share options. The purchase price of the shares covered by the stock options granted under the plan is the closing price of the common shares listed on the TSX Venture Exchange on the eve of the grant. Under this plan 6,850,000 common shares have been reserved for issuance. The terms and conditions for acquiring and exercising options are set by the Board of Directors, as well as the term of the options which, however, cannot be more than five years or any other shorter period as specified by the Board of Directors, according to the regulations of the plan. The Company's stock option plan allows the Company to issue a number of incentive stock options not in excess of 15% of the number of shares issued and outstanding. The total number of shares issued to a single person cannot exceed 5% of the Company's total issued and outstanding common shares, with the maximum being 2% for any one consultant. | ||
Every stock option issuance in the stock option plan will be subject to conditions no less restrictive than a minimal vesting period of 18 months, with the vesting rights acquisition gradual and equal, at least on a quarterly basis. |
34
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
19. |
Stock-based compensation plans (continued): | |
(a) |
Company stock-based compensation plan (continued): Activities within the plan are detailed as follows: |
2011 | 2010 | ||||||||||||
Weighted | Weighted | ||||||||||||
average | average | ||||||||||||
Number of | exercise | Number of | exercise | ||||||||||
options | price | options | price | ||||||||||
Options outstanding, beginning of year | 2,920,250 | $ | 1.63 | 3,669,750 | $ | 1.57 | |||||||
Granted | 2,350,000 | 2.07 | 175,000 | 2.01 | |||||||||
Exercised | (1,320,000 | ) | 0.51 | (448,125 | ) | 0.26 | |||||||
Forfeited | (78,625 | ) | 2.02 | (476,375 | ) | 2.61 | |||||||
Options outstanding, end of year | 3,871,625 | 2.27 | 2,920,250 | 1.63 | |||||||||
Exercisable options, end of year | 1,770,375 | $ | 2.42 | 2,619,500 | $ | 1.54 |
2011 | |||||||||||||
Options | |||||||||||||
outstanding | Exercisable options | ||||||||||||
Weighted | |||||||||||||
remaining | Weighted | ||||||||||||
contractual | Number of | Number of | average | ||||||||||
Exercise | life | options | options | exercise | |||||||||
price | outstanding | outstanding | exercisable | price | |||||||||
$1.50 | 2.39 | 990,000 | 257,500 | $ | 1.50 | ||||||||
$2.00 | 2.55 | 50,000 | 7,500 | 2.00 | |||||||||
$2.25 | 2.12 | 90,000 | 32,500 | 2.25 | |||||||||
$2.50 | 2.09 | 1,985,000 | 716,250 | 2.50 | |||||||||
$2.60 | 0.28 | 716,625 | 716,625 | 2.60 | |||||||||
$4.00 | 0.08 | 40,000 | 40,000 | 4.00 | |||||||||
3,871,625 | 1,770,375 | $ | 2.42 |
35
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
19. |
Stock-based compensation plans (continued): | |
(a) |
Company stock-based compensation plan (continued): | |
The fair value of the options granted has been estimated according to the Black-Scholes option pricing model and based on the weighted average of the following assumptions for options granted during the year: |
2011 | 2010 | |||||||||
Non-employees | Employees | Employees | ||||||||
Dividend yield | 0.01% | 0.01% | | |||||||
Risk-free interest rate | 1.65% | 1.82% | 1.46% | |||||||
Estimated life | 1.69 year | 2.23 years | 2.5 years | |||||||
Expected volatility | 70% | 72.6% | 92% |
The weighted average fair value of the options granted to employees during the year is $0.74 (2010 - $0.87). The weighted average fair value of the options granted to non-employees during the year is $1.06 (2010 - no options were granted to non-employees). | ||
Stock-based compensation recognized under this plan amounted to $610,388 for the year ended February 28, 2011 (2010 - $484,606). | ||
(b) |
Acasti Pharma stock-based compensation plan: | |
The subsidiary, Acasti Pharma, established a stock-based compensation plan for administrators, officers, employees and consultants. The plan provides for the granting of options to purchase Acasti Class A shares. Under this plan, the maximum number of options that can be issued equals the lower of 1,530,000 or 10% of Acasti Class A shares held by public shareholders, as approved annually by such shareholders. As at February 28, 2011, 923,053 Class A shares are reserved for issuance. The terms and conditions for acquiring and exercising options are set by the Company's Board of Directors, subject, among others, to the following limitations: the term of the options cannot exceed ten years and every stock option granted under the stock option plan will be subject to conditions no less restrictive than a minimal vesting period of 18 months, a gradual and equal acquisition of vesting rights, at least on a quarterly basis. |
36
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
19. |
Stock-based compensation plans (continued): | |
(b) |
Acasti Pharma stock-based compensation plan (continued): | |
The following table presents information on outstanding stock options: |
|
2011 | 2010 | |||||||||||
|
|||||||||||||
|
Weighted | Weighted | |||||||||||
|
average | average | |||||||||||
|
Number of | exercise | Number of | exercise | |||||||||
|
options | price | options | price | |||||||||
|
|||||||||||||
Options outstanding, beginning of year |
850,000 | $ | 0.25 | 850,000 | $ | 0.25 | |||||||
Granted |
− | − | 25,000 | 0.25 | |||||||||
Forfeited |
(50,000 | ) | 0.25 | (25,000 | ) | 0.25 | |||||||
|
|||||||||||||
Options outstanding, end of year |
800,000 | 0.25 | 850,000 | 0.25 | |||||||||
|
|||||||||||||
Options exercisable, end of year |
582,500 | $ | 0.25 | 382,500 | $ | 0.25 |
The options outstanding under the plan have a weighted average remaining contractual life of 7.63 years as at February 28, 2011.
The fair value of the options granted has been estimated according to the Black-Scholes option pricing model and based on the weighted average of the following assumptions for options granted (no options were granted during 2011):
2010 | ||||
Fair value of Class A shares | Nil | |||
Dividend | Nil | |||
Risk-free rate | 2.67% | |||
Estimated life | 6 years | |||
Expected volatility | 75% |
At the time of grant, a nominal value was assigned to these stock options. Consequently, no charge was recognized for the year ended February 28, 2011 (2010 - nil).
37
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
19. |
Stock-based compensation plan (continued): | |
(c) |
Other stock-based compensation: | |
From time to time, the Company awards incentive rights to employees over Series 4 warrants it owns in its subsidiaries. | ||
The rights over Acasti warrants vest gradually until October 8, 2012, and those over NeuroBioPharm warrants, until December 24, 2012. All are subject to the employees' continued service, or having reached four years of continued service for directors. | ||
The following table presents information on outstanding rights over Acasti warrants given as stock-based compensation: |
2011 | 2010 | ||||||||||||
Weighted | Weighted | ||||||||||||
average | average | ||||||||||||
Number of | exercise | Number of | exercise | ||||||||||
rights | price | rights | price | ||||||||||
Rights outstanding, beginning of year | 4,695,000 | $ | 0.25 | 5,325,000 | $ | 0.25 | |||||||
Granted | 1,290,000 | 0.50 | − | − | |||||||||
Forfeited | (192,500 | ) | 0.29 | (630,000 | ) | 0.25 | |||||||
Rights outstanding, end of year | 5,792,500 | $ | 0.31 | 4,695,000 | $ | 0.25 | |||||||
Rights exercisable, end of year | 4,974,500 | $ | 0.27 | 3,236,500 | $ | 0.25 |
From the 1,290,000 rights granted, Neptune has awarded 550,000 rights to employees during the year ended February 28, 2011 that are pending shareholders approval. Consequently, no expense was recorded for those rights.
38
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
19. |
Stock-based compensation plan (continued): | |
(c) |
Other stock-based compensation (continued): | |
The fair value of the rights granted has been estimated according to the Black-Scholes awards pricing model and based on the weighted average of the following assumptions for rights granted during the period (no rights were granted during 2010): |
2011 | ||||
Dividend yield | Nil | |||
Risk-free interest rate | 1.91% | |||
Estimated life | 2.5 years | |||
Expected volatility | 75% |
The weighted average of the fair value of the rights granted to employees during the year is $0.22 per share (2010 - no rights were granted). No rights were granted to non-employees.
Stock-based compensation recognized under this plan amounted to $83,932 for the year ended February 28, 2011 (2010 - nil).
The following table presents information on outstanding rights over NeuroBioPharm warrants given as stock-based compensation:
2011 | 2010 | ||||||||||||
Weighted | Weighted | ||||||||||||
average | average | ||||||||||||
Number of | exercise | Number of | exercise | ||||||||||
rights | price | rights | price | ||||||||||
Rights outstanding, beginning of year | 4,590,000 | $ | 0.10 | 5,000,000 | $ | 0.10 | |||||||
Granted | 1,345,000 | 0.23 | | | |||||||||
Forfeited | (185,000 | ) | 0.13 | (410,000 | ) | 0.10 | |||||||
Rights outstanding, end of year | 5,750,000 | $ | 0.13 | 4,590,000 | $ | 0.10 | |||||||
Rights exercisable, end of year | 4,558,750 | $ | 0.11 | 2,015,000 | $ | 0.10 |
39
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
19. |
Stock-based compensation plan (continued): | |
(c) |
Other stock-based compensation (continued): | |
From the 1,345,000 rights granted, Neptune has awarded 550,000 rights to employees during the year ended February 28, 2011 that are pending shareholders' approval. Consequently, no expense was recorded for those rights. | ||
The fair value of the rights granted has been estimated according to the Black-Scholes awards pricing model and based on the weighted average of the following assumptions for rights granted (no rights were granted during 2010): |
2011 | ||||
Dividend yield | Nil | |||
Risk-free interest rate | 2.01% | |||
Estimated life | 3 years | |||
Expected volatility | 75% |
The weighted average of the fair value of the rights granted to employees during the year is $0.12 per share (2010 - no rights were granted). No rights were granted to non-employees.
Stock-based compensation recognized under this plan amounted to $25,502 for the year ended February 28, 2011 (2010 - nil).
40
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
20. |
Income taxes: |
The income tax provision differs from the amount that would have been calculated by applying the combined Canadian statutory income tax rate (federal and provincial: 29,65% in 2011 and 30.73% in 2010) as follows: |
|
2011 | 2010 | |||||
|
|||||||
Income tax at the combined Canadian statutory rate |
|||||||
(federal and provincial) |
$ | 152,969 | $ | (471,766 | ) | ||
Increase (decrease) resulting from: |
|||||||
Change in valuation allowance |
271,000 | 543,889 | |||||
Stock-based compensation |
213,428 | 148,919 | |||||
Gain on dilution |
(689,412 | ) | (221,981 | ) | |||
Non-deductible items and other |
52,015 | 939 | |||||
|
|||||||
|
$ | | $ | |
Net future income tax assets as at February 28, 2011 have not been reflected in these consolidated financial statements because the criteria for recognition of these assets were not met. These assets result primarily from unused non-capital losses and tax deductions resulting from expenses, which are recognized for accounting purposes but not deducted for tax purposes.
