UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission File Number 001-33526
NEPTUNE WELLNESS SOLUTIONS INC.
(Exact name of Registrant as specified in its Charter)
Not Applicable |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
545 Promenade du Centropolis, Suite 100 Laval, Québec Canada |
H7T 0A3 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (450) 687-2262
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common shares, no par value |
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NEPT |
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Nasdaq Capital Market |
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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☐ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☒ |
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Smaller reporting company |
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☒ |
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Emerging growth company |
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☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on August 15, 2022, was $12,703,782.
The number of shares of Registrant’s Common Stock outstanding as of August 15, 2022 was 7,989,800.
1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Quarterly Report" or “Form 10-Q”) contains statements that are, or may be considered to be, “forward-looking statements.” Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on current beliefs, expectations or assumptions regarding the future of the business, future plans and strategies, operational results and other future conditions. All statements other than statements of historical fact included in this Form 10-Q regarding the prospects of Neptune Wellness Solutions Inc. (“Neptune”, the “Company”, “we”, “us”, or “our”) the industry or its prospects, plans, financial position or business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “plans,” “expects” or “does not expect,” “is expected,” “look forward to,” “budget,” “scheduled,” “estimates,” “forecasts,” “will continue,” “intends,” “the intent of,” “have the potential,” “anticipates,” “does not anticipate,” “believes,” “should,” “should not,” or variations of such words and phrases that indicate that certain actions, events or results “may,” “could,” “would,” “might,” or “will,” “be taken,” “occur,” or “be achieved,” or the negative of these terms or variations of them or similar terms. Furthermore, forward-looking statements may be included in various filings that the Company makes with the Securities and Exchange Commission (the “SEC”) or press releases or oral statements made by or with the approval of one of the Company’s authorized executive officers. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. The Company cautions readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. Risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, as applicable, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information and statements include, but are not limited to the risks described in Item 1A-”Risk Factors” of Part II this Form 10-Q.
Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Form 10-Q, which reflect management’s opinions only as of the date hereof. Except as required by law, the Company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures the Company makes in its reports to the SEC. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in this Form 10-Q.
Risks Factors Summary
Set forth below is summary of some of the principal risks the Company faces:
2
Table of Contents
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Page |
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PART I. |
4 |
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Item 1. |
4 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 |
Item 3. |
50 |
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Item 4. |
51 |
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PART II. |
53 |
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Item 1. |
53 |
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Item 1A. |
53 |
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Item 2. |
53 |
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Item 3. |
53 |
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Item 4. |
53 |
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Item 5. |
53 |
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Item 6. |
54 |
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55 |
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In this Quarterly Report on Form 10-Q, all dollar amounts are in United States Dollars unless otherwise indicated.
3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
Condensed Consolidated Interim Financial Statements of
(Unaudited)
neptune WELLNESS SOLUTIONS inc.
For the three-month periods ended June 30, 2022 and 2021
4
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Financial Statements
(Unaudited)
For the three-month periods ended June 30, 2022 and 2021
Financial Statements
6 |
|
Condensed Consolidated Interim Statements of Loss and Comprehensive Loss |
7 |
Condensed Consolidated Interim Statements of Changes in Equity |
8 |
10 |
|
11 |
5
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Balance Sheets
(Unaudited) (in U.S. dollars)
|
|
|
As at |
|
As at |
|
Notes |
|
June 30, |
|
March 31, |
Assets |
|
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|
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Current assets: |
|
|
|
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Cash and cash equivalents |
|
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$6,231,968 |
|
$8,726,341 |
Short-term investment |
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18,715 |
|
19,255 |
Trade and other receivables |
|
|
6,182,876 |
|
7,599,584 |
Prepaid expenses |
|
|
2,865,974 |
|
3,983,427 |
Inventories |
4 |
|
14,056,514 |
|
17,059,406 |
Assets held for sale |
2(d) |
|
21,834,039 |
|
— |
Total current assets |
|
|
51,190,086 |
|
37,388,013 |
|
|
|
|
|
|
Property, plant and equipment |
5 |
|
1,412,323 |
|
21,448,123 |
Operating lease right-of-use assets |
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2,046,835 |
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2,295,263 |
Intangible assets |
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|
21,013,953 |
|
21,655,035 |
Goodwill |
6 |
|
22,093,222 |
|
22,168,288 |
Total assets |
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$97,756,419 |
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$104,954,722 |
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Liabilities and Equity |
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Current liabilities: |
|
|
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|
Trade and other payables |
|
|
$21,296,277 |
|
$22,700,849 |
Current portion of operating lease liabilities |
|
|
626,928 |
|
641,698 |
Deferred revenues |
|
|
351,551 |
|
285,004 |
Provisions |
7 |
|
1,229,462 |
|
1,118,613 |
Liability related to warrants |
8 |
|
3,167,947 |
|
5,570,530 |
Liabilities directly associated with assets held for sale |
2(d) |
|
3,537,176 |
|
— |
Total current liabilities |
|
|
30,209,341 |
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30,316,694 |
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|
|
|
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Operating lease liabilities |
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1,873,919 |
|
2,063,421 |
Loans and borrowings |
9 |
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11,881,589 |
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11,648,320 |
Other liability |
12(c) |
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12,931 |
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88,688 |
Total liabilities |
|
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43,977,780 |
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44,117,123 |
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Shareholders' Equity: |
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Share capital - par value (7,614,434 shares issued and outstanding as of |
10(a) |
|
318,921,917 |
|
317,051,125 |
Warrants |
10(f) |
|
6,079,890 |
|
6,079,890 |
Additional paid-in capital |
|
|
56,346,589 |
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55,980,367 |
Accumulated other comprehensive loss |
|
|
(10,605,642) |
|
(7,814,163) |
Deficit |
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(327,466,047) |
|
(323,181,697) |
Total equity attributable to equity holders of the Corporation |
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|
43,276,707 |
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48,115,522 |
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Non-controlling interest |
11 |
|
10,501,932 |
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12,722,077 |
Total shareholders' equity |
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53,778,639 |
|
60,837,599 |
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15 |
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Subsequent event |
18 |
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|
Total liabilities and shareholders' equity |
|
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$97,756,419 |
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$104,954,722 |
See accompanying notes to the condensed consolidated interim financial statements.
On behalf of the Board: |
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/s/ Julie Philips |
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/s/ Michael Cammarata |
Julie Philips |
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Michael Cammarata |
Chair of the Board |
|
President and CEO |
6
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Statements of Loss and Comprehensive Loss
(Unaudited) (in U.S. dollars)
For the three-month periods ended June 30, 2022 and 2021
|
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||
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Notes |
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June 30, |
|
June 30, |
|
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|
|
|
|
|
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$15,968,098 |
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$9,821,640 |
||
Royalty revenues |
|
|
284,189 |
|
236,067 |
|
Other revenues |
|
|
19,941 |
|
20,802 |
|
Total revenues |
16 |
|
16,272,228 |
|
10,078,509 |
|
|
|
|
|
|
|
|
loss on inventories, net of subsidies |
|
|
(16,086,578) |
|
(12,401,043) |
|
Impairment loss on inventories |
4 |
|
(3,079,997) |
|
— |
|
Total Cost of sales |
|
|
(19,166,575) |
|
(12,401,043) |
|
Gross profit (loss) |
|
|
(2,894,347) |
|
(2,322,534) |
|
|
|
|
|
|
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Research and development expenses |
|
|
(214,687) |
|
(259,666) |
|
Selling, general and administrative expenses, net of subsidies |
|
|
(10,553,734) |
|
(16,014,634) |
|
Impairment loss related to property, plant and equipment |
2(d), 5 |
|
(815,661) |
|
(529,732) |
|
Net gain on sale of assets |
|
|
85,002 |
|
— |
|
Loss from operating activities |
|
|
(14,393,427) |
|
(19,126,566) |
|
|
|
|
|
|
|
|
Finance income |
|
|
1,424 |
|
7,339 |
|
Finance costs |
|
|
(916,522) |
|
(358,116) |
|
Loss on issuance of derivatives |
8 |
|
(2,126,955) |
|
— |
|
Foreign exchange gains (losses) |
|
|
1,407,285 |
|
(1,287,387) |
|
Change in revaluation of marketable securities |
|
|
— |
|
(12,212) |
|
Gain on revaluation of derivatives |
8, 14 |
|
9,523,700 |
|
1,933,330 |
|
|
|
|
|
7,888,932 |
|
282,954 |
Loss before income taxes |
|
|
(6,504,495) |
|
(18,843,612) |
|
|
|
|
|
|
|
|
Income tax expense |
|
|
— |
|
(12,098) |
|
Net loss |
|
|
(6,504,495) |
|
(18,855,710) |
|
|
|
|
|
|
|
|
Other comprehensive (loss) income |
|
|
|
|
|
|
Net change in unrealized foreign currency (losses) gains on translation of |
|
|
(2,791,479) |
|
1,976,562 |
|
Total other comprehensive (loss) income |
|
|
(2,791,479) |
|
1,976,562 |
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
$(9,295,974) |
|
$(16,879,148) |
|
|
|
|
|
|
|
|
Net loss attributable to: |
|
|
|
|
|
|
Equity holders of the Corporation |
|
|
$(4,284,350) |
|
$(16,907,628) |
|
Non-controlling interest |
11 |
|
(2,220,145) |
|
(1,948,082) |
|
Net loss |
|
|
$(6,504,495) |
|
$(18,855,710) |
|
|
|
|
|
|
|
|
Total comprehensive loss attributable to: |
|
|
|
|
|
|
Equity holders of the Corporation |
|
|
$(7,075,829) |
|
$(14,931,066) |
|
Non-controlling interest |
|
|
(2,220,145) |
|
(1,948,082) |
|
Total comprehensive loss |
|
|
$(9,295,974) |
|
$(16,879,148) |
|
|
|
|
|
|
|
|
Basic and diluted loss per share attributable to: |
|
|
|
|
|
|
Equity holders of the Corporation |
|
|
$(0.72) |
|
$(3.56) |
|
Non-controlling interest |
|
|
$(0.37) |
|
$(0.41) |
|
Total loss per share |
13 |
|
$(1.09) |
|
$(3.97) |
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares |
|
|
5,958,266 |
|
4,744,685 |
|
See accompanying notes to the condensed consolidated interim financial statements.
7
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Statements of Changes in Equity
(Unaudited) (in U.S. dollars)
For the three-month periods ended June 30, 2022 and 2021
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
comprehensive |
|
|
|
|
|
|
|
|
|
|
|
Share Capital |
|
|
|
|
|
income (loss) |
|
|
|
|
|
|
|
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||
|
Notes |
|
Number |
|
Dollars |
|
Warrants |
|
Additional |
|
Cumulative |
|
Deficit |
|
Equity attributable to equity holders of the Corporation |
|
Equity attributable to non-controlling interest |
|
Total |
Balance as at March 31, 2022 |
|
|
5,560,829 |
|
$317,051,125 |
|
$6,079,890 |
|
$55,980,367 |
|
$(7,814,163) |
|
$(323,181,697) |
|
$48,115,522 |
|
$12,722,077 |
|
$60,837,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
(4,284,350) |
|
(4,284,350) |
|
(2,220,145) |
|
(6,504,495) |
Other comprehensive loss for the period |
|
|
— |
|
— |
|
— |
|
— |
|
(2,791,479) |
|
— |
|
(2,791,479) |
|
— |
|
(2,791,479) |
Total comprehensive loss for the period |
|
|
— |
|
— |
|
— |
|
— |
|
(2,791,479) |
|
(4,284,350) |
|
(7,075,829) |
|
(2,220,145) |
|
(9,295,974) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction with equity holders recorded directly |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions by and distribution to equity holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment |
12 |
|
— |
|
— |
|
— |
|
2,706,153 |
|
— |
|
— |
|
2,706,153 |
|
— |
|
2,706,153 |
RSUs released, net of withholding taxes |
10(d), 12(b)(ii) |
|
108,079 |
|
1,870,792 |
|
— |
|
(2,339,931) |
|
— |
|
— |
|
(469,139) |
|
— |
|
(469,139) |
Direct Offering, net of issuance costs |
10(g) |
|
1,945,526 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
Total contributions by and distribution to equity holders |
|
|
2,053,605 |
|
1,870,792 |
|
– |
|
366,222 |
|
— |
|
— |
|
2,237,014 |
|
— |
|
2,237,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at June 30, 2022 |
|
|
7,614,434 |
|
$318,921,917 |
|
$6,079,890 |
|
$56,346,589 |
|
$(10,605,642) |
|
$(327,466,047) |
|
$43,276,707 |
|
$10,501,932 |
|
$53,778,639 |
See accompanying notes to the condensed consolidated interim financial statements.
8
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Statements of Changes in Equity (Continued)
(Unaudited) (in U.S. dollars)
For the three-month periods ended June 30, 2022 and 2021
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive |
|
|
|
|
|
|
|
|
|
|
|
Share Capital |
|
|
|
|
|
income (loss) |
|
|
|
|
|
|
|
|
||
|
Notes |
|
Number |
|
Dollars |
|
Warrants |
|
Additional |
|
Cumulative |
|
Deficit |
|
Equity attributable to equity holders of the Corporation |
|
Equity attributable to non-controlling interest |
|
Total |
Balance as at March 31, 2021 |
|
|
4,732,090 |
|
$306,618,482 |
|
$5,900,973 |
|
$59,625,356 |
|
$(8,567,106) |
|
$(248,209,952) |
|
$115,367,753 |
|
$22,177,556 |
|
$137,545,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
(16,907,628) |
|
(16,907,628) |
|
(1,948,082) |
|
(18,855,710) |
Other comprehensive income for the period |
|
|
— |
|
— |
|
— |
|
— |
|
1,976,562 |
|
— |
|
1,976,562 |
|
— |
|
1,976,562 |
Total comprehensive loss for the period |
|
|
— |
|
— |
|
— |
|
— |
|
1,976,562 |
|
(16,907,628) |
|
(14,931,066) |
|
(1,948,082) |
|
(16,879,148) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction with equity holders recorded directly |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions by and distribution to equity holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment |
12 |
|
— |
|
— |
|
— |
|
3,080,269 |
|
— |
|
— |
|
3,080,269 |
|
— |
|
3,080,269 |
Warrants in exchange of services rendered by |
10(f) |
|
— |
|
— |
|
92,685 |
|
— |
|
— |
|
— |
|
92,685 |
|
— |
|
92,685 |
RSUs released, net of withholding taxes |
10(d), 12(b)(ii) |
|
41,660 |
|
4,161,800 |
|
— |
|
(5,140,497) |
|
— |
|
— |
|
(978,697) |
|
— |
|
(978,697) |
Total contributions by and distribution to equity holders |
|
|
41,660 |
|
4,161,800 |
|
92,685 |
|
(2,060,228) |
|
— |
|
— |
|
2,194,257 |
|
— |
|
2,194,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at June 30, 2021 |
|
|
4,773,750 |
|
$310,780,282 |
|
$5,993,658 |
|
$57,565,128 |
|
$(6,590,544) |
|
$(265,117,580) |
|
$102,630,944 |
|
$20,229,474 |
|
$122,860,418 |
See accompanying notes to the condensed consolidated interim financial statements.
9
neptune WELLNESS SOLUTIONS inc.