These future income tax assets are available to reduce current income taxes in future years and are summarized as follows:
2011 | 2010 | ||||||
Net future income tax assets resulting from the following: | |||||||
Non-capital losses | $ | 851,000 | $ | 967,000 | |||
Research and development expenses | 3,052,000 | 1,885,000 | |||||
Property, plant and equipment | 799,000 | 1,579,000 | |||||
4,702,000 | 4,431,000 | ||||||
Valuation allowance | (4,702,000 | ) | (4,431,000 | ) | |||
Net future income tax assets recognized | $ | | $ | |
41
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
20. |
Income taxes (continued): |
As at February 28, 2011, the Company has losses for tax purposes, which are available to reduce future years' taxable income until the following expiry dates: |
Federal | Provincial | ||||||
2029 | $ | 714,000 | $ | 675,000 | |||
2030 | 1,563,000 | 1,563,000 | |||||
2031 | 903,000 | 903,000 | |||||
$ | 3,180,000 | $ | 3,141,000 | ||||
Research and development expenses which can be carried forward indefinitely | $ | 7,182,993 | $ | 11,839,976 |
As of February 28, 2011, the Company also has investment tax credits that have not been recognized in the financial statements. Investment tax credits are available to reduce future federal income taxes payable. The expiration dates are as follows:
Federal | ||||
2022 | $ | 156,000 | ||
2023 | 217,000 | |||
2024 | 75,000 | |||
2025 | 53,000 | |||
2026 | 91,000 | |||
2027 | 145,000 | |||
2028 | 64,000 | |||
2029 | 152,000 | |||
2030 | 384,000 | |||
2031 | 299,000 | |||
$ | 1,636,000 |
42
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
21. |
Capital disclosures: |
The Companys objective in managing capital is to ensure sufficient liquidity to develop its technologies and commercialize its products, finance its research and development activities, general and administrative expenses, expenses associated with intellectual property protection, its overall capital expenditures and those related to its debt reimbursement. The Company is not exposed to external requirements by regulatory agencies regarding its capital. As explained in note 15, the Company is subject to certain financial covenants under its mortgage loan. | |
Since inception, the Company has financed its liquidity needs primarily through a public offering of common shares, private placements with or without warrants and issuance of long-term debt and convertible debentures. The Company optimizes its liquidity needs by non-dilutive sources whenever possible, including research tax credits, government grants, interest income and revenues from strategic partnerships and collaboration agreements. | |
The Company defines capital as being the total of shareholders equity, long-term debt and convertible debentures. | |
The capital management objectives remain the same as for the previous fiscal period. | |
The Companys policy is to maintain a minimal level of debt. As at February 28, 2011, the Company had an authorized operating line of credit $1,000,000, of which an amount of $370,000 was available. | |
As at February 28, 2011, short-term investments amounted to $3,512,858 and tax credit receivable amounted to $644,753, for a total of $4,157,611. On May 13, 2011, the Company completed a private placement financing for aggregate proceeds of $12,400,000 for the issuance of shares and warrants (note 26 (b)). Also, as noted in note 26 (f), Acasti will be completing a rights offering, and a dividend payable in shares of NeuroBioPharm is being planned by the Company (note 26 (g)). |
43
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
22. |
Financial risk management: | |
This note provides disclosures relating to the nature and extent of the Company's exposure to risks arising from financial instruments, including credit risk, foreign exchange risk, interest rate risk and liquidity risk, and how the Company manages those risks. | ||
(a) |
Credit risk: | |
Credit risk is the risk of a loss if a customer or counterparty to a financial asset fails to meet its contractual obligations, and arises primarily from the Companys trade receivables. The Company may also have credit risk relating to cash and short-term investments, which it manages by dealing only with highly-rated Canadian institutions. The carrying amount of financial assets, as disclosed in the consolidated balance sheet, represents the Companys credit exposure at the reporting date. The Companys trade receivables and credit exposure fluctuate throughout the year. The Companys average trade receivables and credit exposure during the year may be higher than the balance at the end of that reporting period. | ||
The Companys credit risk for trade receivables is concentrated, as the majority of its sales are to a relatively small group of distributors. As at February 28, 2011, the Company had thirty-seven trade debtors. Most sales' payment terms are set in accordance with industry practice. Five customers represent 61% (three customers represented 56% as at February 28, 2010) of total trade accounts included in accounts receivable as at February 28, 2011. | ||
Most of the Company's clients are distributors for a given territory and are privately-held enterprises. The profile and credit quality of the Companys retail customers vary significantly. Adverse changes in a customers 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 customers future purchases or result in uncollectible accounts receivable from that customer. Such changes could have a material adverse effect on our business, consolidated results of operations, financial condition and cash flows. |
44
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
22. |
Financial risk management (continued): | |
(a) |
Credit risk (continued): | |
The Companys extension of credit to customers involves considerable judgment and is based on an evaluation of each customers financial condition and payment history. The Company has established various internal controls designed to mitigate credit risk, including a credit analysis by the insurer which recommends customers' credit limits and payment terms that are reviewed and approved by the Company. The Company reviews periodically the insurer's maximum credit quotation for each of its clients. New clients are subject to the same process as regular clients. The Company has also established procedures to obtain approval by senior management to release goods for shipment when customers have fully- utilized approved insurers credit limits. From time to time, the Company will temporarily transact with customers on a prepayment basis where circumstances warrant. | ||
While the Companys credit controls and processes have been effective in mitigating credit risk, these controls cannot eliminate credit risk and there can be no assurance that these controls will continue to be effective, or that the Companys low credit loss experience will continue. | ||
Customers do not provide collateral in exchange for credit, except in unusual circumstances. Receivables from selected customers are covered by credit insurance, with amounts usually up to 100% of the invoicing, with the exception of some customers under specific terms. The information available through the insurers is the main element in the decision process to determine the credit limits assigned to customers. | ||
The Company provides for trade receivable accounts to their expected realizable value as soon as the account is determined not to be fully collectible, with such write-offs charged to consolidated earnings unless the loss has been provided for in prior periods, in which case the write-off is applied to reduce the allowance for doubtful accounts. The Company updates its estimate of the allowance for doubtful accounts, based on evaluations of the collectibility of trade receivable balances at each balance sheet reporting date, taking into account amounts which are past due, and any available information indicating that a customer could be experiencing liquidity or going concern problems. |
45
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
22. |
Financial risk management (continued): | |
(a) |
Credit risk (continued): | |
The aging of trade receivable balances and the allowance for doubtful accounts as at February 28, 2011 and 2010 were as follows: |
2011 | 2010 | ||||||
Current | $ | 3,561,794 | $ | 2,071,825 | |||
Past due 0-30 days | 196,832 | 415,693 | |||||
Past due 31-120 days | 1,132,304 | 187,130 | |||||
Past due 121-180 days | 802,656 | 649,827 | |||||
Trade receivables | 5,693,586 | 3,324,475 | |||||
Less allowance for doubtful accounts | (499,290 | ) | (383,597 | ) | |||
$ | 5,194,296 | $ | 2,940,878 |
(b) |
Foreign exchange risk: | |
The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates and the degrees of volatility of those rates. Foreign currency risk is limited to the portion of the Company's business transactions denominated in currencies other than the Canadian dollar. From time to time, the Company uses derivative financial instruments to reduce its foreign exchange exposure. Fluctuations related to foreign exchange rates could cause unforeseen fluctuations in the Company's operating results. | ||
Approximately 65% of the Companys revenues are in US dollars, and 31% are in Euros. A small portion of the purchases, except for the purchase of raw materials, are made in foreign currencies. There is a financial risk involved related to the fluctuation in the value of the US dollar and the Euro in relation to the Canadian dollar. | ||
The following table provides an indication of the Companys significant foreign exchange currency exposures as stated in Canadian dollars as at February 28, 2011: |
CAD | US$ | EURO | |||||
Cash | $ | 106,213 | $ | (1,341 | ) | ||
Accounts receivable | 3,602,698 | 1,745,705 | |||||
Accounts payable and accrued liabilities | (1,129,866 | ) | (78,706 | ) | |||
Advance payments | − | (554,070 | ) | ||||
$ | 2,579,045 | $ | 1,111,588 |
46
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
22. |
Financial risk management (continued): | |
(b) |
Foreign exchange risk (continued): | |
The following exchange rates applied during the year ended February 28, 2011: |
Reporting | |||||||
Average rate | date rate | ||||||
US$ per CAD | 1.0207 | 0.9714 | |||||
EURO per CAD | 1.3457 | 1.3432 |
Based on the Companys foreign currency exposures noted above, varying the above foreign exchange rates to reflect a 5% strengthening of the US dollar and Euro would have decreased the net income as follows, assuming that all other variables remained constant:
US$ | EURO | ||
Decrease in consolidated net income | $ 128,952 | $ 55,579 |
An assumed 5% weakening of the foreign currency during the year ended February 28, 2011 would have had an equal but opposite effect on the basis that all other variables remained constant.
The Company enters into currency forwards to purchase or sell amounts of foreign currency in the future at predetermined exchange rates. The purpose of these currency forwards is to fix the risk of fluctuations in future exchange rates.
47
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
22. |
Financial risk management (continued): | |
(c) |
Interest rate risk: | |
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market rates. | ||
The Companys exposure to interest rate risk as at February 28, 2011 is as follows: |
Cash | Short-term fixed interest rate | |
Short-term investments | Short-term fixed interest rate | |
Bank loan | Short-term variable interest rate | |
Long-term debt | Variable and fixed interest rate |
The risk that the Company will realize a loss as a result of the decline in the fair value of its short-term investments is limited because these short-term investments have short-term maturities and are generally held to maturity. | ||
An assumed 0.5% interest rate increase during the year ended February 28, 2011 would have decreased consolidated net income by $26,915, with an equal opposite effect for an assumed 0.5% decrease. | ||
The capacity of the Company to reinvest the short-term amounts with equivalent returns will be impacted by variations in short-term fixed interest rates available in the market. | ||
(d) |
Fair value of financial instruments: | |
The carrying amounts of the Company's short-term financial assets and liabilities approximate their fair value given the short-term nature of these instruments. | ||
The fair value of the variable interest rate mortgage loans is equivalent to the carrying amount as the loans bear interest at a rate which varies according to the market rate. | ||
The fair value of obligations under capital leases, of the refundable contributions obtained under a federal grant program is determined by discounting future cash flows using rates that the Company can use for loans with similar terms, conditions and maturity dates. The fair value of these loans approximates the carrying amounts. |
48
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
22. |
Financial risk management (continued): | |
(d) |
Fair value of financial instruments (continued): | |
The following table summarizes financial assets and liabilities fair value on a recurring basis: |
Fair value measurements at reporting date using: | |||||||||||||
Quoted prices | Significant | ||||||||||||
in active | other | Significant | |||||||||||
markets for | observable | unobservable | |||||||||||
February 28, | identical assets | inputs | inputs | ||||||||||
2011 | (Level 1 | ) | (Level 2 | ) | (Level 3 | ) | |||||||
Short-term investments | $ | 3,512,858 | $ | − | $ | 3,512,858 | $ | − | |||||
Foreign currency forwards | 5,853 | − | 5,853 | − |
The fair value of foreign currency forward contracts has been determined using rates published by the financial institution that is counterparty to these contracts. | ||
(e) |
Liquidity risk: | |
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure and financial leverage, as outlined in note 21. It also manages liquidity risk by continuously monitoring actual and projected cash flows. The Audit Committee and the Board of Directors review and approve the Company's operating budgets, and review the most important material transactions outside the normal course of business. |
49
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
22. |
Financial risk management (continued): | |
(e) |
Liquidity risk (continued): | |
The following are the contractual maturities of financial liabilities as at February 28, 2011: |
Required payments per year |
Less than | 2 to 3 | 4 to 5 | More than | ||||||||||||
(in thousands of dollars) |
Total | one year | years | years | 5 years | |||||||||||
|
||||||||||||||||
Bank overdraft and bank loan |
$ | 670 | $ | 670 | $ | | $ | | $ | | ||||||
|
||||||||||||||||
Accounts payable and accrued liabilities |
3,258 | 3,258 | − | − | − | |||||||||||
|
||||||||||||||||
Long-term debt |
4,778 | 967 | 1,887 | 1,743 | 181 | |||||||||||
|
||||||||||||||||
Loans guaranteed by investments in lease contracts (i) |
46 | 29 | 15 | 2 | − | |||||||||||
|
8,752 | 4,924 | 1,902 | 1,745 | 181 | |||||||||||
|
||||||||||||||||
Other contractual obligations: |
||||||||||||||||
Research and development contracts |
1,002 | 776 | 226 | − | − | |||||||||||
Other lease contracts |
491 | 183 | 171 | 137 | − | |||||||||||
|
||||||||||||||||
|
$ | 10,245 | $ | 5,883 | $ | 2,299 | $ | 1,882 | $ | 181 |
(i) Including interest costs | ||
In addition, approximately $554,070 of advance payments at February 28, 2011 may be refundable in the next year if the Company fails to meet certain development milestones. | ||
(f) |
Short-term investments: | |
As at February 28, 2011, short-term investments include two investments totaling $2,507,747 with maturity dates of November 30, 2011 and December 20, 2011 bearing interest rate at 1.45% per annum, cashable at any time at the discretion of the Company under certain conditions. The balance of $1,005,111 corresponds to one investment with a maturity date of December 9, 2012, bearing interest rate at 2.2% per annum and cashable at the Companys option on November 30, 2011. |
50
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
22. |
Financial risk management (continued): | |
(f) |
Short-term investments (continued): | |
As at February 28, 2010, short-term investments had a weighted-average maturity date of November 30, 2010 and weighted-average interest rate of 0.41%, and were cashable at any time at the discretion of the Company under certain conditions. | ||
23. |
Commitments and contingencies: | |
(a) |
License agreement: | |
The Company has entered into a licensing agreement, which calls for semi-annual payments of royalties based on the net realized sales of licensed products, according to the following conditions: |
|
Minimum | ||
|
Rate | royalty | |
|
|||
To a Canadian university as of June 1, 2002 (i) (for the term of the patents or until the Company exercised its option) |
4% | $ 5,000 | |
To a company controlled by an officer and director as of June 1, 2002 (for an unlimited period) (note 5) |
1% | |
(i) The Company has a $275,000 purchase option relating to the intellectual property currently held by this Canadian university.
On August 18, 2004, the Company notified the Canadian university of its intention to exercise its $275,000 purchase option relating to the intellectual property. As per the licensing agreement reached between the Canadian university and the Company, the terms of payment are as follows: $100,000 on the transfer date of the intellectual property, $50,000 on the first anniversary date of the transfer, $50,000 on the second anniversary and $75,000 on the third anniversary.
On August 23, 2004, university researchers filed an injunction against the Company and the Canadian university, demanding cancellation of the purchase option of the intellectual property granted to the Company by the Canadian university.