Condensed Consolidated Interim Statements of Cash Flows
(Unaudited) (in U.S. dollars)
For the three-month periods ended June 30, 2022 and 2021
|
|
|
|
||
|
|
|
Three-month periods ended |
||
|
Notes |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
Net loss for the period |
|
|
$(6,504,495) |
|
$(18,855,710) |
Adjustments: |
|
|
|
|
|
Depreciation of property, plant and equipment |
|
|
401,548 |
|
755,675 |
Non-cash lease expense |
|
|
157,881 |
|
96,290 |
Amortization of intangible assets |
|
|
479,209 |
|
491,565 |
Share-based payment |
12 |
|
2,706,153 |
|
3,080,269 |
Impairment loss on inventories |
4 |
|
3,079,997 |
|
— |
Expected credit losses |
|
|
15,000 |
|
37,485 |
Non-employee compensation related to warrants |
10(f) |
|
— |
|
92,685 |
Loss on issuance of derivatives |
|
|
2,126,955 |
|
— |
Net finance expense |
|
|
915,098 |
|
350,777 |
Unrealized foreign exchange (gain) loss |
|
|
(137,909) |
|
868,195 |
Change in revaluation of marketable securities |
|
|
— |
|
12,212 |
Interest received |
|
|
— |
|
5,303 |
Interest paid |
|
|
— |
|
(302,781) |
Revaluation of derivatives |
|
|
(9,523,700) |
|
(1,933,330) |
Impairment loss on property, plant and equipment |
5 |
|
— |
|
529,732 |
Payment of lease liabilities |
|
|
— |
|
(74,304) |
Income tax expense |
|
|
— |
|
12,098 |
Net gains from sale of property, plant and equipment |
|
|
(85,002) |
|
— |
Changes in operating assets and liabilities |
|
|
(828,526) |
|
(4,424,058) |
Income taxes paid |
|
|
— |
|
(12,098) |
Net cash used in operating activities |
|
|
(7,197,791) |
|
(19,269,995) |
Cash flows from investing activities: |
|
|
|
|
|
Acquisition of property, plant and equipment |
|
|
— |
|
(470,408) |
Acquisition of intangible assets |
|
|
— |
|
(73,679) |
Net cash used in investing activities: |
|
|
— |
|
(544,087) |
Cash flows from financing activities: |
|
|
|
|
|
Withholding taxes paid pursuant to the settlement of non-treasury |
|
|
— |
|
(978,697) |
Proceeds from the issuance of shares and warrants through a Direct Offering |
10(g) |
|
5,000,002 |
|
— |
Issuance of shares and warrants costs |
10(g) |
|
(465,211) |
|
— |
Proceeds from exercise of options and pre-funded warrants |
10(g) |
|
65 |
|
— |
Net cash provided by (used in) financing activities: |
|
|
4,534,856 |
|
(978,697) |
Foreign exchange loss on cash and cash equivalents |
|
|
168,562 |
|
132,415 |
Net decrease in cash and cash equivalents |
|
|
(2,494,373) |
|
(20,660,364) |
Cash and cash equivalents, beginning of period |
|
|
8,726,341 |
|
59,836,889 |
Cash and cash equivalents as at June 30, 2022 and 2021 |
|
|
$6,231,968 |
|
$39,176,525 |
|
|
|
|
|
|
Cash and cash equivalents is comprised of: |
|
|
|
|
|
Cash |
|
|
$6,231,968 |
|
$39,176,525 |
See accompanying notes to the condensed consolidated interim financial statements.
10
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
1. Reporting entity:
Neptune Wellness Solutions Inc. (the "Corporation" or "Neptune") is incorporated under the Business Corporations Act (Québec) (formerly Part 1A of the Companies Act (Québec)). The Corporation is domiciled in Canada and its registered office is located at 100-545 Promenade du Centropolis, Laval, Québec, with a 50,000 square-foot production facility located in Sherbrooke, Quebec and a 24,000 square-foot facility located in North Carolina. The condensed consolidated interim financial statements of the Corporation comprise the Corporation and its subsidiaries, Biodroga Nutraceuticals Inc. ("Biodroga"), SugarLeaf Labs, Inc. ("SugarLeaf"), 9354-7537 Québec Inc., Neptune Holding USA, Inc., Neptune Health & Wellness Innovation, Inc., Neptune Forest, Inc., Neptune Care, Inc. (formerly known as Neptune Ocean, Inc.), Neptune Growth Ventures, Inc., 9418-1252 Québec Inc., Neptune Wellness Brands Canada, Inc. and Sprout Foods, Inc. (“Sprout”).
Neptune is a diversified and fully integrated health and wellness company. Through its flagship consumer-facing brands, Neptune Wellness, Forest Remedies™, Biodroga, MaxSimil®, MoodRing™, PanHash™, Sprout®, Nosh® and NurturMe®, Neptune is redefining health and wellness by building a broad portfolio of natural, plant-based, sustainable and purpose-driven lifestyle brands and consumer packaged goods products in key health and wellness markets, including cannabis, hemp, nutraceuticals, organic baby food, personal care and home care.
On June 8, 2022, Neptune announced the launch of a new Consumer Packaged Goods ("CPG") focused strategic plan to reduce costs, improve the Company's path to profitability and enhance current shareholder value. This plan builds on the Company's initial strategic review that took place in fall of 2021 and focuses on two primary actions: (1) planned divestiture of the Canadian cannabis business and (2) a realignment of focus and operational resources toward increasing the value of Neptune's consumer products business. Refer to note 2(d).
Share consolidation and delisting from TSX
On June 9, 2022, Neptune announced the completion of the Corporation's proposed consolidation of its common shares (the "Common Shares") on the basis of one (1) post-consolidation Common Share for every thirty-five (35) pre-consolidation Common Shares (the "Share Consolidation"). The post-Share Consolidation Common Shares commenced trading on the NASDAQ and the TSX at the market open on June 13, 2022 . The Share Consolidation reduced the number of Common Shares issued and outstanding from approximately 198 million Common Shares to approximately 5.7 million Common Shares as at June 13, 2022. These consolidated financial statements have been retroactively adjusted to reflect the Share Consolidation. As a result, the number of common shares, options, deferred share units ("DSUs"), restricted share units ("RSUs"), restricted shares and warrants, issuance and exercise prices of options, DSUs, RSUs, restricted shares and warrants, loss per share reflect the Share Consolidation.
On July 29, 2022, Neptune announced that it has applied and received approval for a voluntary delisting of its common shares from the Toronto Stock Exchange ("TSX"). The delisting from the TSX will not affect the Corporation's listing on the Nasdaq Capital Market ("Nasdaq"). Neptune's common shares will be delisted from the TSX at the close of trading on August 15, 2022.
Going concern
These condensed consolidated interim financial statements have been prepared on a going concern basis, which presumes that the Corporation will continue realizing its assets and discharging its liabilities in the normal course of business for the foreseeable future. The Corporation has incurred significant operating losses and negative cash flows from operations since inception. To date, the Corporation has financed its operations through the public offering and private placement of Common Shares, units consisting of Common Shares and warrants, and convertible debt, the proceeds from research grants and research tax credits, and the exercises of warrants, rights and options. For the three-month period ended June 30, 2022, the Corporation incurred a net loss of $6.5 million and negative cash flows from operations of $7.2 million, and had an accumulated deficit of $327.5 million as at June 30, 2022. For the year ended March 31, 2022, the Corporation incurred a net loss of $84.4 million and negative cash flows from operations of $54.3 million. Furthermore, as at June 30, 2022, the Corporation’s current liabilities and expected level of expenses for the next twelve months exceed cash on hand of $6.2 million. The Corporation currently has no committed sources of financing available.
As of the date these financial statements are authorized for issuance, the Corporation is required to actively manage its liquidity and expenses. The Corporation currently has minimal available cash balances. Payables are now in excess of available cash balances and payments of payables are not being made as the amounts become due for certain suppliers. As of the date these financial statements are authorized for issuance, the cash balance is expected to be sufficient to operate the business for only the next two to three months under the current business plan. The Corporation requires funding in the very near term in order to continue its operations. If the Corporation is unable to obtain funding in the upcoming days, it may have to liquidate its assets.
These conditions cast substantial doubt about the Corporation's ability to continue as a going concern.
11
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
Going forward, the Corporation will seek additional financing in various forms as part of its plan to have the right funding structure in place. To achieve the objectives of its business plan, Neptune plans to raise the necessary funds through additional financings and the establishment of strategic alliances as well as additional research grants and research tax credits. While the Corporation has limited debt, all of which is subordinated, assets available for financing include real estate, accounts receivable and inventories. The ability of the Corporation to complete the needed financing and ultimately achieve profitable operations is dependent on a number of factors outside of the Corporation’s control. The Corporation’s business plan is dependent upon, amongst other things, its ability to achieve and maintain profitability, and continue to obtain adequate ongoing debt and/or equity financing with creditors, officers, directors and stakeholders to finance operations within and beyond the next twelve months.
While the Corporation has been successful in obtaining financing from public issuances, private placements, and related parties in the past, there is no certainty as to future financings.