51
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
23. |
Commitments and contingencies (continued): | |
(a) |
License agreement (continued): | |
In January 2010, the court of appeal ruled in favor of the Company confirming in its ruling the Companys rights to exercise its purchase option relating to the intellectual property at a purchase price of $275,000 plus interests of $36,000, for a total of $311,000. The court also confirmed that the Company had exercised its option on August 18, 2004 and rejected all royalty claims with the exception of $36,000 plus interest of $11,000, for a total of $47,000. Following the January 2010 ruling, the Company has decided to present the $311,000 as a commitment and the $47,000 as an accrual. | ||
As at February 28, 2011, the Company is still working on the documentation regarding the exercise of the purchase option. | ||
(b) |
Litigation claim: | |
In August 2009, the Company received a complaint filed by Schiff Nutrition Group Inc. ("Schiff"), a former distributor of the Company's products, in the United States District Court for the District of Utah, Central division, alleging that the Company failed to meet certain delivery thresholds. As a result, Schiff is seeking monetary damages in the minimum amount of US$1 million from the Company. | ||
The Company filed a response and counterclaims to the Schiff complaint in the federal district court in Utah. The Company denies all material allegations and the requested monetary compensation in the complaint and asserts federal and state law claims against Schiff, including that Schiff failed to pay the Company for shipments of NKO® accepted by Schiff, and that Schiff caused its contractor to encapsulate NKO® despite the Companys objections that the resulting product would not meet specifications after encapsulation by Schiff contractor. | ||
No provision has been recorded by the Company as at February 28, 2011 for this matter because the outcome and the amount of loss, if any, are not determinable. | ||
(c) |
Research and development agreements: | |
In the normal course of business, the Company has signed agreements with various partners and suppliers for them to execute research projects and to produce and market certain products. The Company has reserved certain rights relating to these projects. | ||
The Company initiated many research and development projects that will be conducted over a 12-month period for a total of $2,149,596. As at February 28, 2011, accruals of $113,598 are included in "Accounts payable and accrued liabilities" in relation to these projects. Payments for the next years are $775,741 in 2012 and $226,282 in 2013. |
52
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
23. |
Commitments and contingencies (continued): | |
(d) |
Rental agreements: | |
The Company has entered into long-term operating lease agreements, which call for payments of $490,791 for the rental of premises. Minimum lease payments for the next years are $182,609 in 2012, $171,430 in 2013, and $136,752 in 2014. | ||
24. |
Segment disclosures: | |
(a) |
Descriptive information on the Company's reportable segments: | |
The Company has three reportable operating segments structured in legal entities: the first is producing and commercializing nutraceutical products (Neptune), the second is the development and commercialization of pharmaceutical applications for cardiovascular diseases (Acasti Pharma), and the third is the development and commercialization of pharmaceutical neurological diseases (NeuroBioPharm). |
53
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
24. |
Segment disclosures (continued): | |
(a) |
Descriptive information on the Company's reportable segments (continued): The following tables show information by segment: |
|
2011 | |||||||||||||||
|
||||||||||||||||
|
||||||||||||||||
|
Elimination | |||||||||||||||
|
Nutraceutical | Cardiovascular | Neurological | and other | Total | |||||||||||
|
||||||||||||||||
Revenue from sales and research contracts |
$ | 16,734,214 | $ | 28,402 | $ | 102,629 | $ | (179,862 | ) | $ | 16,685,383 | |||||
Cost of sales and operating expenses (excluding amortization and stock-based compensation) |
(12,997,857 | ) | (733,116 | ) | (170,720 | ) | | (13,901,693 | ) | |||||||
Research and development expenses |
(811,861 | ) | (1,429,710 | ) | (321,987 | ) | 28,402 | (2,535,156 | ) | |||||||
Royalties |
| (132,830 | ) | (18,630 | ) | 151,460 | | |||||||||
Amortization |
(909,523 | ) | (13,043 | ) | | | (922,566 | ) | ||||||||
Stock-based compensation |
(587,173 | ) | (105,763 | ) | (26,887 | ) | | (719,823 | ) | |||||||
Foreign exchange (loss) gain |
(198,274 | ) | 2,232 | | | (196,042 | ) | |||||||||
Loss from sale of property, plant and equipment |
(99,337 | ) | | | | (99,337 | ) | |||||||||
Impairment of property, plant and equipment |
(139,306 | ) | | | | (139,306 | ) | |||||||||
Interest income |
10,246 | 11,775 | 360 | | 22,381 | |||||||||||
Financial expenses |
(441,551 | ) | (1,402 | ) | | | (442,953 | ) | ||||||||
Gain on dilution |
1,523,173 | | | 1,241,856 | 2,765,029 | |||||||||||
|
||||||||||||||||
Net income (loss) and comprehensive income (loss) |
$ | 2,082,751 | $ | (2,373,455 | ) | $ | (435,235 | ) | $ | 1,241,856 | $ | 515,917 | ||||
|
||||||||||||||||
(Bank overdraft) cash |
$ | (459,717 | ) | $ | 322,183 | $ | 98,001 | $ | | $ | (39,533 | ) | ||||
Short-term investments |
1,005,111 | 2,507,747 | | | 3,512,858 | |||||||||||
Total assets |
20,216,973 | 3,316,010 | 207,975 | | 23,740,958 | |||||||||||
|
||||||||||||||||
Expenditures for long-lived assets |
$ | 1,019,892 | $ | 13,648 | $ | | $ | | $ | 1,033,540 |
54
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
24. |
Segment disclosures (continued): | |
(a) |
Descriptive information on the Company's reportable segments (continued): |
|
2010 | |||||||||||||||
|
||||||||||||||||
|
Elimination | |||||||||||||||
|
Nutraceutical | Cardiovascular | Neurological | and other | Total | |||||||||||
|
||||||||||||||||
|
||||||||||||||||
Revenue from sales and research contracts |
$ | 12,634,757 | $ | | $ | 58,875 | $ | (29,170 | ) | $ | 12,664,462 | |||||
Cost of sales and operating expenses (excluding amortization and stock-based compensation) |
(10,674,861 | ) | (400,298 | ) | (81,334 | ) | | (11,156,493 | ) | |||||||
Research and development expenses |
(1,292,399 | ) | (1,178,375 | ) | (272,745 | ) | | (2,743,519 | ) | |||||||
Royalties |
| (29,170 | ) | | 29,170 | | ||||||||||
Amortization |
(759,254 | ) | (9,065 | ) | | | (768,319 | ) | ||||||||
Stock-based compensation |
(484,606 | ) | | | | (484,606 | ) | |||||||||
Foreign exchange (loss) gain |
(647,716 | ) | 11,981 | | | (635,735 | ) | |||||||||
Interest income |
25,474 | 20,004 | | | 45,478 | |||||||||||
Financial expenses |
(677,942 | ) | (454 | ) | | | (678,396 | ) | ||||||||
Gain on dilution |
2,140,574 | | | 81,356 | 2,221,930 | |||||||||||
|
||||||||||||||||
Net income (loss) and comprehensive income (loss) |
$ | 264,027 | $ | (1,585,377 | ) | $ | (295,204 | ) | $ | 81,356 | $ | (1,535,198 | ) | |||
|
||||||||||||||||
Cash |
$ | 680,372 | $ | 412,822 | $ | | $ | | $ | 1,093,194 | ||||||
Short-term investments |
1,001,011 | | | | 1,001,011 | |||||||||||
Total assets |
16,605,943 | 913,319 | 46,879 | | 17,566,141 | |||||||||||
|
||||||||||||||||
Expenditures for long-lived assets |
$ | 3,640,992 | $ | 16,141 | $ | | $ | | $ | 3,657,133 |
55
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
24. |
Segment disclosures (continued): | |
(b) |
Geographic information: | |
All of the Company's assets are located in Canada. | ||
The Company's sales are attributed based on the customer's area of residence: |
2011 | 2010 | ||||||
Canada | $ | 1,356,623 | $ | 151,762 | |||
United States | 7,585,983 | 7,877,542 | |||||
Europe | 6,169,020 | 2,790,004 | |||||
Asia/Oceania | 1,462,524 | 1,786,279 | |||||
$ | 16,574,150 | $ | 12,605,587 |
Sales above exclude revenues from a partnership and collaboration agreement. | ||
(c) |
Information about major customers: | |
During the year ended February 28, 2011, the Company realized sales from the nutraceutical segment amounting to $4,701,256 from two customers individually accounting for more than 10% of consolidated sales ($4,708,867 from two different customers in 2010). Individually, sales to these customers represented 15% and 13.4% of consolidated sales (2010 - 24.5% and 12.8%). |
25. |
Comparative figures: |
The comparative figures for 2010 have been reclassified to conform with the financial statement presentation adopted for 2011. |
56
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
26. |
Subsequent events: | |
(a) |
Clinical research contract: | |
On March 24, 2011, the Company initiated a clinical research trial that is being conducted over a 24-month period at an estimated cost of $2,400,000. | ||
(b) |
Private placement financing: | |
On May 3 and May 13, 2011, the Company closed the two portions of a private placement financing, from U.S. and Canadian accredited investors, for gross proceeds of $12,400,000. A portion of the proceeds came from US institutional investors for 2,722,222 common shares at US$2.25 per share and warrants to purchase 680,556 additional common shares. The warrants to purchase additional shares will be exercisable at a price of US$2.75 per share for 18 months commencing one day following their issue date. The other portion of the proceeds came from Canadian institutional investors for 3,062,835 common shares at $2.15 per share and warrants to purchase 765,709 additional shares. The warrants to purchase additional shares will be exercisable at a price of $2.65 per share for 18 months commencing one day following their issue date. The Company has agreed to use its reasonable best efforts to file and has declared effective by the end of June 2011 a registration statement with the Securities and Exchange Commission to permit the resale of the shares and warrants. | ||
(c) |
On March 21, 2011, the outstanding Class B and Class C shares of Acasti, of 5,000,000 and 260,000, respectively, were converted into Class A shares by their holders on a 1:1 basis (the Conversion). Following the Conversion, the Company owns 60% of Class A shares, which also reflects its participation and share of the vote. | |
(d) |
On March 21, 2011, the Board of Directors of Acasti amended the incentive stock option plan (the Plan) described in note 19 (b). The amendments to the Plan are subject to the approval by the shareholders at their next annual meeting. The main modification to the Plan consists of an increase in the number of shares reserved for issuance of incentive stock options under the Plan to 6,443,444. | |
(e) |
On March 21, 2011, the Board of Directors of Acasti approved the submission of a listing application to the TSX Venture Exchange, for the public listing of Acasti's Class A shares. A copy of the Listing Application is available on SEDAR. Acasti's shares began trading on March 31, 2011. |
57
NEPTUNE TECHNOLOGIES & |
BIORESSOURCES INC. |
Notes to Consolidated Financial Statements |
Years ended February 28, 2011 and 2010 |
26. |
Subsequent events (continued): | |
(f) |
Rights offering: | |
On May 6, 2011, Acastis Board of Directors authorized, subject to regulatory approval, the issuance of rights to its shareholders to subscribe to additional Class A shares of Acasti. The maximum number of shares to be issued following the rights offering will equal 15% of Acastis outstanding shares. If approved, the rights will be exercisable at a minimal price of $0.60 and not less than the discounted market price permitted by the TSX-Venture Exchange (the Exchange). Acasti has received the Exchanges conditional approval, which is also subject to the Autorité des Marchés Financiers (AMF) approval. Acasti has filed a request to obtain a prospectus exemption from the AMF. At May 17, 2011, approvals from the AMF for the rights offering and the exemption requested were pending. | ||
Concurrently, the Companys Board of Directors approved the flow-through of rights received from Acasti directly to its own shareholders. Assuming all rights were exercised, the Company would still remain the controlling shareholder of Acasti. | ||
(g) |
Prospectus and declaration of dividend: | |
On April 19, 2011, the Board of Directors of the Company and NeuroBioPharm approved plans for NeuroBioPharm to prepare to file a non-offering prospectus to become a reporting issuer under Canadian securities regulation and as a result allow the Company to declare a dividend payable with a number of shares of NeuroBioPharm that would represent a minority interest. Neither the filing of the prospectus nor the declaration of dividend has occurred prior to the approval of these consolidated financial statements. |
58
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KPMG LLP | Telephone (514) 840-2100 |
Chartered Accountants | Fax (514) 840-2187 | |
600 de Maisonneuve Blvd. West | Internet www.kpmg.ca | |
Suite 1500 | ||
Tour KPMG | ||
Montréal, Québec H3A 0A3 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Shareholders
We have audited the accompanying consolidated balance sheets of Neptune Technologies & Bioressources Inc. as at February 28, 2011 and 2010 and the related consolidated statements of earnings and comprehensive loss, changes in shareholders equity and cash flows for each of the years in the two-year period ended February 28, 2011. These consolidated financial statements are the responsibility of Neptune Technologies & Bioressources Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Neptune Technologies & Bioressources Inc. as of February 28, 2011 and 2010 and its consolidated results of operations and its consolidated cash flows for each of the years in the two-year period ended February 28, 2011 in conformity with Canadian generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplementary information included in Exhibit 99.4 entitled "Reconciliation to United States Generally Accepted Accounting Principles " is presented for purposes of additional analysis and requirements under securities legislation. Such supplementary information has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.
(Signed) KPMG LLP*
Chartered Accountants
May 17, 2011, except for Exhibit 99.4 which is as of May 31, 2011
Montréal, Canada
*CA Auditor permit no 14114
KPMG LLP is a Canadian limited liability partnership and a
member firm of the KPMG
network of independent member firms affiliated with
KPMG International Cooperative
(KPMG International), a Swiss entity. KPMG
Canada provides services to KPMG LLP.
Exhibit 99.4 Reconciliation to United States Generally Accepted Accounting Principles
NEPTUNE TECHNOLOGIES
&
BIORESSOURCES INC.
Years ended February 28, 2011 and 2010
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles:
The consolidated financial statements of the Company are prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP), which differs in some respects from accounting principles generally accepted in the United States (US GAAP). The significant differences between Canadian and US GAAP are described below:
Consolidated statements of income (loss) and comprehensive income (loss):
2011 | 2010 | |||||
|
||||||
Net income (loss) and comprehensive income (loss)-Canadian GAAP |
$ | 515,917 | $ | (1,535,198 | ) | |
Development costs (1) |
(23,728 | ) | (11,323 | ) | ||
Capitalized interest (2) |
(5,174 | ) | 41,551 | |||
Convertible debentures (3) |
(10,415 | ) | (119,527 | ) | ||
Patents (4) |
(5,460 | ) | (5,460 | ) | ||
Debenture Call-Options (5) |
- | (244,612 | ) | |||
Transactions with non-controlling interest(6) |
(2,765,029 | ) | (2,221,930 | ) | ||
|
||||||
Net loss and comprehensive loss * - US GAAP |
$ | (2,293,889 | ) | $ | (4,096,499 | ) |
|
||||||
Net loss and comprehensive loss US GAAP attributable to: |
||||||
Shareholders of Neptune Technologies & Bioressources Inc. |
$ | (1,293,586 | ) | $ | (2,940,202 | ) |
Non-controlling interest Acasti |
$ | (1,000,303 | ) | $ | (1,156,297 | ) |
Weighted average number of common shares outstanding |
40,463,967 | 37,913,163 | ||||
Loss per common share attributable to Neptune Technologies |
||||||
& Bioressources Inc.s shareholders - basic and diluted US GAAP |
$ | (0.03 | ) | $ | (0.08 | ) |
* Since the Company is not recording income tax benefits due to its cumulative loss position, there is no tax effect reflected for any of the operating reconciling items.
2
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
The cumulative effect of these adjustments on equity is as follows:
2011 | 2010 | |||||
Shareholders equity - Canadian GAAP | $ | 14,204,427 | $ | 7,995,689 | ||
Deferred development costs (1) | (374,796 | ) | (351,068 | ) | ||
Capitalized interest (2) | 72,377 | 77,551 | ||||
Convertible debentures (3) | - | (18,529 | ) | |||
Patents (4) | 135,995 | 141,455 | ||||
Total shareholders equity | $ | 14,038,003 | $ | 7,845,098 | ||
Non-controlling interest (6) | (323,955 | ) | (670,954 | ) | ||
Neptune Technologies & Bioressources Inc.s shareholders equity US GAAP | $ | 14,361,958 | $ | 8,516,052 |
(1) |
Development costs: |
Under Canadian GAAP, the Company capitalizes certain development costs. Capitalized development costs of $374,796 (2010 - $351,068) are to be amortized over a maximum period of five years, beginning at the time of the commercialization. | |
For US GAAP purposes, these costs are expensed as incurred. Accordingly, the Company decreased intangible assets and increased research and development expenses by $23,728 (2010 - $11,323) and deficit in the amount of $374,796 (2010 - $351,068) to reconcile the financial position and earnings to US GAAP. | |
(2) |
Capitalized interest: |
Under Canadian GAAP, the Company expensed interest costs related to its plant expansion. For US GAAP, interest related to its plant expansion was capitalized as part of the historical cost of the plant expansion. Cumulative interest expense of $36,000 was reversed to February 28, 2009 and capitalized for US GAAP purposes. In 2010, interest expense of $45,000 was capitalized for US GAAP purposes, net of related amortization expense of $3,449. In 2011, the Company recorded amortization expense of $5,174. Amortization is based on an estimated useful life of 40 years for the plant and 10 years for the processing equipment. |
3
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
(3) |
Convertible debentures: |
In accordance with Canadian GAAP, the convertible debentures issued during fiscal 2009, were accounted for as a compound financial instrument and were presented in their component parts of debt and equity using the relative fair value method in accordance with the substance of the contractual arrangement. The debt component, net of debt issue costs, was accreted to its face value through a charge to earnings over its term using the effective interest method. The equity component comprised the value attributable to the detachable warrants and the holder conversion option. | |
Under US GAAP, the Company determined that the embedded conversion option within the convertible debentures was not separable from the contract. However, a beneficial conversion feature existed at inception of the contact, which was included in additional paid-in capital for US GAAP purposes. The resulting debt component was accreted to the face value through a charge to earnings over the term using the effective interest method. In addition, under US GAAP, the debt issue costs are classified as an asset and amortized over the term of the debt using the effective interest method. | |
The total adjustments to US GAAP related to convertible debentures for the periods ended February 28, 2011 and 2010 are comprised as follows: |
2011 | 2010 | ||||||||||||
Statement | Statement | ||||||||||||
of loss | Equity | of loss | Equity | ||||||||||
Differences in accretion and amortization of beneficial conversion feature of $191,678 |
$ | (10,415 | ) | $ | - | $ | (119,527 | ) | $ | (105,773 | ) | ||
|
|||||||||||||
Differences in the allocation of values between debt and equity |
- | - | - | (391,714 | ) | ||||||||
|
|||||||||||||
Beneficial conversion feature included in additional paid-in capital for US GAAP |
- | - | - | 243,181 | |||||||||
|
|||||||||||||
Differences in the allocation of carrying amounts to equity upon conversion |
- | - | - | 235,777 | |||||||||
|
|||||||||||||
|
$ | (10,415 | ) | $ | - | $ | (119,527 | ) | $ | (18,529 | ) |
4
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
(4) |
Patents: |
Under Canadian GAAP, direct costs incurred by the Company to secure patents related to internally-generated assets in the research phase are no longer capitalized, in accordance with CICA Handbook Section 3064, Goodwill and Intangible Assets. For US GAAP, these direct costs are capitalized as incurred and amortized over the estimated useful life of 20 years. Accordingly, the Company increased intangible assets by $146,915 for patent costs that were capitalizable under US GAAP. In 2011, the Company recorded amortization expense of $5,460 ($5,460 in 2010). | |
(5) |
Debenture Call-Options: |
On March 1, 2009, the Company adopted new guidance contained in ASC 815 - Derivatives and Hedging, previously issued as EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock, and EITF 08-8, Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entitys Consolidated Subsidiary. This new guidance has no equivalence in Canadian GAAP. | |
After the review of all its relevant financial instruments, the Company concluded that the Debenture Call-Options should be classified as a derivative liability until November 15, 2009 under US GAAP, as their conversion ratio remained subject to adjustment if a new financing had been concluded at a price per Class A share below $0.25 until that date. After the expiry of this feature, the instrument was determined to meet the criteria for equity classification. | |
As derivative liabilities are to be recorded at their fair values through profit and loss, the Company determined that the instruments outstanding as at March 1, 2009 and November 15, 2009 had a fair value of nil and $244,612, respectively. In reconciling to US GAAP, this increase in fair value was recognized as a loss, which became the carrying amount of the non-controlling interest equity instrument subsequent to November 15, 2009. | |
(6) |
Non-controlling interest: |
On March 1, 2009, the Company adopted new guidance contained in ASC 810 - Consolidation, previously issued as FAS 160, Non-controlling Interests in Consolidated Financial Statements an amendment of ARB No.51, for which there currently is no equivalent in Canadian GAAP. The Company adopted this new guidance prospectively as of March 1, 2009. | |
Had the Company continued to apply the previous requirements associated with non-controlling interest, no profit or loss would have been allocated to the non-controlling interest during the year ended February 28, 2010 and the gain on dilution recognized under Canadian GAAP would have remained unadjusted under US GAAP. Accordingly, the Company's loss under US GAAP for that year would have been $1,874,569, and the loss per common share attributable to the Company's shareholders would have been $0.05. |
5
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4 Reconciliation to United States Generally
Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
(6) |
Non-controlling interest (continued): |
This new US GAAP standard impacted the Companys accounting for non-controlling interest in three different ways compared to prior US GAAP policies and Canadian GAAP. First, under the new standard, the consolidated net loss and comprehensive loss is attributed between the shareholders of the Company and the non-controlling interest in its subsidiary, and the non- controlling interest is presented as a separate component of consolidated equity. Second, the non-controlling interest continues to be attributed its share of losses of a subsidiary even if that attribution results in a deficit non-controlling interest balance. Third, transactions with non- controlling interest that do not result in a change in control of the subsidiary are treated as equity transactions, with no gain or loss on dilution being recognized. | |
Previous US GAAP guidance and current Canadian GAAP guidance had resulted in non- controlling interest being continuously carried at nil on the balance sheet and statement of operations as the carrying amount of Acastis net assets was negative. The recognition of the gain on dilution under Canadian GAAP, in the amount of $2,765,029 for the year ended February 28, 2011 (2010 - $2,221,930) was reversed for US GAAP purposes, as it was recognized for transactions which did not result in a loss of control. This entry has no impact on the shareholders equity reconciliation as it is already included therein (Canadian GAAP retained earnings). | |
In accordance with new guidance, the Company allocated losses of its majority-owned subsidiary Acasti to controlling and non-controlling interests based on their proportionate shareholdings in Acastis Class A shares throughout the year. Also, it calculated the changes in carrying amounts of non-controlling interest for each transaction that occurred during the year. |
6
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
(6) |
Non-controlling interest (continued): |
The following details the changes in non-controlling interest in accordance with US GAAP for the year ended February 28, 2011 and 2010: |
2011 | 2010 | ||||||
Non-controlling interest, beginning of year US GAAP |
$ | (670,954 | ) | $ | - | ||
Exercise of Debenture Call-Options (note18 (a)) |
(335,491 | ) | - | ||||
Exercise of Conversion Call-Options (note18 (c)) |
(304,102 | ) | - | ||||
Exercise of subsidiary warrants by Neptune (note18 (d)) |
1,541,618 | - | |||||
Conversion of class C shares to class A Shares (note 18 (e)) |
- | 744,476 | |||||
Reclassification of Debenture Call-Options (5) |
- | 244,612 | |||||
Conversion of convertible debentures (note 18 (f)) |
- | (520,085 | ) | ||||
Exercise of subsidiary warrants by third parties (note 18 (b) and (g)) |
454,330 | 16,340 | |||||
Expiry of Debenture Call-Options and Conversion Call-Options |
(118,487 | ) | - | ||||
Other stock-based compensation (note 19 (c)) |
109,434 | - | |||||
Net loss and comprehensive loss attributable to the non-controlling interest |
(1,000,303 | ) | (1,156,297 | ) | |||
|
|||||||
Non-controlling interest, end of year US GAAP |
$ | (323,955 | ) | $ | (670,954 | ) |
7
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
Additional US GAAP disclosures:
Additional significant disclosures pursuant to US GAAP are as follows:
a) |
Intangible Assets: |
Estimated aggregate amortization expense based on existing intangibles for each of the five next fiscal years and thereafter is approximately as follows: |
Years | Patents | |||
2012 | $ | 37,490 | ||
2013 | 37,490 | |||
2014 | 37,490 | |||
2015 | 37,490 | |||
2016 | 37,490 | |||
Thereafter | 548,087 | |||
$ | 735,537 | |||
Weighted average amortization period (in years) | 17.0 |
As noted above, development costs, deferred under Canadian GAAP, are expensed as incurred under US GAAP.
8
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States generally accepted accounting principles (continued):
Additional US GAAP disclosures (continued):
b) |
Deferred debt issuance costs: |
The following is a summary of changes in deferred debt issuance costs: |
2011 | 2010 | ||||||
Balance, beginning of year | $ | 41,498 | $ | 47,378 | |||
Less: | |||||||
Amortization for the year | (7,217 | ) | (5,880 | ) | |||
Balance, end of year | $ | 34,281 | $ | 41,498 |
Debt issuance costs are being amortized over the term of the related debt using the effective interest method and such amortization is classified as interest expense. Deferred debt issue costs are presented as an asset under US GAAP. Under Canadian GAAP, these amounted are netted against the related debt. | |
c) |
Allowance for doubtful accounts: |
2011 | 2010 | ||||||
Balance, beginning of year | $ | 383,597 | $ | 51,000 | |||
Bad debt expense | 120,000 | 332,597 | |||||
Recovery of accounts previously written off | (4,307 | ) | - | ||||
Balance, end of year | $ | 499,290 | $ | 383,597 |
Generally, the Companys receivables are recorded when billed and represent claims against third parties that will be settled in cash. The carrying value of the receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value.
The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivable aging and evaluates individual customer receivables by considering its knowledge of a customers financial condition, credit history and current economic conditions. The Company writes off trade receivables when they are deemed uncollectible. The Company reviews its allowance for doubtful accounts regularly. However, judgment is required to determine whether an increase or reversal of the allowance is warranted.
9
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
Additional US GAAP disclosures (continued):
c) |
Allowance for doubtful accounts (continued): |
The Company will record an increase of the allowance if there is a deterioration in past due balances, if economic conditions are less favorable than the Company had anticipated, or for customer-specific circumstances, such as bankruptcy. The Company will record a reversal of the allowance if there is significant improvement in collection rates. Historically, the allowance has been adequate to cover the actual losses from uncollectible accounts. | |
d) |
Accounts payable and accrued liabilities: |
2011 | 2010 | ||||||
Trade payables | $ | 1,395,901 | $ | 1,234,861 | |||
Accrued liabilities | 820,654 | 470,109 | |||||
Accrued salaries | 862,124 | 517,077 | |||||
Other | 1,600 | 19,189 | |||||
$ | 3,080,279 | $ | 2,241,236 |
10
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
Additional US GAAP disclosures (continued):
e) |
Supplemental statement of operations information: |
Amortization and stock-based compensation expense would be attributed to the following captions in the consolidated statements of operations: |
2011 | 2010 | ||||||
Amortization | |||||||
Cost of sales and operating expense | $ | 903,895 | $ | 747,923 | |||
Research and development expense | 29,305 | 29,305 | |||||
$ | 933,200 | $ | 777,228 | ||||
Stock based compensation | |||||||
Cost of sales and operating expense | $ | 568,005 | $ | 381,198 | |||
Research and development expense | 151,818 | 103,408 | |||||
$ | 719,823 | $ | 484,606 | ||||
Rent expense for the year was as follows: | |||||||
Rent expense | $ | 294,167 | $ | 233,385 |
f) |
Statement of cash flow: |
The adjustments to comply with US GAAP, with respect to the years ended February 28, 2011 and 2010 would have no material effect on cash provided by operating activities, cash provided by (used in) financing activities and cash used in investing activities. |
11
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
Additional US GAAP disclosures (continued):
g) |
Sales taxes: |
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of income. | |
h) |
Accounting for tax uncertainties: |
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. As of February 28, 2011 and 2010, the total amount of unrecognized tax benefits was nil. The Company and its subsidiaries file income tax returns with the federal and provincial tax authorities within Canada. The Company is subject to examination by tax authorities for years after 2001. |
12
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
Additional US GAAP disclosures (continued):
i) |
Stock-based compensation: | |
i) |
Company stock-based compensation plan | |
The aggregate intrinsic value of options outstanding and exercisable at February 28, 2011 and 2010 was $542,000 and nil, respectively. The total intrinsic value of options exercised during the years ended February 28, 2011 and 2010 were $2,508,000 and $780,000 respectively. | ||
Compensation cost for an award is amortized on a straight-line basis over the requisite service period for the entire award. | ||
Volatility is based on historical volatility of the companys stock for a period commensurate with the expected life of the award. The expected life represents the period of time that options granted are expected to be outstanding based on historical experience and other factors. The risk-free rate for periods commensurate with the expected life of the respective option is based on the Canadian Treasury yield curve in effect at the time of the grant. Expected dividend yield is nil because the Company has not historically paid dividends and does not expect to do so in the future. | ||
The number of unvested options outstanding fluctuated as follows: |
Non-vested options | 2011 | 2010 | |||||||||||
Weighted | Weighted | ||||||||||||
average | average | ||||||||||||
grant-date | grant-date | ||||||||||||
Options | fair value | Options | fair value | ||||||||||
Balance, beginning of year | 300,750 | $ | 1.05 | 819,250 | $ | 1.01 | |||||||
Granted | 2,350,000 | 0.74 | 175,000 | 0.86 | |||||||||
Vested | (528,750 | ) | 0.87 | (452,250 | ) | 1.07 | |||||||
Forfeited | (20,750 | ) | 0.61 | (241,250 | ) | 0.72 | |||||||
Balance, end of year | 2,101,250 | $ | 0.75 | 300,750 | $ | 1.05 |
13
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States Generally Accepted Accounting Principles (continued):
Additional US GAAP disclosures (continued):
i) |
Stock-based compensation (continued): | |
i) |
Company stock-based compensation plan (continued) | |
As of February 28, 2011, the total compensation cost related to unvested awards not yet recognized is $1,430,000 and the weighted-average period over which the total compensation cost related to unvested awards not yet recognized is expected to be recognized is 1.4 years. | ||
ii) |
Acasti Pharma stock based compensation plan | |
The aggregate intrinsic value of options outstanding and exercisable under the Acasti Stock option plan at February 28 2011 was $400,000 and $145,000 respectively. During the year, 200,000 previously unvested awards vested (2010 382,500). | ||
iii) |
Other stock-based compensation | |
The aggregate intrinsic value of other awards outstanding and exercisable for Acasti warrants given as stock based compensation as at February 28, 2011 and 2010 was $1,100,000 and $1,100,000 respectively. | ||
The aggregate intrinsic value of other awards outstanding and exercisable for NeuroBiopharm warrants given as stock-based compensation as at February 28, 2011 and 2010 was $nil and $nil respectively. | ||
j) |
Recent accounting standards: | |
In October 2009, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. |
14
NEPTUNE TECHNOLOGIES &
BIORESSOURCES INC.
Exhibit 99.4
Reconciliation to United States Generally Accepted Accounting Principles
Years ended February 28, 2011 and 2010
Reconciliation to United States generally accepted accounting principles (continued):
Additional US GAAP disclosures (continued):
j) |
Recent accounting standards (continued): |
In April 2010, FASB issued ASU 2010-13 Compensation-Stock Compensation (Topic 718) Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entitys equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this Update should be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied. Management has not evaluated the potential impact these amendments could have on the financial statements because it intends to cease providing information under US GAAP after it starts reporting under IFRS, from March 1, 2011. |
15
Exhibit 99.5
Management Analysis of the Financial Situation and Operating Results
Management Discussion and Analysis
Year Ended February 28, 2011
MANAGEMENT ANALYSIS OF THE FINANCIAL SITUATION AND OPERATING RESULTS/ MANAGEMENT DISCUSSION AND ANALYSIS
This analysis is presented in order to provide the reader with an overview of the changes to the consolidated financial position and operating results of Neptune Technologies & Bioressources Inc. (Neptune or the Company) including its subsidiaries, Acasti Pharma Inc. (Acasti) and NeuroBioPharm Inc. (NeuroBioPharm). This analysis explains the material variations in the audited consolidated statements of earnings and comprehensive income, shareholders equity, financial position and cash flows of Neptune for the year ended February 28, 2011, compared to the corresponding period ended February 28, 2010.
This analysis, completed on May 17, 2011, must be read in conjunction with the Companys audited, consolidated financial statements as at and for the year ended February 28, 2011 which are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP).
For additional discussion regarding risks and uncertainties, also refer to the Annual Information Form for the year ended February 28, 2011, as well as registration statements and other public filings, which are available on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.
All dollar amounts in this document, with the exception of per-share amounts or unless otherwise noted, are in thousands of Canadian dollars.
OVERVIEW
The Company has three reportable operating segments structured in three distinct legal entities: the first is producing and commercializing nutraceutical products (Neptune), the second is the development and commercialization of pharmaceutical products for cardiovascular diseases applications (Acasti Pharma) and the third is the development and commercialization of pharmaceutical products for neurological diseases applications (NeuroBioPharm).
NEPTUNE
The Company continues to expand its customer base worldwide and is expecting revenue growth driven by repeat demand from existing customers and incoming demand from new customers from North America, Europe and Asia. Following the rising demand, the Company managed to increase its original plant expansion from a maximum of 100,000 kilograms per year to a maximum of 130,000 kilograms per year, simply by optimizing the use of actual manufacturing equipments. Neptunes additional industrial plant project discussions are on schedule, with the target for the realization of a new industrial plant to take place during the course of fiscal 2012.