Neptune announced on June 8, 2022 the intended divestiture of the cannabis business, which would include the sale of the Mood Ring™ and PanHash™ brands, along with the Corporation's Sherbrooke, Quebec facility, in one or more transactions. In order to accelerate its cost savings, the Corporation will focus on winding up its cannabis operations pending a transaction. This planned action is intended to provide significant cost savings and help maximize operational efficiencies. Finally, the exit of the Canadian cannabis business is expected to reduce the amount of financing the Corporation seeks and is expected to facilitate working with a broader set of financing sources.
These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the going concern basis not be valid. These adjustments could be material.
2. Basis of preparation:
As at March 31, 2022, the Corporation has retroactively adopted United States generally accepted accounting principles (“US GAAP”). The consolidated financial statements of the Corporation have been prepared in accordance with US GAAP for all periods presented. Comparative figures, which were previously prepared in accordance with International Financial Reporting Standards (”IFRS”) as issued by the International Accounting Standards Board, have been adjusted as required to be compliant with the Corporation’s accounting policies under US GAAP.
Effective March 31, 2022, the Corporation has changed its reporting currency from Canadian dollars (“CAD”) to U.S. dollars (“USD”). This change in reporting currency has been applied retroactively such that all amounts in the consolidated financial statements of the Corporation and the accompanying notes thereto are expressed in U.S. dollars. References to "$" and "USD" are U.S dollars and references to “CAD $” and "CAD" are to Canadian dollars. For comparative purposes, historical consolidated financial statements were recast in U.S. dollars by translating assets and liabilities at the closing exchange rate in effect at the end of the respective period, revenues, expenses and cash flows at the average exchange rate in effect for the respective period and equity transactions at historical exchange rates. Translation gains and losses are included as part of the cumulative foreign currency translation adjustment, which is reported as a component of shareholders’ equity under accumulated other comprehensive loss.
The assets and liabilities of foreign operations with a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at the monthly average exchange rates for the period. Differences arising from the exchange rate changes are recorded within foreign currency translation adjustments, a component of other comprehensive income (loss).
Transactions in foreign currencies are translated to the respective functional currencies of the Corporation’s subsidiaries at the average exchange rates for the period. The monetary items denominated in currencies other than the functional currency of a subsidiary are translated at the exchange rates prevailing at the balance sheet date. Non-monetary items denominated in currencies other than the functional currency are translated at historical rates. Gains and losses resulting from re-measurement are recorded in the Corporation’s consolidated statement of loss as foreign exchange gain (loss).
The functional currency of the Corporation is the Canadian dollars.
The preparation of the condensed consolidated interim financial statements in accordance with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from the estimates made by management.
12
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
Estimates are based on management’s best knowledge of current events and actions that the Corporation may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Estimates include the following:
On June 8, 2022, the Company announced a planned divestiture of the Canadian cannabis business and the Corporation will focus on winding up its cannabis operations pending one or more sales transactions. Following this announcement, the Corporation had Canadian cannabis disposal group assets that met the criteria to be classified as held for sale. As at June 30, 2022, all assets and liabilities related to the Canadian cannabis business are now respectively shown under assets held for sale and liabilities directly associated with assets held for sale on Neptune's balance sheet. Comparative balance sheet amounts have not been reclassified. The disposal group has been measured at fair value less cost to sell using market prices for comparative assets (level 3) and an estimate of disposal costs which resulted in an impairment loss of $815,661 for the three-month period ended June 30, 2022.
The Corporation expects that the cannabis disposal group will be sold within the next twelve months through a sale.
The following table presents information related to the major classes of assets and liabilities that were classified as held for sale:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
Trade and other receivables |
|
|
|
$ |
2,096,537 |
|
Prepaid expenses |
|
|
|
|
204,610 |
|
Inventories |
|
|
|
|
791,105 |
|
Building and building components |
|
|
|
|
15,629,366 |
|
Laboratory and plant equipment |
|
|
|
|
3,015,218 |
|
Intangible assets |
|
|
|
|
97,203 |
|
Assets held for sale |
|
|
|
$ |
21,834,039 |
|
|
|
|
|
|
|
|
Trade and other payables |
|
|
|
|
3,314,508 |
|
Deferred revenues |
|
|
|
|
12,928 |
|
Provisions |
|
|
|
|
209,740 |
|
Liabilities directly associated with assets held for sale |
|
|
|
$ |
3,537,176 |
|
3. Significant accounting policies:
These unaudited Consolidated Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and on a basis consistent with those accounting principles followed by the Corporation and disclosed in note 2 of its Annual Consolidated Financial Statements for the year ended March 31, 2022, except as disclosed in note 3 – Significant accounting policies and should be read in conjunction with and Notes thereto.
13
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
These consolidated financial statements include the accounts of the Corporation and its subsidiaries in which the Corporation has a controlling financial interest. All intercompany balances and transactions have been eliminated from the Corporation’s consolidated financial statements. On February 10, 2021, Neptune acquired a 50.1% interest in Sprout Foods, Inc. (“Sprout” or “Sprout Foods”). The accounts of the subsidiary are included in the consolidated financial statements from that date.
Accounting pronouncements not yet adopted
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which amends ASC Topic 848, Reference Rate Reform. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This new guidance is optional and may be elected over time through December 31, 2022 as reference rate reform activities occur. This new guidance is not expected to have a material impact on the Corporation’s consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC Topic 805, Business Combinations, The ASU improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the (1) recognition of an acquired contract liability and (2) payment terms and their direct effect on subsequent revenue recognized by the acquirer. ASU 2021-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2022. Management has not yet evaluated the impact of this ASU on the Corporation's consolidated financial statements.
The Corporation does not intend to early adopt any of the above amendments.
(c) Assets held for sale:
The Corporation classifies long-lived assets or disposal groups to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the asset or disposal group; the asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets or disposal groups; an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated; the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset or disposal group beyond one year; the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Assets and liabilities directly associated with assets held for sale are measured at the lower of carrying amount and fair value less costs to sell immediately prior to their classification. Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale.
Assets classified as held for sale, and the assets and liabilities included within a disposal group classified as held for sale are presented separately on the face of the statement of balance sheet. Non-current assets that are classified as held for sale are not depreciated.
4. Inventories:
|
|
|
|
June 30, |
|
March 31, |
|
|
|
|
|
|
|
Raw materials |
|
|
|
$6,231,095 |
|
$7,920,190 |
Work in progress |
|
|
|
— |
|
1,016,916 |
Finished goods |
|
|
|
7,825,419 |
|
7,974,690 |
Supplies and spare parts |
|
|
|
— |
|
147,610 |
|
|
|
|
$14,056,514 |
|
$17,059,406 |
During the three-month periods ended June 30, 2022 and 2021, inventories have been reduced by $3,079,997 and nil respectively. The write-down of inventories during the quarter ended June 30, 2022 is related to assets held for sale inventories that are not expected to be realized.
14
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
5. Property, plant and equipment:
As at June 30, 2022, property, plant and equipment in the amount of $18.6 million related to the Canadian cannabis asset group were reclassified to assets held for sale on the balance sheet (refer to note 2(d)).
During the first quarter of June 30, 2021, the Corporation impaired certain cannabis property, plant and equipment in the amount of $529,732.
6. Goodwill:
7. Provisions
As of June 30, 2022, a provision of $477,982 (March 31, 2022 - $362,809) has been recorded by the Corporation. During the current quarter, the Corporation increased the provision by $126,204, recorded foreign currency translation adjustments of $(11,031) and made no payments to the Former CEO in relation to this provision. During the period ended June 30, 2021, the Corporation increased the provision by $116,467, recorded foreign currency translation adjustments of $31,773 and made payments totaling $1,417,219 to the Former CEO in relation to this provision.
15
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
8. Liability related to warrants:
The Corporation has issued common share, pre-funded warrants and warrants as part of its financing arrangements which are exercisable for a variable number of shares. Common shares and pre-funded warrants are classified as equity. Warrants are classified as liabilities rather than equity.