During the first quarter, the Company was named as one of the TSX Venture 50, a ranking of strong performers listed on TSX Venture Exchange. Again in the first quarter, following a PCB contamination worldwide, the Company reassured its customers that it had been unaffected by the PCB contamination observed in marine oils and confirmed NKO®s safety and quality. In addition to this comfort, Neptune was recognized by industry peers as the gold standard for krill oils.
During the first quarter, 1,068,000 Debenture warrants and 1,086,400 Debenture Call options of Neptune were exercised for total proceeds of $1,607.
The Company presented novel innovative product opportunities customized for dietary supplements, functional and medical foods and introduced a new pipeline of novel formulations containing its proprietary marine omega-3 phospholipids enhanced with validated bioactive ingredients targeted to specific health applications. Neptune pre-launched its new product, ECO Krill Oil- EKOTM to its clientele at Health Ingredient Europe 2010 in Madrid. The pre-launch was well received by the market. EKOTM is a product similar to NKO® with slightly lower specifications and a lower selling price. Moreover, EKOTM sells at a lower price than competing krill oil products and presents better specifications than these products. The Company is also testing the industrys reception of a new biomass extract generated from Neptunes research and development program targeting new cognitive health indications. The Company will also be presenting pilot commercial products for functional food applications including juice, fruit berries, fruit paste and protein bars.
2
The Company also sustained its clinical research initiatives. As a result, Neptune is able to leverage scientific results demonstrating health benefits specific to the proprietary composition of Neptune Krill Oil - NKO® on prevalent human conditions, such as premenstrual syndrome, high cholesterol, inflammation, osteoarthritis and attention deficit hyperactivity disorder. Similarly, the clinical trials for functional/medical food applications with the multinational corporations Yoplait and Nestlé are progressing and should conclude before the end of our 2012 fiscal year at the latest. In accordance with its scientific strategy, Health Canada approved, exclusively for NKO®, therapeutic and risk reduction claims, corrobating aspects of Neptunes clinical research and substantiating NKO® safety and effectiveness on cardiovascular health, inflammation and womens health.
During the second quarter, Neptune appointed two investor relation firms, The Howard Group and CEOcast, in order to increase Neptunes visibility toward the investment community in Canada and the United States respectively. This increased awareness of Neptune combined with various determining factors has already translated into higher trading volume on NASDAQ and TSX-V.
During the third quarter, the Company realised a non-brokered private placement of $2,647 through the offering of common shares at a price of $1.85. Two important institutional investors participated in the financing. Also, toward the end of the third quarter, 2,418,381 Conversion Call Options, issued to debenture holders who had previously decided to convert their debenture into Acasti shares in accordance with the debenture terms and conditions, were exercised at $0.50, resulting in the transfer of 2,418,381 Class A shares of Acasti. As the carrying amount of the Acasti net assets, after accounting for the Companys preference share, was negative at the time of the transaction, the cash collected on exercise of Conversion Call Options in the amount of $1,209, as well as their ascribed value of $42, was recognized as a gain on dilution and no amount was allocated to non-controlling interest.
Also during the third quarter, after two years of rigorous review of NKO® safety and clinical research data, the Canadian Minister of Health has approved therapeutic and risk reduction claims exclusively for NKO®. In June 2009 Health Canada approved health claims for omega-3, among the strongest of which was the claim that products providing 1g - 3g EPA + DHA, per day (amounting to 3-10g of fish oil per day, or 6-20 softgels) help to reduce serum triglycerides, compared to 4 NKO® softgels recently approved for the same indication. Contrary to fish oil, Health Canada approved a stronger claim for NKO® for cholesterol with a decrease of LDL (bad cholesterol) and increase of HDL (good cholesterol) using only two softgels per day as well as an anti-inflammatory claim using only one softgel per day and a specific claim for premenstrual syndrome (PMS).
In regards to its intellectual property protection, the Company has always had a firm policy to protect its intellectual property rights including its patents, trademarks and trade secrets, with every legal means available. Since last year, certain of Neptunes competitors have been marketing, advertising and selling their finished krill-based products claiming benefits based on Neptunes research or by infringing on patents for which Neptune has exclusive rights. Neptune, being determined to enforce its rights, has thus taken action against some of those companies in order to protect its intellectual property.
3
ABOUT THE SUBSIDIARIES
Acasti Pharma Inc. (Acasti)
The status of the Companys new pharmaceutical products; Over-the-counter (OTC), medical foods, and prescription drug products, is as follows:
During 2011 fiscal year, the Company has completed the development and launched its first medical food, Onemia, on October 21, 2010 at the Cardiometabolic Health Congress in Boston as an initial introduction to health care practitioners. Onemia is an omega-3 phospholipid targeting omega-3 phospholipid deficiency related to cardiometabolic disorders, a multibillion dollar market. As a medical food, Onemia is regulated by the FDA and can only be administered under medical supervision. Onemia has been very well received by the medical community in the United States; the first distribution agreement was signed in March 2011 and the first purchase order received in March 2011.
The Companys OTC product, Vectos, is developed as a platform technology for fixed dose combinations with existing OTC products. The Vectos platform has been designed to improve drug activity and safety profile; ideal for co-development ventures and partnerships with a fast to market opportunity. The Company has advanced its negotiations to commercialize Vectos with potential partners.
The Company completed the non-clinical program required for the Clinical Trial Application (CTA) submission demonstrating that CaPre, the Companys prescription drug candidate, is safe and effective for the management of mixed dyslipidemia and cardiometabolic disorders by significantly increasing HDL, reducing triglycerides and LDL, and managing glucose intolerance.
The cardiometabolic effects of CaPre were also compared with prescription drug Lovaza®. The results of these comparative studies demonstrated a clear superiority of CaPre on a gram to gram omega-3 basis. According to IMS Health, global sales of Lovaza® topped $1 billion in 2009, with $758 million of those sales originating in the U.S. Moreover, in 2007, GlaxoSmithKline PLC (LSE/NYSE: GSK) acquired the USA rights to Lovaza® by its acquisition of Reliant Pharmaceuticals Inc. for $1.65 billion.
Moving forward towards the clinical stage with CaPre, the Company submitted to Health Canada a CTA for a Phase II clinical trial in October 2010, following a very positive pre-CTA meeting. The Chemistry Manufacturing and Control (CMC) section of the CTA has been completed and approved. The Company is looking forward to the acceptance of the CTA and the initiation of the clinical study within the near future.
Acasti expanded its Scientific Advisory Board (SAB) with four new members: Dr. Jean Davignon, Dr. Jacques Genest, Pr. Ruth McPherson and Pr. William Harris. The Company has worked closely with its SAB members and other scientific and clinical advisors to finalize the design of the upcoming clinical trial by correlating preclinical data with efficacy in patients through an efficient clinical study design. The SAB has indicated their strong support of Acastis research and development efforts towards the next stage of development.
Increasing public and industry awareness, the Company was a sponsor and presenter at the 7th Annual Alliance Management congress and the 2nd Annual Combination Drug Therapies Conference, both organized by the Cambridge Healthtech Institute (CHI) and the BioPharmaceutical Strategy Series held April 13-14, 2010 in Philadelphia, PA. Acasti presented its unique positioning in the field of Cardiometabolic disorders and its action plan for successful collaboration with worldwide pharmaceutical industry leaders. The Company was well received and multiple important leads were generated.
In accordance with the strategic plan initially established in 2008 for the development of Acasti, a total of 11,703,911 Acasti warrants have been exercised, during years ended February 28, 2011 and 2010, for total proceeds of $4,382, detailed as follows: 3,285,530 Series 2 Acasti warrants exercised at $0.40; 5,418,381 Series 3 Acasti warrants exercised at $0.40 and 3,000,000 Series 5 Acasti warrants exercised at $0.30. From the preceding transactions Neptune exercised 2,418,381 Series 3 Acasti warrants in order to deliver shares following the exercise of options it had issued on Acasti shares and exercised 3,000,000 Series 3 Acasti warrants and 2,970,000 Series 5 Acasti warrants. Following those transactions and the conversion of Class B and C shares in Class A shares, described in the subsequent events section of this document, Neptune has a 60% participation in Acasti.
In March 2011, Acasti completed its listing application on the TSX-Venture Exchange. As a result, Acasti had its share listed on the TSX-Venture Exchange on March 31, 2011 under the symbol APO.
4
NeuroBioPharm Inc. (NeuroBioPharm or NBP)
The status of The Companys new pharmaceutical products; Over-the-counter (OTC), prescription medical foods, and prescription drug products, is as follows:
During 2011 fiscal year, The Company made significant progress in its scientific research and development programs. NeuroBioPharm announced the results of preclinical research performed by NeuroCode AG, (Wetzlar, Germany), a team of recognized experts dedicated to specific profiling of active pharmaceutical ingredients by means of electroencephalographic (EEG) power spectra of conscious free moving rats. Three different preparations were tested on a rat model for the purpose of understanding their dose and time dependent effects on the electrical brain activity recorder on an electropharmacogram over four brain areas. According to analysis, the NeuroBioPharm APIs were projected in close neighbourhood to stimulatory and cognition enhancing drugs like Ginkgo extract and metanicotine, a potential treatment for senile dementia, and methylphenidate (MPD) or Ritalin, a drug used for treatment of attention deficit hyperactivity disorder (ADHD) in children. Furthermore, the Company has completed initial non-GLP preclinical toxicity and pharmacokinetic studies and has initiated a preclinical efficacy evaluation of the two new preparations.
The clinical trial evaluating the effect of the medical food in early stage Alzheimer disease has now completed the treatment phase. The trial was conducted in multiple sites in different provinces in Canada. The purpose of this study is to evaluate the efficacy of NKO softgels in reducing decline of global cognitive function as measured by the Neuropsychological Test Battery (NTB), in patients diagnosed with early stage Alzheimer's disease when compared to fish oil and a placebo after 24 weeks of treatment. The primary outcome measure is the change in Neurological Test Battery (NTB) between baseline and 24 weeks of treatment. Secondary outcome measures include the change in Disability Assessment in Dementia (DAD) at 24 weeks of treatment, the change in GDS NTB, DAD, and MMSE at 12 weeks. Safety and tolerability was assessed by the incidence of treatment emergent adverse events.
NeuroBioPharm is establishing itself with international and strategic industrial partners who are seeking safe and effective products for the maintenance of cognitive health for the OTC market, the clinical dietary management of cognitive decline and neurodevelopmental problems as medical foods and finally, prescription drugs for the treatment of neurodevelopmental and neurodegenerative disorders. In relation to the latter, upon receipt of the final clinical report for the Alzheimer study, NeuroBioharm intends to negotiate the terms of a License Agreement with the multinational company transferred to NeuroBioPharm by Neptune. The terms to be negotiated will include the agreed commercialization deal defining milestone payments and minimum annual royalty conditions.
5
Selected consolidated financial information | ||||||||||||
(In thousands of dollars, except per share data) |
||||||||||||
Three-month period | ||||||||||||
Ended February 28, | Year Ended February 28, | |||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||
(Unaudited) | (Unaudited) | |||||||||||
$ | $ | $ | $ | |||||||||
Revenue from sales and research contracts |
4,120 | 4,657 | 16,685 | 12,664 | ||||||||
EBITDA1 |
(1,272 | ) | 288 | 271 | (1,190 | ) | ||||||
Net income (loss) and comprehensive income (loss) |
(2,036 | ) | (39 | ) | 516 | (1,535 | ) | |||||
Basic earnings (loss) per share |
(0.048 | ) | (0.001 | ) | 0.01 | (0.04 | ) | |||||
Diluted earnings (loss) per share |
(0.048 | ) | (0.001 | ) | 0.01 | (0.04 | ) | |||||
Total assets |
23,741 | 17,566 | 23,741 | 17,566 | ||||||||
Working capital2 |
9,562 | 4,497 | 9,562 | 4,497 | ||||||||
Total long term financial liabilities, including current portion |
4,785 | 6,275 | 4,785 | 6,275 | ||||||||
Shareholder equity |
14,204 | 7,996 | 14,204 | 7,996 | ||||||||
Book value per common share3 |
0.334 | 0.209 | 0.334 | 0.209 |
1 |
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is presented for information purposes only and represents a financial performance measurement tool mostly used in financial circles. Because there is no standard method endorsed by Canadian GAAP requirements, the results may not be comparable to similar measurements presented by other public companies. Neptune obtains its EBITDA measurement by adding to net income (loss), financial expenses, amortization, income taxes, foreign exchange, loss from sale of property, plant and equipment and impairment of property, plant and equipment, incurred during the fiscal year. Neptune also excludes the effects of certain non-monetary transactions recorded, such as share-based compensation and gain on dilution for its EBITDA calculation. | |
2 |
Working capital is presented for information purposes only and represents a measurement of the Companys short-term financial health mostly used in financial circles. The working capital is calculated by subtracting current liabilities from current assets. Because there is no standard method endorsed by Canadian GAAP requirements, the results may not be comparable to similar measurements presented by other public companies. | |
3 |
Book value per common share is presented for information purposes only and is obtained by dividing the book value of shareholders equity by the number of outstanding common shares at the end of the fiscal year. Because there is no standard method endorsed by Canadian GAAP requirements, the results may not be comparable to similar measurements presented by other public companies. |
RECONCILIATION OF THE CONSOLIDATED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)
A reconciliation of this non-GAAP financial measure is presented in the table below. The Company uses non-GAAP measures to assess its operating performance. Securities regulations require that companies caution readers that earnings and other measures adjusted to a basis other than GAAP do not have standardized meanings and are unlikely to be comparable to similar measures used by other companies. Accordingly, they should not be considered in isolation. The Company uses EBITDA to measure its performance from one period to the next without the variation caused by certain adjustments that could potentially distort the analysis of trends in our operating performance, and because the Company believes it provides meaningful information on the Companys financial condition and operating results.
Neptune obtains its EBITDA measure by adding to net income (net loss), financial expenses, amortization, income taxes, foreign exchange, loss from sale of property, plant and equipment and impairment of property, plant and equipment, incurred during the fiscal year, on a consolidated basis. Neptune also excludes the effects of certain non-monetary transactions recorded, such as share-based compensation and gain on dilution, for its consolidated EBITDA calculation. The Company believes it is useful to exclude these items as they are either non-cash expenses, items that cannot be influenced by management in the short term, or items that do not impact core operating performance. Excluding these items does not imply they are necessarily nonrecurring.