On June 23, 2022, Neptune issued a total of 645,526 pre-funded warrants (“Pre-Funded Warrants”), along with 1,300,000 common shares of the Corporation, as part of a registered direct offering ("June 2022 Direct Offering"). Each Pre-Funded Warrant was exercisable for one Common Share. The common shares and the Pre-Funded Warrants were sold together with 1,945,526 Series C Warrants (the "Series C Warrants"), and 1,945,526 Series D Warrants (the "Series D Warrants") and collectively, the "June 2022 Common Warrants". Each of the June 2022 Common Warrant is exercisable for one common share. Each common share and Pre-Funded Warrants and the accompanying June 2022 Common Warrants were sold together at a combined offering price of $2.57, for aggregate gross proceeds of $5.0 million before deducting fees and other estimated offering expenses. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $0.0001 and are exercisable commencing on the Closing Date and will terminate when such Pre-Funded Warrants are exercised in full. The Series C Warrants and the Series D Warrants have an exercise price of $2.32 per share and can be exercised for a period of 5 years and 2 years respectively from the date of issuance.
Proceeds of the June 2022 Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. The fair value of the liability-classified warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $4,046,836 for the Series C Warrants and $3,080,121 for the Series D Warrants. Because the fair value of the liability classified warrant exceeds the total proceeds, no consideration was allocated to the Common Shares and Pre-Funded Warrants and a loss $2,126,955 was immediately recognized in the net loss of the period as there were no additional rights or privileges identified. The Corporation is in need of financing to be able to continue its activities as described in note 1. The Pre-Funded Warrants were exercised in full on June 24, 2022 for gross proceeds of $65. Total issue costs related to this private placement of $465,211, was recorded under finance costs.
The fair value of the Series C Warrants and Series D Warrants liability was determined using the Black-Scholes model. Warrants are revalued each period-end at fair value through profit and loss in “gain on revaluation of derivatives”.
Changes in the value of the liability related to the warrants for the three-month periods ended June 30, 2022 and 2021 were as follows:
|
|
|
Warrants |
|
Amount |
|
|
|
|
|
|
Outstanding as at March 31, 2021 |
|
|
497,355 |
|
$10,462,000 |
Warrants issued during the period |
|
|
– |
|
– |
Revaluation |
|
|
|
|
(1,829,330) |
Movements in exchange rates |
|
|
|
|
156,669 |
Outstanding as at June 30, |
|
|
497,355 |
|
8,789,339 |
|
|
|
|
|
|
Outstanding as at March 31, |
|
|
1,925,929 |
|
$5,570,530 |
Warrants issued during the period |
|
|
3,891,052 |
|
7,126,957 |
Revaluation |
|
|
|
|
(9,523,700) |
Movements in exchange rates |
|
|
|
|
(5,840) |
Outstanding as at June 30, 2022 |
|
|
5,816,981 |
|
3,167,947 |
16
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
The following table provides the relevant information on the outstanding warrants as at June 30, 2022:
Reference |
|
Date of issuance |
|
Number of warrants outstanding |
|
Number of warrants exercisable |
|
Exercise price |
|
Expiry date |
|
|
|
|
|
|
|
|
|
|
|
2020 Warrants |
|
October 22, 2020 |
|
300,926 |
|
300,926 |
|
$78.75 |
|
October 22, 2025 |
2021 Warrants |
|
February 19, 2021 |
|
196,429 |
|
196,429 |
|
$78.75 |
|
August 19, 2026 |
Series A Warrants |
|
March 14, 2022 |
|
714,287 |
|
714,287 |
|
$11.20 |
|
September 14, 2027 |
Series B Warrants |
|
March 14, 2022 |
|
714,287 |
|
714,287 |
|
$11.20 |
|
March 14, 2028 |
Series C Warrants |
|
June 23, 2022 |
|
1,945,526 |
|
1,945,526 |
|
$2.32 |
|
June 23, 2027 |
Series D Warrants |
|
June 23, 2022 |
|
1,945,526 |
|
1,945,526 |
|
$2.32 |
|
June 24, 2024 |
|
|
|
|
5,816,981 |
|
5,816,981 |
|
$11.04 |
|
|
The derivative warrant liabilities are measured at fair value at each reporting period and the reconciliation of changes in fair value is presented in the following tables:
|
|
2020 Warrants |
|
2021 Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Balance - beginning of period |
|
$309,769 |
|
$6,174,000 |
|
$306,704 |
|
$4,288,000 |
|
|
|
|
|
|
|
|
|
Change in fair value |
|
(288,585) |
|
(1,100,996) |
|
(284,062) |
|
(728,334) |
Translation effect |
|
(1,598) |
|
93,052 |
|
(8,985) |
|
63,617 |
|
|
|
|
|
|
|
|
|
Balance - end of period |
|
$19,586 |
|
$5,166,056 |
|
$13,657 |
|
$3,623,283 |
|
|
Series A Warrants |
|
Series B Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Balance - beginning of period |
|
$3,270,816 |
|
$— |
|
$1,683,241 |
|
$— |
|
|
|
|
|
|
|
|
|
Warrants issued during the period |
|
— |
|
— |
|
— |
|
— |
Change in fair value |
|
(2,862,450) |
|
— |
|
(1,608,960) |
|
— |
Translation effect |
|
(17,994) |
|
— |
|
(7,900) |
|
— |
|
|
|
|
|
|
|
|
|
Balance - end of period |
|
$390,372 |
|
$— |
|
$66,381 |
|
$— |
|
|
Series C Warrants |
|
Series D Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Balance - beginning of period |
|
$— |
|
$— |
|
$— |
|
$— |
|
|
|
|
|
|
|
|
|
Warrants issued during the period |
|
4,046,836 |
|
— |
|
3,080,121 |
|
— |
Change in fair value |
|
(2,415,483) |
|
— |
|
(2,064,160) |
|
— |
Translation effect |
|
17,379 |
|
— |
|
13,258 |
|
— |
|
|
|
|
|
|
|
|
|
Balance - end of period |
|
$1,648,732 |
|
$— |
|
$1,029,219 |
|
$— |
The fair value of the derivative warrant liabilities was estimated using the Black-Scholes option pricing model and based on the following assumptions:
17
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
|
|
2020 Warrants |
|
2021 Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Share price |
|
$1.40 |
|
$40.95 |
|
$1.40 |
|
$40.95 |
Exercise price |
|
$78.75 |
|
$78.75 |
|
$78.75 |
|
$78.75 |
Dividend yield |
|
— |
|
— |
|
— |
|
— |
Risk-free interest |
|
2.99% |
|
0.73% |
|
3.00% |
|
0.89% |
Remaining contractual life (years) |
|
3.32 |
|
4.32 |
|
4.14 |
|
5.14 |
Expected volatility |
|
92.6% |
|
77.6% |
|
89.2% |
|
73.6% |
|
|
Series A Warrants |
|
Series B Warrants |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
Share price |
|
$1.40 |
|
$— |
|
$1.40 |
|
$— |
Exercise price |
|
$11.20 |
|
$— |
|
$11.20 |
|
$— |
Dividend yield |
|
— |
|
— |
|
— |
|
— |
Risk-free interest |
|
3.01% |
|
— |
|
2.83% |
|
— |
Remaining contractual life (years) |
|
5.21 |
|
— |
|
1.21 |
|
— |
Expected volatility |
|
85.4% |
|
— |
|
96.4% |
|
— |
|
|
Series C Warrants |
|
Series D Warrants |
||||
|
|
June 30, |
|
June 23, 2022 |
|
June 30, |
|
June 23, 2022 |
|
|
|
|
|
|
|
|
|
Share price |
|
$1.40 |
|
$2.90 |
|
$1.40 |
|
$2.90 |
Exercise price |
|
$2.32 |
|
$2.32 |
|
$2.32 |
|
$2.32 |
Dividend yield |
|
— |
|
— |
|
— |
|
— |
Risk-free interest |
|
3.01% |
|
3.38% |
|
2.92% |
|
3.21% |
Remaining contractual life (years) |
|
4.98 |
|
5.00 |
|
1.98 |
|
2.00 |
Expected volatility |
|
86.3% |
|
84.0% |
|
93.5% |
|
88.7% |
The Corporation measured its derivative warrant liabilities at fair value on a recurring basis. These financial liabilities were measured using level 3 inputs. The Corporation uses the historical volatility of the underlying share to establish the expected volatility of the warrants. An increase or decrease in this assumption to estimate the fair values using the Black-Scholes option pricing model would result in a decrease or an increase in the fair value of the instruments, respectively.
9. Loans and borrowings:
|
|
|
|
June 30, |
|
March 31, |
|
|
|
|
|
|
|
Loans and borrowings: |
|
|
|
|
|
|
|
Promissory note of $10,000,000 issued by Sprout, guaranteed by the Corporation and secured through a first-ranking mortgage on all movable assets of Sprout current and future, corporeal and incorporeal, and tangible and intangible. The outstanding principal balance bears interest at the rate of 10.0% per annum. Interest is accrued and added to the principal amount of the loan. The principal is payable on February 1, 2024. |
|
$11,881,589 |
|
$11,648,320 |
|
|
|
|
|
|
|
|
|
|
|
|
11,881,589 |
|
11,648,320 |
Less current portion of loans and borrowings |
|
|
— |
|
— |
|
Loans and borrowings |
|
|
$11,881,589 |
|
$11,648,320 |
|
During the three-month periods ended June 30, 2022 and 2021, interest expense of $250,000 and $252,778 respectively were recognized on loans and borrowings. There are no covenants to be met for the loans and borrowings outstanding as at June 30, 2022 and March 31, 2022.
18
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
10. Capital and other components of equity:
Authorized capital stock:
Unlimited number of shares without par value:
Preferred shares, issuable in series, rights, privileges and restrictions determined at time of issuance:
All issued shares are fully paid.
During the three-month periods ended June 30, 2022 and 2021, Neptune issued no common shares of the Corporation upon exercise of stock options.
During the three-month periods ended June 30, 2022 and 2021 , Neptune issued no common shares of the Corporation for the release of DSUs to former and current members of the Board of Directors.
During the three-month period ended June 30, 2022, Neptune issued 108,079 common shares of the Corporation for RSUs released to the CEO as part of his employment agreement at a weighted average price of $8.74 per common share. The Corporation did not issue an additional 68,697 RSUs since withholding taxes of $469,139 will be paid pursuant to the issuance of the common shares.
During the three-month period ended June 30, 2021, Neptune issued 41,660 common shares of the Corporation to the CEO as part of his employment agreement at a weighted average price of $155.05 per common share. Withholding taxes of $978,697 were paid by the Corporation pursuant to the issuance of these RSUs resulting in the Corporation not issuing an additional 21,011 RSUs.
During the three-month periods ended June 30, 2022 and 2021, Neptune issued no restricted common shares of the Corporation to employees.
On June 23, 2022, as part of the June 2022 Direct Offering described under note 8, Neptune issued a total of 645,526 pre-funded warrants (“Pre-Funded Warrants”), with each Pre-Funded Warrant exercisable for one Common Share. The Pre-Funded Warrants were funded in full at closing except for a nominal exercise price of $0.001 and were exercisable commencing on the Closing Date, and were to terminate when such Pre-Funded Warrants would be exercised in full. The Pre-funded warrants were fully exercised on June 24, 2022 for $65.
Changes in the value of equity related to the warrants were as follows:
|
|
June 30, 2022 |
|
March 31, 2022 |
||||
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
average |
|
Number of |
|
average |
|
Number of |
|
|
exercise price |
|
warrants |
|
exercise price |
|
warrants |
|
|
|
|
|
|
|
|
|
Warrants outstanding at April 1, 2022 and 2021 |
|
$325.34 |
|
176,429 |
|
$325.34 |
|
176,429 |
Issued |
|
0.0001 |
|
645,526 |
|
0.0035 |
|
185,715 |
Exercised |
|
0.0001 |
|
(645,526) |
|
0.0035 |
|
(185,715) |
Warrants outstanding at June 30, 2022 |
|
$325.34 |
|
176,429 |
|
$325.34 |
|
176,429 |
|
|
|
|
|
|
|
|
|
Warrants exercisable at June 30, 2022 |
|
$325.34 |
|
176,429 |
|
$325.34 |
|
176,429 |
Warrants of the Corporation classified as equity are composed of the following as at June 30, 2022 and March 31, 2022:
19
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
|
|
|
|
|
|
June 30, |
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2022 |
|
|
|
|
|
2022 |
|
|
Number |
|
Number |
|
|
|
Number |
|
Number |
|
|
|
|
outstanding |
|
exercisable |
|
Amount |
|
outstanding |
|
exercisable |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants IFF (i) |
|
57,143 |
|
57,143 |
|
$1,630,210 |
|
57,143 |
|
57,143 |
|
$1,630,210 |
Warrants AMI (ii) |
|
119,286 |
|
119,286 |
|
4,449,680 |
|
119,286 |
|
119,286 |
|
4,449,680 |
|
|
176,429 |
|
176,429 |
|
$6,079,890 |
|
176,429 |
|
176,429 |
|
$6,079,890 |
11. Non-controlling interest:
The summarized financial information of Sprout Foods, Inc. subsidiary is provided below. This information is based on amounts before inter-company eliminations and include the effects of the Corporation’s purchase price adjustments.
Summarized statement of loss and comprehensive loss:
|
|
Three-month period ended |
||
|
|
June 30, 2022 |
|
June 30, 2021 |
Revenue from contracts with customers |
|
$8,157,597 |
|
$5,647,427 |
Cost of sales |
|
(8,312,289) |
|
(5,569,279) |
Selling, general and administrative expenses |
|
(3,755,529) |
|
(4,041,149) |
Finance income (costs) |
|
(538,967) |
|
71,128 |
Loss before tax |
|
(4,449,188) |
|
(3,891,873) |
Income tax |
|
— |
|
(12,098) |
Net loss |
|
(4,449,188) |
|
(3,903,971) |
Total comprehensive loss |
|
(4,449,188) |
|
(3,903,971) |
Loss attributable to the subsidiary's non-controlling interest |
|
(2,220,145) |
|
(1,948,082) |
Comprehensive loss attributable to the subsidiary's non-controlling interest |
|
$(2,220,145) |
|
$(1,948,082) |
Summarized statement of balance sheets:
|
|
|
June 30, |
|
March 31, |
Current assets |
|
|
$11,430,620 |
|
12,260,375 |
Non-current assets |
|
|
38,751,184 |
|
39,000,367 |
Current liabilities |
|
|
7,963,838 |
|
5,991,483 |
Non-current liabilities |
|
|
26,760,154 |
|
25,362,259 |
Total equity |
|
|
15,457,812 |
|
19,907,000 |
Attributable to: |
|
|
|
|
|
Equity holders of the Corporation |
|
|
$4,955,880 |
|
$7,184,923 |
Non-controlling interest |
|
|
10,501,932 |
|
12,722,077 |
20
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
Summarized statement of cash flow:
|
|
Three-month period ended |
||
|
|
June 30, 2022 |
|
June 30, 2021 |
Cash flow used in operating activities |
|
$(2,082,940) |
|
$(3,749,412) |
Cash flow used in investment activities |
|
— |
|
— |
Cash flow from financing activities(1) |
|
648,022 |
|
3,663,605 |
Net decrease in cash and cash equivalents |
|
$(1,434,918) |
|
$(85,807) |
(1) Cash flow from financing activities is provided through intercompany advances. |
|
|
|
|
12. Share-based payment:
Under the Corporation’s share-based payment arrangements, a total stock-based compensation expense of $2,706,153 was recognized on equity based share based awards and a gain $3,154,328 on liability based awards and were recognized in the consolidated statement of loss and comprehensive loss for the three-month period ended June 30, 2022 (three-month period ended June 30, 2021 - equity expense of $3,080,269 and liability of nil).
As at June 30, 2022, the Corporation had the following share-based payment arrangements:
The Corporation has established a stock option plan for directors, officers, employees and consultants. The exercise price of the stock options granted under the plan is not lower than the closing price of the common shares listed on the TSX on the eve of the grant. The terms and conditions for acquiring and exercising options are set by the 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 minimum vesting period of 18 months and a gradual and equal acquisition of vesting rights at least on a quarterly basis. The Corporation’s stock-option plan allows the Corporation to issue a number of stock options not exceeding 15% of the number of common shares issued and outstanding at the time of any grant. The total number of stock options issuable to a single holder cannot exceed 5% of the Corporation’s total issued and outstanding common shares at the time of the grant, with the maximum of 2% for any one consultant.