6
Reconciliation of non-GAAP financial information | ||||||||||||
(In thousands of dollars, except per share data) |
||||||||||||
Three-month period | ||||||||||||
ended February 28, | Year Ended February 28, | |||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||
(Unaudited) | (Unaudited) | |||||||||||
$ | $ | $ | $ | |||||||||
Net income (loss) |
(2,036 | ) | (39 | ) | 516 | (1,535 | ) | |||||
Add (deduct): |
||||||||||||
Amortization |
229 | 242 | 923 | 768 | ||||||||
Financial expenses |
107 | 111 | 443 | 678 | ||||||||
Stock-based compensation |
260 | 103 | 720 | 485 | ||||||||
Foreign exchange (gain) loss |
168 | (49 | ) | 196 | 636 | |||||||
Loss from sale of property, plant and equipment |
- | - | 99 | - | ||||||||
Impairment of property, plant and equipment |
- | - | 139 | - | ||||||||
Gain on dilution |
- | (80 | ) | (2,765 | ) | (2,222 | ) | |||||
EBITDA |
(1,272 | ) | 288 | 271 | (1,190 | ) |
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
Fiscal year ended February 28, 2011 | |||||||||||||||
First | Second | Third | Fourth | ||||||||||||
Total | Quarter | Quarter | Quarter | Quarter | |||||||||||
$ | $ | $ | $ | $ | |||||||||||
Revenue from sales and research contracts |
16,685 | 4,162 | 4,114 | 4,289 | 4,120 | ||||||||||
EBITDA2 |
271 | 676 | 732 | 135 | (1,272 | ) | |||||||||
Net income (loss) |
516 | 477 | 274 | 1,801 | (2,036 | ) | |||||||||
Basic earnings (loss) per share |
0.01 | 0.01 | 0.01 | 0.044 | (0.048 | ) | |||||||||
Diluted earnings (loss) per share |
0.01 | 0.01 | 0.01 | 0.043 | (0.048 | ) | |||||||||
|
|||||||||||||||
Fiscal year ended February 28, 2010 | |||||||||||||||
First | Second | Third | Fourth | ||||||||||||
Total | Quarter | Quarter1 | Quarter | Quarter | |||||||||||
$ | $ | $ | $ | $ | |||||||||||
Revenue from sales and research contracts |
12,664 | 2,878 | 1,371 | 3,758 | 4,657 | ||||||||||
EBITDA2 |
(1,190 | ) | (284 | ) | (1,634 | ) | 440 | 288 | |||||||
Net income (loss) |
(1,535 | ) | (1,407 | ) | (2,112 | ) | 2,023 | (39 | ) | ||||||
Basic and diluted earnings (loss) per share |
(0.04 | ) | (0.04 | ) | (0.06 | ) | 0.05 | (0.00 | ) | ||||||
|
1 |
Impact of plant shut down during second quarter of fiscal 2010. | |
2 |
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is presented for information purposes only and represents a financial performance measurement tool mostly used in financial circles. Because there is no standard method endorsed by Canadian GAAP requirements, the results may not be comparable to similar measurements presented by other public companies. Neptune obtains its EBITDA measurement by adding to net income (loss), financial expenses, amortization, income taxes, foreign exchange, loss from sale of property, plant and equipment and impairment of property, plant and equipment, incurred during the fiscal year. Neptune also excludes the effects of certain non-monetary transactions, such as share-based compensation and gain on dilution for its EBITDA calculation. |
7
SEGMENT DISCLOSURES
The Company has three reportable operating segments structured in three distinct legal entities: the first is producing and commercializing nutraceutical products (Neptune), the second is the development and commercialization of pharmaceutical products for cardiovascular diseases (Acasti Pharma) and the third is the development and commercialization of pharmaceutical products for neurological diseases (NeuroBioPharm).
For the fiscal year ended February 28, 2011, all revenues are generated by the nutraceutical segment with the exception of a small amount of revenue from a research contract in NeuroBioPharm. The continuity of all operations of the consolidated group is presently supported by Neptunes revenues and recent financings in both Neptune and Acasti. Acasti operations are at the pre-commercialization stage for the prescription medical food product, OnemiaTM, at the partnership negotiation stage for the OTC product, VectosTM, and at the Phase II clinical trial preparation for prescription drug program, CaPreTM. As for NeuroBioPharm, operations are limited to product development in the OTC, prescription medical foods, and prescription drug products as well as pre-clinical research.
At this moment, NKO® and EKO are the only products sold in the nutraceutical market by Neptune. NKO® and EKO presently generate gross margins that vary between 40% and 50% depending on the country and the market where they are sold. In the case of Acasti and NeuroBioPharm, several products have been developed but none are presently generating revenue since Acastis product OnemiaTM is at the pre-commercialization stage. Acasti Pharma and NeuroBioPharm have adopted the same development strategy as Neptune which is to generate short term revenue with the OTC and prescription medical food products. It is currently not possible to evaluate a precise timeline for the launch of any of NeuroBioPharm products as negotiation are ongoing with potential partners.
The consolidated cash flows are explained in the following section. Except as described below, significant consolidated cash flows are consistent with those of the nutraceutical segment. In regards to the cardiovascular segment during the fiscal year ended February 28, 2011, Acastis operating activities generated a decrease in cash of $1,862 mostly related to its operating loss as well as to the changes in operating assets and liabilities. Acastis investing activities generated a decrease in cash of $2,529 related mostly to the purchase of short-term investments. Acastis financing activities generated an increase in cash of $4,300 related to the issuance of shares pursuant the exercise of warrants of which $3,067 was provided by the Company on exercise of warrants it owned and therefore eliminated upon consolidation. Overall, as a result, Acasti decreased its cash by $91 since February 28, 2010, while it had increased its cash by $84 from February 28, 2009 to February 28, 2010. Total liquidities of Acasti as at February 28, 2011, comprised of cash and short-term investments, amounted to $2,830.
8
Selected financial information by segment is as follows as at February 28, 2011 (12 months):
The following table show selected financial information by segments :
Fiscal Year Ended February 28, 2011 | |||||||||||||||
Elimination | |||||||||||||||
Nutraceutical | Cardiovascular | Neurological | and other | Total | |||||||||||
(Expressed in thousands) | $ | $ | $ | $ | $ | ||||||||||
Revenue from sales and research contracts |
16,734 | 28 | 103 | (180 | ) | 16,685 | |||||||||
|
|||||||||||||||
EBITDA |
2,934 | (2,255 | ) | (408 | ) | - | 271 | ||||||||
|
|||||||||||||||
Net income (loss) |
2,082 | (2,373 | ) | (435 | ) | 1,242 | 516 | ||||||||
|
|||||||||||||||
Total assets |
20,217 | 3,316 | 208 | - | 23,741 | ||||||||||
|
|||||||||||||||
Working capital |
6,745 | 2,768 | 49 | - | 9,562 | ||||||||||
|
|||||||||||||||
|
|||||||||||||||
EBITDA calculation |
|||||||||||||||
Net income (loss) |
2,082 | (2,373 | ) | (435 | ) | 1,242 | 516 | ||||||||
add (deduct) |
|||||||||||||||
Amortization |
910 | 13 | - | - | 923 | ||||||||||
Financial expenses |
442 | 1 | - | - | 443 | ||||||||||
Stock-based compensation |
587 | 106 | 27 | - | 720 | ||||||||||
Foreign exchange loss (gain) |
198 | (2 | ) | - | - | 196 | |||||||||
Loss from sale of property, plant and equipment |
99 | - | - | - | 99 | ||||||||||
Impairment of property, plant and equipment |
139 | - | - | - | 139 | ||||||||||
Gain on dilution |
(1,523 | ) | - | - | (1,242 | ) | (2,765 | ) | |||||||
|
|||||||||||||||
EBITDA |
2,934 | (2,255 | ) | (408 | ) | - | 271 |
9
COMMENTS RELATIVE TO THE SIGNIFICANT VARIATIONS BETWEEN THE ANNUAL AND FOURTH QUARTER OF THE YEARS ENDED FEBRUARY 28, 2011 AND 2010
Revenue
Revenue for the fourth quarter continued to be above the $4,000 quarterly objective and amounted to $4,120 for the three-month period ended February 28, 2011, representing a decrease of 11.5% compared to the record setting quarter of $4,657 for the three-month period ended February 28, 2010. Revenues amounted to $16,685 for the fiscal year ended February 28, 2011, representing a 5-year high increase of 31.7% compared to $12,664 for fiscal year ended February 28, 2010. This 5-year high increase in the Companys revenue is even more remarkable considering the devaluation in the US dollar vs CDN dollar in the recent months since more than 60% of all revenues are recorded in US dollar. This increase in revenue is also attributable to the aggressive penetration of the American, European and Asian/Australian markets due to the increasing awareness and recognition of NKO® and EKOTM.
Virtually all of the Companys sales are derived from the nutraceutical segment.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA decreased substantially for the three-month period ended February 28, 2011 to $(1,272) compared to $288 for the three-month period ended February 28, 2010. EBITDA increased by $1,461 for the fiscal year ended February 28, 2011 to $271 compared to $(1,190) for the fiscal year ended February 28, 2010. For the year ended February 28, 2011, the Company recorded a positive consolidated EBITDA for the first time since the initiation of the subsidiaries R&D programs, primarily due to EBITDA in the nutraceutical segment, which was $2,934 compared to $688 for the fiscal year ended February 28, 2010. The lower EBITDA for the three-month period ended February 28, 2011 when compared to the corresponding period of the previous year is attributable to higher legal fees and investor relation expenses, as well as increased R&D expenses incurred by Acasti and NeuroBioPharm. The main reason for the fiscal year ended February 28, 2011 increased EBITDA over the corresponding period of last year are increased revenues and overall improved production performance.
Net Income (Loss)
The Company realized a consolidated net loss for the three-month period ended February 28, 2011 of $(1,272) or $(0.045) per share compared to a net loss of $(39) or $(0.001) per share for the three-month period ended February 28, 2010 on an annual basis. As a result of substantial gain on dilution, the Company realized for the first time a consolidated net income for the fiscal year ended February 28, 2011 since the initiation of the subsidiaries R&D programs. Consolidated net income amounted to $516 or $0.01 per share compared to a net loss of $(1,535) or $(0.04) per share for the fiscal year ended February 28, 2010. During the fiscal year ended February 28, 2011 the Company realized a gain on dilution of $2,765. The gain on dilution realized during the fiscal year ended February 28, 2011 was offset by the loss from sale of property, plant and equipment and the impairment of property, plant and equipment. During the fiscal year ended February 28, 2011 the Company incurred increased expenses in operating, amortization and stock-based compensation when compared with the corresponding period of 2010. The cumulative effect of the elements described above and in the EBITDA section explains the difference in net income between the year ended February 28, 2011 and 2010. The increase in net income for the fiscal year ended February 28, 2011 over the corresponding period of 2010 is principally attributable to the considerable increase in sales level along with less significant increases in the cost of sales and operating expenses for the fiscal year ended February 28, 2011. This improved performance is not only attributable, as mentioned here above, to higher sales level and to an overall improved production performance, but also to the higher gain on dilution and to lower financial expenses, explained by a lower amount of long term debt. These favourable variances were offset by an increase in two non-monetary expenses, amortization and stock based compensation.
CASH FLOW AND FINANCIAL CONDITION COMPARISON BETWEEN THE YEARS ENDED FEBRUARY 28, 2011 AND 2010
Operating Activities
During the fiscal year ended February 28, 2011, the operating activities generated negative cash flows of $4,545, compared to negative cash flows of $507 for the corresponding fiscal year ended February 28, 2010. The difference derived from operating activities from the comparable fiscal year is attributable to the use of cash of $4,345 from the net change of $4,345 in operating assets and liabilities during the fiscal year ended February 28, 2011 compared to the corresponding period in 2010 principally as a result of the Companys increased investments in accounts receivable and inventories offset by an increase in accounts payable and accrued liabilities as of February 28, 2011 compared to February 28, 2010.
10
Investing Activities
During the fiscal year ended February 28, 2011, the investing activities generated a decrease in cash of $3,316. This decrease is mainly due to the purchase of short-term investments for $(2,512), compared with $2,317 of short-term investments that came to maturity for the corresponding period in 2010. The Company also invested $995 in additions to property, plant and equipment but added $229 from the sale of processing equipment.
Financing Activities
During the fiscal year ended February 28, 2011, the financing activities generated an increase in cash of $6,794. This increase is mainly due to issuance of 1,430,540 shares pursuant to a private placement financing for an amount of $2,647, to the exercice of Acasti warrants for an amount of $1,242 and to the exercice of Call Options on Acasti shares for an amount of $1,481. This increase is also attributable to the issuance of an additional 1,068,000 shares following the exercise of the debenture warrants for an amount of $1,335, and to the issuance of 1,320,000 shares pursuant to the exercise of incentive stock options exercise for an amount of $668. These increases in cash were partly offset by the repayment of long-term debt by $1,042.
Overall, as a result of cash flows from all activities, the Company decreased its cash by $1,133 for the fiscal year ended February 28, 2011.
At February 28, 2011, the Companys liquidity position, consisting of cash, short-term investments and bank overdraft was $3,473. See subsequent events for details of a private placement financing completed in May 2011.
Also, at February 28, 2011, the Company had an authorized operating line of credit $1,000, of which an amount of $630 was used, as well as an additional $200 for foreign exchange contracts, all of which was also available.
The Company believes that its available cash and short-term investments research collaborations and licensing agreements, research tax credits, and access to capital markets should be sufficient to finance the Companys operations and capital needs during the ensuing fiscal year. However, in light of the uncertainties associated with the regulatory approval process, clinical trial results, commercialization of nutraceutical products and the Companys ability to secure additional licensing, partnership and/or other agreements, further financing may be required to support the Companys operations in the future.
FINANCIAL POSITION
The following table details the significant changes to the balance sheet at February 28, 2011 compared to February 28, 2010:
Increase | |||
Accounts | (Reduction) | Comments | |
(In thousands of dollars) | |||
Cash |
(1,093) | See cash flow statement | |
Short-term investments |
2,512 | Purchase of short-term investments | |
Receivables |
2,337 | Increased sales | |
Inventories |
1,899 | Purchase of raw material and increased production | |
Bank loan |
630 | Use of credit line to finance receivables | |
Accounts payable and accrued liabilities |
841 | Timing of supplier payments | |
Convertible debenture |
(468) | Conversion of outstanding debenture | |
Long-term debt |
(1,022) | Reimbursement of long-term debt |
PRIMARY ANNUAL FINANCIAL RATIOS
2011 | 2010 | 2009 | ||
Working Capital Ratio (current assets/current liabilities)1 |
2.67 | 2.05 | 2.98 | |
Solvency Ratio (Debt Capital/Shareholders Equity)*2 |
0.34 | 0.78 | 0.63 | |
* including convertible debentures for 2009 and 2010. |
1 |
The Working Capital Ratio is presented for information purposes only and represents a financial performance measurement tool mostly used in financial circles. Because there is no standard method endorsed by Canadian GAAP requirements, the results may not be comparable to similar measurements presented by other public companies. | |
2 |
The Solvency Ratio is presented for information purposes only and represents a financial performance measurement tool mostly used in financial circles. Because there is no standard method endorsed by Canadian GAAP requirements, the results may not be comparable to similar measurements presented by other public companies. |
11
The Companys Working Capital Ratio improved during the year ended February 28, 2011 compared to the year ended February 28, 2010 mainly due to increases in short term assets, which included the increase in short-term investments due to an increase in cash resources from the financing activities as previously detailed and the increase in account receivable due to the increase in sales. The Companys solvency ratio improved during the period ended February 28, 2011 compared to the period ended February 28, 2010 and to February 28, 2009 mainly due to the decrease and increase of the Companys Debt and Shareholders Equity, respectively.