The number and weighted average exercise prices of stock options are as follows:
|
|
|
|
|
2022 |
|
|
|
2021 |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
|
average |
|
|
|
average |
|
|
|
|
|
exercise |
|
Number of |
|
exercise |
|
Number of |
|
Notes |
|
price |
|
options |
|
price |
|
options |
|
|
|
|
|
|
|
|
|
|
Options outstanding at April 1st, 2022 and 2021 |
|
|
$37.41 |
|
306,321 |
|
$65.91 |
|
121,208 |
Granted |
|
|
— |
|
— |
|
— |
|
— |
Exercised |
11(b) |
|
— |
|
— |
|
— |
|
— |
Forfeited/Cancelled |
|
|
10.60 |
|
(14,286) |
|
4.88 |
|
(166) |
Expired |
|
|
36.98 |
|
(1,094) |
|
— |
|
— |
Options outstanding at June 30, 2022 and 2021 |
|
|
$36.98 |
|
290,941 |
|
$70.38 |
|
121,042 |
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2022 and 2021 |
|
|
$56.82 |
|
106,476 |
|
$72.38 |
|
67,612 |
21
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
|
|
|
|
|
|
|
|
June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Exercisable options |
||||
|
|
Weighted |
|
|
|
|
|
|
|
|
remaining |
|
|
|
Weighted |
|
Weighted |
|
|
contractual |
|
Number of |
|
number of |
|
average |
Exercise |
|
life |
|
options |
|
options |
|
exercise |
price |
|
outstanding |
|
outstanding |
|
exercisable |
|
price |
|
|
|
|
|
|
|
|
|
$17.57 - $55.42 |
|
4.48 |
|
187,549 |
|
28,571 |
|
42.35 |
$55.43 - $92.36 |
|
4.93 |
|
84,150 |
|
61,912 |
|
90.42 |
$92.37 - $106.33 |
|
0.45 |
|
2,143 |
|
2,143 |
|
95.97 |
$106.34 - $233.84 |
|
2.36 |
|
10,350 |
|
7,101 |
|
178.11 |
$233.85 - $274.39 |
|
6.25 |
|
6,749 |
|
6,749 |
|
259.65 |
|
|
|
|
290,941 |
|
106,476 |
|
|
The fair value of options granted has been estimated using the Black-Scholes option pricing model and based on the weighted average of certain assumptions. There were no options granted to employees during the three-month period ended June 30, 2022 and 2021.
Stock-based compensation recognized under this plan amounted to $480,411 for the three-month period ended June 30, 2022 (three-month period ended June 30, 2021 - $400,544). Unrecognized compensation cost at June 2022 is $918,873 with a weighted average period remaining of 1.18 years (2021 - $1,357,686 with a weighted average period remaining of 1.47 years)
On July 8, 2019, the Corporation granted 3,500,000 non-market performance options under the Corporation stock option plan at an exercise price of $4.43 per share to the CEO, expiring on July 8, 2029. These options vest after the attainment of non-market performance conditions within the following ten years. These non-market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revalued up to the date of approval of the amendments (grant date). None of these non-market performance options have vested as at June 30, 2022. These options were not exercisable as at June 30, 2022 and 2021.
No stock-based compensation expense was recognized during the three-month period ended June 30, 2022 (three-month period ended June 30, 2021- $101,319).
On July 8, 2019, the Corporation granted 5,500,000 market performance options under the Corporation stock option plan at an exercise price of $4.43 per share to the CEO, expiring on July 8, 2029. These options vest after the attainment of market performance conditions within the following ten years. Some of these market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revaluated up to the date of approval of the amendments (grant date).
The number and weighted average exercise prices of market performance options are as follows:
|
|
|
|
|
2022 |
|
|
|
2021 |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
|
average |
|
|
|
average |
|
|
|
|
|
exercise |
|
Number of |
|
exercise |
|
Number of |
|
Notes |
|
price |
|
options |
|
price |
|
options |
|
|
|
|
|
|
|
|
|
|
Options outstanding at April 1, 2022 and 2021 |
|
|
$155.05 |
|
157,142 |
|
$155.05 |
|
157,142 |
Options outstanding at June 30, 2022 and 2021 |
|
|
$155.05 |
|
157,142 |
|
$155.05 |
|
157,142 |
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2022 and 2021 |
|
|
$155.05 |
|
21,429 |
|
$155.05 |
|
21,429 |
Stock-based compensation recognized under this plan amounted to $601,034 and $627,261 respectively for the three-month periods ended June 30, 2022 and 2021. Unrecognized compensation cost at June 30, 2022 is $11,188,736 with a weighted average period remaining of 7.26 years (2021 - $14,110,008 with a weighted average period remaining of 8.26 years).
22
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
The Corporation has established an equity incentive plan for employees, directors and consultants of the Corporation. The plan provides for the issuance of restricted share units, performance share units, restricted shares, deferred share units and other share-based awards, subject to restricted conditions as may be determined by the Board of Directors. Upon fulfillment of the restricted conditions, as the case may be, the plan provides for settlement of the awards outstanding through shares.
The number and weighted average share prices of DSUs are as follows:
|
|
|
|
|
2022 |
|
|
|
2021 |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
|
average |
|
|
|
average |
|
|
|
|
|
share |
|
Number of |
|
share |
|
Number of |
|
Notes |
|
price |
|
DSUs |
|
price |
|
DSUs |
|
|
|
|
|
|
|
|
|
|
DSUs outstanding at April 1, 2022 and 2021 |
|
|
$66.45 |
|
6,468 |
|
$63.00 |
|
3,362 |
DSUs outstanding at June 30, 2022 and 2021 |
|
|
$66.45 |
|
6,468 |
|
$63.00 |
|
3,362 |
|
|
|
|
|
|
|
|
|
|
DSUs exercisable at June 30, 2022 and 2021 |
|
|
$39.93 |
|
2,753 |
|
$67.82 |
|
1,917 |
Of the 6,468 DSUs outstanding as at June 30, 2022 (2021 – 3,362), 1,944 DSUs vested upon services to be rendered during a period of twelve months from date of grant (2021 – 1,108). The fair value of the DSUs is determined to be the share price at the date of grant and is recognized as stock-based compensation, through additional paid-in capital, over the vesting period.
Stock-based compensation recognized under this plan amounted to $9,194 and $4,204 respectively for the three-month periods ended June 30, 2022 and 2021.
During the year ended March 31, 2020, as part of the employment agreement of the CEO, the Corporation granted RSUs which vest over three years in 36 equal instalments. During the year ended March 31, 2021, Neptune granted additional RSUs to the CEO and to executives of the Corporation, which vest over periods ranging from 6 months to 3 years. The fair value of the RSUs is determined to be the share price at the date of grant and is recognized as stock-based compensation, through additional paid-in capital, over the vesting period. The fair value of the RSUs granted during the three-month period ended June 30, 2022 was $6.83 per unit (2021 - $)
|
|
|
|
|
2022 |
|
|
|
2021 |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
|
average |
|
|
|
average |
|
|
|
|
|
share |
|
Number of |
|
share |
|
Number of |
|
Notes |
|
price |
|
RSUs |
|
price |
|
RSUs |
|
|
|
|
|
|
|
|
|
|
RSUs outstanding at April 1st, 2022 and 2021 |
|
|
$59.75 |
|
25,038 |
|
$92.08 |
|
95,845 |
Granted |
|
|
6.83 |
|
174,579 |
|
— |
|
— |
Released through the issuance of common shares |
10(d) |
|
8.74 |
|
(108,079) |
|
155.05 |
|
(41,660) |
Withheld as payment of withholding taxes |
10(d) |
|
5.31 |
|
(68,697) |
|
155.05 |
|
(21,011) |
RSUs outstanding at June 30, 2022 and 2021 |
|
|
$50.57 |
|
22,841 |
|
$148.49 |
|
33,174 |
Stock-based compensation recognized under this plan amounted to $1,615,514 and $1,946,941 respectively for the three-month periods ended June 30, 2022 and 2021. Unrecognized compensation cost at June 30, 2022 is $142,141 with a weighted average remaining life of 1.55 years (2021 - $1,061,082 unrecognized compensation cost with a weighted average remaining life of 0.8 years).