CONTRACTUAL OBLIGATIONS
The Companys contractual obligations as at February 28, 2011, including payments due during the next five reporting periods and thereafter, are presented in the following table:
Required payments per year | Less than | 2 to 3 | 4 to 5 | More than | |||||||||||
(in thousands of dollars) | Total | one year | years | years | 5 years | ||||||||||
Bank overdraft and bank loan | $ | 670 | $ | 670 | $ | | $ | | $ | | |||||
Accounts payable and accrued liabilities | 3,258 | 3,258 | - | - | - | ||||||||||
Long-term debt | 4,778 | 967 | 1,887 | 1,743 | 181 | ||||||||||
Loans guaranteed by investments in lease contracts (i) | 46 | 29 | 15 | 2 | - | ||||||||||
8,752 | 4,924 | 1,902 | 1,745 | 181 | |||||||||||
Other contractual obligations: | |||||||||||||||
Research and development contracts | 1,002 | 776 | 226 | - | - | ||||||||||
Other lease contracts | 491 | 183 | 171 | 137 | - | ||||||||||
$ | 10,245 | $ | 5,883 | $ | 2,299 | $ | 1,882 | $ | 181 |
(i) |
Including interest costs |
In addition, approximately $554 of advance payments at February 28, 2011 may be refundable in the next year if the Company fails to meet certain development milestones.
12
OFF-BALANCE SHEET ARRANGEMENTS
The Company
off-balance sheet arrangements consist of the following commitments:
(a) |
License agreement | |
The Company has entered into a licensing agreement, which calls for semi-annual payments of royalties based on the net realized sales of licensed products, according to the following conditions: |
Minimum | |||
Rate | royalty | ||
To a Canadian university as of June 1, 2002 (i) (for the term of the patents or until the Company exercised its option) | 4% | $ 5 | |
To a company controlled by an officer and director as of June 1, 2002 (for an unlimited period) | 1% | |
(i) |
The Company has a $275 purchase option relating to the intellectual property currently held by this Canadian university. | ||
(b) |
Research and development agreements: | ||
In the normal course of business, the Company has signed agreements with various partners and suppliers for them to execute research projects and to produce and market certain products. The Company has reserved certain rights relating to these projects. | |||
The Company initiated many research and development projects that will be conducted over a 12-month period for a total of $2,149. As at February 28, 2011, accruals of $114 are included in accounts payable and accrued liabilities in relation to these projects. Payments for the next years are $776 in 2012 and $226 in 2013. | |||
(c) |
Rental agreements: | ||
The Company has entered into long-term operating lease agreements, which call for payments of $491 for the rental of premises. Minimum lease payments for the next years are $183 in 2012, $171 in 2013, and $137 in 2014. |
SUBSEQUENT EVENTS
(a) |
Clinical research contract: | ||
On March 24, 2011, the Company initiated a clinical research trial that is being conducted over a 24-month period at an estimated cost of $2,400. | |||
(b) |
Private placement financing: | ||
On May 3 and May 13, 2011, the Company closed the two portions of a private placement financing, from U.S. and Canadian accredited investors, for gross proceeds of $12,400. | |||
A portion of the proceeds came from US institutional investors for 2,722,222 common shares at US$2.25 per share and warrants to purchase 680,556 additional common shares. The warrants to purchase additional shares will be exercisable at a price of US$2.75 per share for 18 months commencing one day following their issue date. The other portion of the proceeds came from Canadian institutional investors for 3,062,835 common shares at $2.15 per share and warrants to purchase 765,709 additional shares. The warrants to purchase additional shares will be exercisable at a price of $2.65 per share for 18 months commencing one day following their issue date. The Company has agreed to use its reasonable best efforts to file and has declared effective by the end of June 2011 a registration statement with the Securities and Exchange Commission to permit the resale of the shares and warrants. | |||
(c) |
On March 21, 2011, the outstanding Class B and Class C shares of Acasti, of 5,000,000 and 260,000, respectively, were converted into Class A shares by their holders on a 1:1 basis (the Conversion). Following the Conversion, the Company owns 60% of Class A shares, which also reflects its participation and share of the vote. |
13
(d) |
On March 21, 2011, the Board of Directors of Acasti amended the incentive stock option plan (the Plan). The amendments to the Plan are subject to the approval by the shareholders at their next annual meeting. The main modification to the Plan consists of an increase in the number of shares reserved for issuance of incentive stock options under the Plan to 6,443,444. | |
(e) |
On March 21, 2011, the Board of Directors of Acasti approved the submission of a listing application to the TSX Venture Exchange, for the public listing of Acasti's Class A shares. A copy of the Listing Application is available on SEDAR. Acasti's shares began trading on March 31, 2011. | |
(f) |
Rights offering: | |
On May 6, 2011, Acastis Board of Directors authorized, subject to regulatory approval, the issuance of rights to its shareholders to subscribe to additional Class A shares of Acasti. The maximum number of shares to be issued following the rights offering will equal 15% of Acastis outstanding shares. If approved, the rights will be exercisable at a minimal price of $0.60 and not less than the discounted market price permitted by the TSX- Venture Exchange (the Exchange). Acasti has received the Exchanges conditional approval, which is also subject to the Autorité des Marchés Financiers (AMF) approval. Acasti has filed a request to obtain a prospectus exemption from the AMF. At May 17, 2011, approvals from the AMF for the rights offering and the exemption requested were pending. | ||
Concurrently, the Companys Board of Directors approved the flow-through of rights received from Acasti directly to its own shareholders. Assuming all rights were exercised, the Company would still remain the controlling shareholder of Acasti. | ||
(g) |
Prospectus and declaration of dividend: | |
On April 19, 2011, the Board of Directors of the Company and NeuroBioPharm approved plans for NeuroBioPharm to prepare to file a non-offering prospectus to become a reporting issuer under Canadian securities regulation and as a result allow the Company to declare a dividend payable with a number of shares of NeuroBioPharm that would represent a minority interest. Neither the filing of the prospectus nor the declaration of dividend has occurred prior to the approval of these consolidated financial statements. |
RELATED PARTY TRANSACTIONS
Under the terms of an agreement entered into with a company controlled by an officer and director (which is also a shareholder of the Company), the Company is committed to pay royalties of 1% of its revenues in semi-annual instalments, for an unlimited period. The annual amount disbursed cannot exceed net earnings before interest, taxes and amortization of the Company on a non-consolidated basis. For the year ended February 28, 2011, total royalties included in operating expenses amounted to $164 (2010 - $120). As at February 28, 2011, the balance due to this company under this agreement amounts to $178 (2010 - $175). This amount is presented in the consolidated balance sheet under Accounts payable and accrued liabilities.
These transactions are measured at the exchange amount, which is the amount of consideration determined and accepted by the parties involved.
CRITICAL ACCOUNTING POLICIES
In preparing the Companys consolidated financial statements in conformity with GAAP, Management is required to make certain estimates, judgements and assumptions that the Company believes are reasonable based upon the information available at the time. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The accounting policies which the Company considers to be critical are those that require the most difficult, subjective, or complex judgments and that are the most important to aid in fully understanding and evaluating its consolidated financial statements. These accounting policies are discussed in the following paragraphs.
Property, Plant and Equipment and Intangible Assets are started at cost and amortized on a straight-line or declining balance basis. The Company regularly reviews property, plant and equipment and intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets exceeds the sum of the expected cash flows from its uses and disposal. Managements judgment regarding the existence of impairment indicators is based on legal factors, market conditions and operating performances. Future events could cause management to conclude that impairment indicators exist and that the carrying values of the Companys capital assets or intangible assets are impaired. Any results impairment loss could have a material adverse impact on the Companys financial position and results of operations.
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Income Taxes are accounted for under the asset and liability method. In the Companys case, recurring operating losses during the development years create tax assets that may reduce future taxable earnings, if any. In assessing whether future tax assets may be realized, management provides valuation allowances by considering the likelihood that some portion or all of the tax assets is dependent upon the generation of future taxable income. Given the Companys history of losses, management has determined that the criteria for the recognition of tax assets were not met at February 28, 2011.
Research and Development consist of direct and indirect expenditures, including a reasonable allocation of overhead expenses, associated with the Companys various research and development programs. Research costs are expensed as incurred. Development costs are expensed as incurred unless a development project meets generally accepted accounting criteria for deferral and amortization. Overhead expenses comprise general and administrative support provided to the research and development programs and involve costs associated with support activities such as facility maintenance, utilities, office services, information technology.
Refundable Research and Development tax credits are recorded based on our estimates of amounts expected to be recovered and are subject to audit by the taxation authorities and, accordingly, these amounts may vary materially.
Stock-based Compensation represents the accounting cost of stock options awarded to employees and directors under the corporations stock option plan. The value of these options is estimated by using the Black-Scholes option-pricing model that was developed to estimate the fair value of freely-tradable, fully transferable options without vesting restrictions. The use of this model requires highly subjective assumptions, especially the assumption relating to future stock price volatility, which greatly affects the computed values.
CHANGE TO ACCOUNTING POLICIES
New accounting policies adopted in 2010:
On March 1, 2009, the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants (CICA):
Goodwill and Intangible Assets:
The CICA issued Handbook Section 3064, Goodwill and Intangible Assets, which replaced Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs. The new standard provides guidance on the recognition of intangible assets in accordance with the definition of an asset and the criteria for asset recognition, as well as clarifying the application of the concept of matching revenues and expenses, whether these assets are separately acquired or internally developed. This standard applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008.
As a result of this standard, direct costs incurred to secure patents related to internally-generated assets in the research phase will no longer be capitalized by the Company. The Company applied this standard on a retrospective basis. The impact of adopting this standard was to increase the opening deficit and reduce intangible assets as at March 1, 2009 by $147, for such assets capitalized prior to the date of commercialization, May 31, 2002.
Financial Instruments:
Effective September 1, 2009, the Company has adopted an amendment to CICA Handbook Section 3862, Financial Instruments - Disclosures, which requires additional disclosures about fair value and liquidity risk. The amendments introduce a ''fair value hierarchy'' for disclosures which intends to provide information to financial statement users about the relative reliability of fair value measurements. The new standard relates to disclosure only and did not impact the financial results of the Company.
Future accounting changes:
International Financial Reporting Standards:
In February 2008, Canadas Accounting Standards Board (''AcSB'') confirmed that Canadian generally accepted accounting principles (''GAAP''), as used by publicly accountable enterprises, would be replaced by International Financial Reporting Standards (''IFRS''), as issued by the International Accounting Standards Board (''IASB''). The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Therefore, the Company will be required to report under IFRS for its 2011-2012 interim and annual consolidated financial statements with comparative figures for the previous period. The Company will convert to these new standards according to the timetable set within these new rules.
15
The Companys transition process from Canadian GAAP to IFRS has been initiated. A progress report was submitted to the Audit Committee on the status of the IFRS implementation in May, July, October 2010 and January 2011.
The transition work plan to IFRS is outlined in the following tables:
Phase 1 : Initial Assessment Phase | |
Actions |
High-level assessment to identify areas of accounting differences between Canadian GAAP and IFRS. |
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Rank their impact (high, medium or low priority) that may arise from the transition to IFRS. |
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Assessment of potential consequences on financial reporting, business processes, internal controls and information systems. | |
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Timetable |
End of second quarter of 2010-2011. |
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Progress |
Completed. |
Phase 2 : Detailed Assessment and Design Phase | |
Actions |
Each area of accounting differences between Canadian GAAP and IFRS identified in the initial phase will be further assessed in order of descending priority. |
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Specification of changes required to existing accounting policies, information systems, and business processes. | |
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Analysis of possible IFRS choices and impacts for the presentation of the consolidated financial statements. Analysis and decisions made, including the Companys selection of IFRS 1 exemptions at the date of transition, will be included in IFRS memos and reviewed by the External Auditors, which will be approved by the Audit Committee. | |
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Preparation of draft consolidated financial statements and notes. |
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Timetable |
Our initial detailed timetable that contemplated that the bulk of the analysis would be completed by the end of fiscal 2010-2011. We prioritized standards, based on their ranking in the diagnostic, the time needed to complete the analysis and implementation, and working group members availability. However, the work required to prepare and file Acastis listing application in March 2011, along with other regulatory filing projects within the Neptune group of companies during the period from October 2010 required the immediate attention of those members, such that progress could not go as planned. The Company has prepared a revised timetable to allow completion of this phase by July 2011. |
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Progress |
At the end of the second quarter of 2010-2011, we commenced our analysis of certain IFRS standards that may have an impact on our Company. We expect to complete the analysis in accordance with our revised timetable. |
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Phase 3 : Implementation and Testing Phase | |
Actions |
Execution of changes to information systems and business processes. |
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Completing formal authorization processes to approve recommended accounting policies changes. | |
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Training programs for the Companys finance and other staff, as necessary. | |
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Culmination in the collection of financial information necessary to compile IFRS-compliant interim and annual consolidated financial statements, embedding IFRS in business processes, elimination of any unnecessary data collection processes and Audit Committee approval of IFRS financial statements. | |
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Implementation also involves further training to staff as revised systems begin to take effect. |
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Timetable |
We initially planned that by the end of the fourth quarter of 2010-2011, our opening balance sheet, comparative financial data under IFRS and changes regarding specification of changes required to existing accounting policies, information systems, and business processes would be completed. However, the work required to prepare and file Acastis listing application in March 2011, along with other regulatory filing projects within the Neptune group of companies during the period from October 2010 required the immediate attention of those members, such that progress could not go as planned. The Company has prepared a revised timetable to allow completion by the time the Companys regulatory filings are due for the first quarter of the 2011-2012 fiscal year, on August 14, 2011. This due date includes the 30 days extension permissible under securities rules for the first IFRS quarterly financial statements. |
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Progress |
At the end of the second quarter of 2010-2011, we commenced compiling the financial data for our opening balance sheet based on the analysis of certain IFRS standards. We expect to complete in accordance with our revised timetable. |
Key accounting areas
Management is in the process of quantifying the expected material differences between IFRS and the current accounting treatment under Canadian GAAP. Differences with respect to recognition, measurement, presentation and disclosure of financial information are expected to be in the following key accounting areas.
Key accounting areas |
Differences with potential impact for the Company |
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Functional currency |
Documentation of sales currency, sales market currency, and the manufacturing costs currency, for determining whether the Canadian dollar remains the functional currency. |
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Related party transactions |
Lack of standards for transactions outside the ordinary course of business. |
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Convertibles debentures |
Complexity of standards, required residual method. |
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Consolidation |
Allocation of losses of subsidiaries to non-controlling interest even if it results in a negative number and treatment as equity transactions of changes that gave rise to gains on dilution. |
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Provisions |
Lower recognition threshold for provisions, the concept of onerous contract. |
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Warrants |
Possible reclassification to liabilities of any warrant with a settlement option other than the issue of equity. |
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Property, plant and equipment |
Component approach, capitalization of interest. |
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Share-based payment |
Retrospectively treating each tranche of award under graded vesting as separate award: determination of fair value estimates and expense recognition, allocation of expenditure within the consolidated group. |
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Income taxes |
Tax impact of differences quantified. |
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Presentation of financial statements |
Approach by nature or function to the income statement, various disclosures. |
This is not an exhaustive list of all the significant impacts that could occur during the conversion to IFRS.
17
At this time, the comprehensive impact of the changeover on the Companys future financial position and results of operations is not yet determinable. Management expects to complete this assessment in time for parallel recording of financial information in accordance with IFRS.
The Company continues to monitor and assess the impact of evolving differences between Canadian GAAP and IFRS, since the IASB is expected to continue issuing new accounting standards until the filing of the Companys first annual IFRS financial statements.
As the project advances, the Company could alter its intentions and the milestones communicated at the time of reporting as a result if changes to international standards currently in development between now and when the changeover is completed.
Information technology
We currently do not expect the transition to IFRS to require significant changes to our information technology systems and reports. We also expect our systems to be reliable for purposes of generating the comparative fiscal 2010-2011 information that needs to be provided in accordance with IFRS during fiscal 2011-2012 (i.e. the first period of reporting prepared in accordance with IFRS), as well as the information required in the opening balance sheet as at the transition date (March 1, 2010).
Internal controls over financial reporting and disclosure controls and procedures
Internal control processes and procedures will be put into place in order to address the key accounting differences resulting from the changeover to IFRS. Internal controls applicable to our reporting process under Canadian GAAP are expected to be substantially the same as those required in our IFRS reporting environment.
Our disclosure controls and procedures will also be updated as our changeover to IFRS continues to ensure that information is appropriately communicated in our external communications and other periodic published reports.
Financial expertise
The project to transition to IFRS is being led by the Corporate Accounting group in Laval. The Corporate Accounting group has the appropriate resources and skills to effectively complete the changeover to IFRS on a timely basis. Periodic meetings are held with management and the Audit Committee in order to keep them informed of the progress of our transition plan. External advisors are also being consulted on an as needed basis to review our transition work plan and business impact analysis, and advise us on issues as they arise.
Business contracts
Business contracts which are affected by financial results such as financial covenants and long-term incentive plans are being reviewed to assess the impact from the changeover to IFRS. The changeover to IFRS is not expected to have a significant impact on our business contracts.
USE OF ESTIMATES
The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amount of assets and liabilities and the reported amount of contingent assets and liabilities at the date of the financial statements and the recorded amounts of income and expenses during the year. Significant areas requiring the use of management estimates include estimating the useful life and recoverability of long-lived assets, including property, plant and equipment and intangible assets, determining the fair value of financial instruments and estimating the fair value of stock-option awards, assessing the recognition and measurement of contingent liabilities, assessing the recoverability of research tax credit receivable and future income tax assets and the collectibility of trade receivables. Consequently, actual results could differ from those estimates.
EFFECTIVENESS OF DISCLOSURE PROCEDURES AND CONTROLS
In accordance with Multilateral Instrument 52-109 (MI 52-109), Certification of Disclosure in Issuers Annual and Interim Filings, the Companys CEO and CFO have designed, or have caused to be designed under their supervision, controls and procedures that provide reasonable assurance that information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under provincial or territorial securities legislation is recorded, processed, summarized and reported within the time periods specified in the provincial and territorial securities legislation. The Companys CEO and CFO are assisted in such functions by a Disclosure Policy Committee (the Committee) responsible for the Companys disclosure policy established by the Board to ensure that the communication of material information to the public is timely, factual and accurate and broadly disseminated in accordance with all applicable legal and regulatory requirements. The Committee is currently comprised of the CEO, the CFO and the Controller. The CEO and the CFO, after evaluating the effectiveness of the Companys disclosure controls and procedures as at February 28, 2011, have concluded that the Companys disclosure controls and procedures are effective.
18
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of the Companys financial reporting and its compliance with GAAP in its consolidated financial statements.
An evaluation was carried out under the supervision and with the participation of the Companys Chief Executive Officer and the Chief Financial Officer to evaluate the design and operating effectiveness of the Companys internal controls over financial reporting as at February 28, 2011. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the internal control over financial reporting, as defined by National Instrument 52-109, was appropriately designed and operating effectively. The evaluations were conducted in accordance with the framework criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), a recognized control model, and the requirements of National Instrument 52-109, Certification of Disclosures in Issuers Annual and Interim Filings.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the period ended February 28, 2011, the CEO and the CFO evaluated whether there were any material changes in internal control over financial reporting pursuant to MI 52-109. They individually concluded that there was no change during the fiscal year ended February 28, 2011 that affected materially or is reasonably likely to affect materially the Companys internal controls over financial reporting and disclosure controls and procedures.
RISK FACTORS
The information contained in the consolidated financial statements and the MD&A for the year ended February 28, 2011 should be read in conjunction with all the Companys public documentation and in particular the risk factors section in the Annual Information Form. This information does not represent an exhaustive list of all risks related to an investment decision in the Company.
Credit risk:
Credit risk is the risk of a loss if a customer or counterparty to a financial asset fails to meet its contractual obligations, and arises primarily from the Companys trade receivables. The Company may also have credit risk relating to cash and short-term investments, which it manages by dealing only with highly-rated Canadian institutions. The carrying amount of financial assets, as disclosed in the consolidated balance sheet, represents the Companys credit exposure at the reporting date. The Companys trade receivables and credit exposure fluctuate throughout the year. The Companys average trade receivables and credit exposure during the year may be higher than the balance at the end of that reporting period.
The Companys credit risk for trade receivables is concentrated, as the majority of its sales are to a relatively small group of distributors. As at February 28, 2011, the Company had thirty-seven trade debtors. Most sales' payment terms are set in accordance with industry practice. Five customers represent 61% (three customers represented 56% as at February 28, 2010) of total trade accounts included in accounts receivable as at February 28, 2011.
Most of the Company's clients are distributors for a given territory and are privately-held enterprises. The profile and credit quality of the Companys retail customers vary significantly. Adverse changes in a customers 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 customers future purchases or result in uncollectible accounts receivable from that customer. Such changes could have a material adverse effect on our business, consolidated results of operations, financial condition and cash flows.
The Companys extension of credit to customers involves considerable judgment and is based on an evaluation of each customers financial condition and payment history. The Company has established various internal controls designed to mitigate credit risk, including a credit analysis by the insurer which recommends customers' credit limits and payment terms that are reviewed and approved by the Company. The Company reviews periodically the insurer's maximum credit quotation for each of its clients. New clients are subject to the same process as regular clients. The Company has also established procedures to obtain approval by senior management to release goods for shipment when customers have fully-utilized approved insurers credit limits. From time to time, the Company will temporarily transact with customers on a prepayment basis where circumstances warrant.
19
While the Companys credit controls and processes have been effective in mitigating credit risk, these controls cannot eliminate credit risk and there can be no assurance that these controls will continue to be effective, or that the Companys low credit loss experience will continue.
Customers do not provide collateral in exchange for credit, except in unusual circumstances. Receivables from selected customers are covered by credit insurance, with amounts usually up to 100% of the invoicing, with the exception of some customers under specific terms. The information available through the insurers is the main element in the decision process to determine the credit limits assigned to customers.
The Company provides for trade receivable accounts to their expected realizable value as soon as the account is determined not to be fully collectible, with such write-offs charged to consolidated earnings unless the loss has been provided for in prior periods, in which case the write-off is applied to reduce the allowance for doubtful accounts. The Company updates its estimate of the allowance for doubtful accounts, based on evaluations of the collectibility of trade receivable balances at each balance sheet reporting date, taking into account amounts which are past due, and any available information indicating that a customer could be experiencing liquidity or going concern problems.
Foreign exchange risk:
The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates and the degrees of volatility of those rates. Foreign currency risk is limited to the portion of the Company's business transactions denominated in currencies other than the Canadian dollar. From time to time, the Company uses derivative financial instruments to reduce its foreign exchange exposure. Fluctuations related to foreign exchange rates could cause unforeseen fluctuations in the Company's operating results.
Approximately 65% of the Companys revenues are in US dollars, and 31% are in Euros. A small portion of the purchases, except for the purchase of raw materials, are made in foreign currencies. There is a financial risk involved related to the fluctuation in the value of the US dollar and the Euro in relation to the Canadian dollar.
The Company enters into currency forwards to purchase or sell amounts of foreign currency in the future at predetermined exchange rates. The purpose of these currency forwards is to fix the risk of fluctuations in future exchange rates.
Interest rate risk:
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market rates.
The risk that the Company will realize a loss as a result of the decline in the fair value of its short-term investments is limited because these short-term investments have short-term maturities and are generally held to maturity.
An assumed 0.5% interest rate increase during the year ended February 28, 2011 would have decreased consolidated net income by $27, with an equal opposite effect for an assumed 0.5% decrease.
The capacity of the Company to reinvest the short-term amounts with equivalent returns will be impacted by variations in short-term fixed interest rates available in the market.
Liquidity risk:
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure and financial leverage. It also manages liquidity risk by continuously monitoring actual and projected cash flows. The Audit Committee and the Board of Directors review and approve the Company's operating budgets, and review the most important material transactions outside the normal course of business.
Financial risks:
Until each entity is independently financed, the success of the Company is dependent on its ability to support the development of its two subsidiaries and its ability to bring their products to market, obtain the necessary approvals, and achieve future profitable operations. This is dependent on the Companys ability to obtain adequate financing through a combination of financing activities and operations. It is not possible to predict either the outcome of future research and development programs nor the Companys ability, nor its subsidiaries ability, to fund these programs going forward.
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Management intends to continue the careful management of risks relating to exports, foreign exchange, interest rates and sale prices for its merchandise, credit and financial risks.
PRODUCT LIABILITY
The Company has secured a $5,000 product liability insurance policy, renewable on an annual basis, to cover civil liability relating to its products. The Company also maintains a quality-assurance process that is QMP certified by the Canadian Food Inspection Agency (CFIA). Additionally, The Company has obtained Good Manufacturing Practices accreditation from Health Canada.
FORWARD-LOOKING INFORMATION
This Management Analysis contains prospective information. Prospective statements include a certain amount of risk and uncertainty and may result in actual future Company results differing noticeably from those predicted. These risks include, but are not limited to: the growth in demand for Company products, seasonal variations in customer orders, changes to raw material pricing and availability, the time required to complete important strategic transactions and changes to economic conditions in Canada, the United-States and Europe (including changes to exchange and interest rates).
The Company based its statements on the information available when this analysis was issued. The inclusion of this information should not be considered a declaration by the Company these estimated results have been achieved.
ADDITIONAL INFORMATION
Updated and additional Company information is available from the SEDAR Website at www.sedar.com and from EDGAR Website at www.sec.gov
As at May 17, 2011, the total number of common shares issued by the Company and in circulation was 48,275,930. The Companys common shares trade on the TSX Exchange Venture under the symbol NTB and on NASDAQ Capital Market under the symbol NEPT. There were also 1,581,765 warrants for which 309,919 were broker warrants and conversion warrants and 2,681,625 options outstanding as at the same date.
/s/ Henri Harland | /s/ André Godin |
Henri Harland | André Godin |
President and Chief Executive Officer | Chief Financial Officer and Finance |
21
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KPMG LLP | Telephone (514) 840-2100 |
Chartered Accountants | Fax (514) 840-2187 | |
600 de Maisonneuve Blvd. West | Internet www.kpmg.ca | |
Suite 1500 | ||
Tour KPMG | ||
Montréal, Québec H3A 0A3 |
Consent of Independent Registered Public
Accounting Firm
The Board of Directors
Neptune Technologies & Bioressources Inc.
We consent to the use of our reports, both dated May 17, 2011 (except for Exhibit 99.4 Reconciliation to United States Generally Accepted Accounting Principles, which is dated May 31, 2011), included in this annual report on Form 40-F.
(Signed) KPMG LLP
Chartered Accountants
Montreal, Canada
May 31, 2011
KPMG LLP is a Canadian limited liability partnership and a
member firm of the KPMG
network of independent member firms affiliated with
KPMG International Cooperative
(KPMG International), a Swiss entity. KPMG
Canada provides services to KPMG LLP.
Exhibit 99.7
RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
I, Henri Harland, President and Chief Executive Officer of Neptune Technologies & Bioressources Inc., certify that:
1. |
I have reviewed this annual report on Form 40-F of Neptune Technologies & Bioressources Inc.; | |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; | |
4. |
The issuers other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have: | |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
(c) |
Evaluated the effectiveness of the issuers disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
(d) |
Disclosed in this report any change in the issuers internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuers internal control over financial reporting; and | |
5. |
The issuers other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuers auditors and the audit committee of the issuers board of directors (or persons performing the equivalent functions): | |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuers ability to record, process, summarize and report financial information; and | |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuers internal control over financial reporting. |
/s/ Henri Harland | |
Henri Harland | |
President and Chief Executive Officer | |
Date: May 30, 2011 |
EXHIBIT 99.7
RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
I, André Godin, Chief Financial Officer of Neptune Technologies & Bioressources Inc., certify that:
1. |
I have reviewed this annual report on Form 40-F of Neptune Technologies & Bioressources Inc.; | |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; | |
4. |
The issuers other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have: | |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
(c) |
Evaluated the effectiveness of the issuers disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
(d) |
Disclosed in this report any change in the issuers internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuers internal control over financial reporting; and | |
5. |
The issuers other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuers auditors and the audit committee of the issuers board of directors (or persons performing the equivalent functions): | |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuers ability to record, process, summarize and report financial information; and | |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuers internal control over financial reporting. |
/s/ André Godin | |
André Godin | |
Chief Financial Officer | |
Date: May 30, 2011 |
Exhibit 99.8
SECTION 1350 CERTIFICATIONS
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350 of chapter 63 of title 18 of the United States Code), the undersigned officer of Neptune Technologies & Bioressources Inc. (the Company), hereby certifies, to such officers knowledge, that:
This annual report on Form 40-F for the year ended February 28, 2011 (the Report) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Henri Harland | |
Henri Harland | |
President and Chief Executive Officer | |
Date: May 30, 2011 |
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350 of chapter 63 of title 18 of the United States Code), the undersigned officer of Neptune Technologies & Bioressources Inc. (the Company), hereby certifies, to such officers knowledge, that:
This annual report on Form 40-F for the year ended February 28, 2011 (the Report) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ André Godin | |
André Godin | |
Chief Financial Officer | |
Date: May 30, 2011 |
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