23
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
In addition to above, on November 14, 2021, the Corporation and its CEO entered into an agreement pursuant to which the CEO’s existing employment agreement was amended to waive the Corporation’s obligation to procure directors and officers insurance coverage of up to $15 million for the period covering July 1, 2021 to July 31, 2022. The parties agreed that if the Corporation had successfully completed a strategic partnership prior to December 31, 2021, the CEO would have been entitled to approximately $6.9 million in cash and would have been granted fully vested options to purchase 8.5 million shares of the Corporation’s common stock. As the strategic partnership was not consummated by December 31, 2021, the CEO will be entitled to a grant of vested RSUs with a value of approximately $0.8 million. The balance of the liability accrual to the CEO is $833,786 as at June 30, 2022, in trade and other payables. The revaluation of the liability amounted to a gain of $3,154,328 for the three-month period ended June 30, 2022 and was recorded into SG&A. During the three-months ended June 30, 2022, settlement in RSUs was of $1,187,221. The compensation to be settled in RSUs or if the Corporation is unable to grant such RSUs, then a combination of cash and vested RSUs with equivalent value, is not reflected in the number of RSUs outstanding above.
According to the employment agreement with the CEO, a long-term incentive of $15 million is payable if the Corporation’s US market capitalization is at least $1 billion. The Company uses a risk-neutral Monte Carlo simulation to estimate the fair-value of this instrument and recognizes the incentive over the estimated period to reach the market capitalization. As at June 30, 2022, the liability related to this long-term incentive of $12,931 ($88,688 as at March 31, 2022) is presented in Other liability in the consolidated balance sheets. During the three-month period ended June 30, 2022, a recovery of $75,757 (2021 - an expense of $95,845) was recorded in connection with the long-term incentive under selling, general and administrative expenses in the consolidated statement of loss.
13. Loss per share:
Diluted loss per share was the same amount as basic loss per share, as the effect of options, DSUs, RSUs and warrants are anti-dilutive, as the Corporation has incurred losses in each of the periods presented. All outstanding options, DSUs, RSUs and warrants could potentially be dilutive in the future.
14. Fair-value:
The Corporation uses various methods to estimate the fair value recognized in the consolidated financial statements. The fair value, hierarchy reflects the significance of inputs used in determining the fair values:
Financial assets and liabilities measured at fair value on a recurring basis are the investment in Acasti Pharma Inc. (“Acasti”), the call option granted to Neptune by Sprout’s non-controlling interest owners of equity (the “Call Option”), and liability related to warrants.
The following table presents the Corporation’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and March 31, 2022:
|
|
|
June 30, 2022 |
||||||
|
Notes |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Liability related to warrants |
8 |
|
$— |
|
$— |
|
$3,167,947 |
|
$3,167,947 |
Total |
|
|
$— |
|
$— |
|
$3,167,947 |
|
$3,167,947 |
|
|
|
March 31, 2022 |
||||||
|
Notes |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Liability related to warrants |
8 |
|
$— |
|
$— |
|
$5,570,530 |
|
$5,570,530 |
Total |
|
|
$— |
|
$— |
|
$5,570,530 |
|
$5,570,530 |
24
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
On February 10, 2021, Sprout’s other equity interest owners granted Neptune a call option (the "Call Option") to purchase the remaining 49.9% outstanding equity interests of Sprout, at any time beginning on January 1, 2023 and ending on December 31, 2023. On June 30, 2022 and March 31, 2022, the Call Option was measured based on level 3 inputs to nil. For the three months ended June 30, 2022, the Company recorded a gain on re-measurement of nil (gain of $104,000 for the three months ended June 30, 2021). The liabilities related to warrants were recorded at their fair value using a Black-Scholes pricing model. Warrants are revalued each period-end at fair value through profit and loss using level 3 inputs (note 8).
The Corporation has determined that the carrying values of its short-term financial assets and liabilities approximate their fair values given the short-term nature of these instruments. The carrying value of the short-term investment also approximates its fair value given the short-term maturity of the reinvested funds. For variable rate loans and borrowings, the fair value is considered to approximate the carrying amount.
The fair value of the fixed rate loans and borrowings and long-term payable is determined by discounting future cash flows using a rate that the Corporation could obtain for loans with similar terms, conditions and maturity dates. The fair value of these instruments approximates the carrying amounts and was measured using level 3 inputs.
15. Commitments and contingencies:
(b) Contingencies:
In the normal course of business, the Corporation is involved in various claims and legal proceedings, for which the outcomes, inflow or outflow of economic benefits, are uncertain. The most significant of which are ongoing are as follows:
25
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
On February 11, 2021, following the acquisition of a 50.1% stake in Sprout by Neptune, the Subcommittee contacted Sprout, reiterating its requests for documents and information about toxic heavy metals in Sprout’s baby foods. Sprout provided an initial response to the Subcommittee on February 25, 2021 and is cooperating with the Subcommittee requests.
Further, on February 24, 2021, the Office of the Attorney General of the State of New Mexico (“NMAG”) delivered to Sprout a civil investigative demand requesting similar documents and information with regards to the Report and the NMAG’s investigation into possible violations of the False Advertising Act of New Mexico. Sprout is responding to the requests of the NMAG.
Since February 2021, several putative consumer class action lawsuits have been brought against Sprout alleging that its products (the “Products”) contain unsafe and undisclosed levels of various naturally occurring heavy metals, namely lead, arsenic, cadmium and mercury. There are currently two active putative class action lawsuits, which allege that Sprout violated various state consumer protection laws and make other state and common law warranty and for unjust enrichment claims related to the alleged failure to disclose the presence of these metals, whereas consumers would have allegedly either not purchased the Products or would have paid less had Sprout made adequate disclosures. These putative class actions seek to certify a nationwide class of consumers as well as various state subclasses. These kinds of class actions have also been separately filed against all of the major baby food manufacturers in federal courts across the country. The U.S. Judicial Panel on Multidistrict Litigation (“JPML”) declined a request to centralize all of the consumer class action lawsuits against all of the baby food manufacturers into a single multidistrict proceeding. One of the class actions is currently pending in New Jersey Superior Court. The other class action is currently pending in the U.S. District Court for the Central District of California, but has been ordered to be transferred to the U.S. District for the District of New Jersey. Sprout denies the allegations in these lawsuits and contends that its baby foods are safe and properly labeled. No provision has been recorded in the financial statements for these cases.
In addition to the consumer class actions discussed above, Sprout is currently named in a lawsuit filed on June 16, 2021 in the state court of California alleging some form of personal injury from the ingestion of Sprout’s Products, purportedly due to unsafe and undisclosed levels of various naturally occurring heavy metals. This lawsuit alleges injuries related to neurological development disorders, such as autism spectrum disorder and attention deficit hyperactivity disorder. Sprout denies that its Products contributed to any of these injuries and will defend the case vigorously. No provision has been recorded in the financial statements for this matter.
Furthermore, the Office of the Attorney General for the District of Columbia (“OAG”) in October 2021 sent a letter to Sprout, similar to letters sent to other baby food manufacturers, alleging potential labeling and marketing misrepresentations and omissions regarding the health and safety of its baby food products, constituting an unlawful trade practice. Sprout has agreed to meet with the OAG and will vigorously defend against the allegations. No provision has been recorded in the financial statements for this matter.
These matters may have a material adverse effect on Sprout's, financial condition, or results of operations.
The outcome of these claims and legal proceedings against the Corporation cannot be determined with certainty and is subject to future resolution, including the uncertainties of litigation.
16. Operating Segments:
The Corporation measures its performance based on a segment, which is the consolidated level used in internal management reports that are reviewed by the Corporation’s Chief Operating Decision Maker.
26
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
Revenue is attributed to geographical locations based on the origin of customers’ location:
|
|
|
Three-month periods ended |
||
|
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
Canada |
|
|
$5,056,502 |
|
$2,283,224 |
United States |
|
|
10,931,537 |
|
7,559,218 |
Other countries |
|
|
284,189 |
|
236,067 |
|
|
|
$16,272,228 |
|
$10,078,509 |
Long-lived assets of the Corporation are located in the following geographical location:
|
|
June 30, |
|
March 31, |
Canada |
|
$308,743 |
|
$20,724,674 |
United States |
|
1,103,580 |
|
723,449 |
Total property, plant and equipment |
|
$1,412,323 |
|
$21,448,123 |
|
|
June 30, |
|
March 31, |
Canada |
|
$2,066,151 |
|
$2,353,054 |
United States |
|
18,947,802 |
|
19,301,981 |
Total intangible assets |
|
$21,013,953 |
|
$21,655,035 |
|
|
June 30, |
|
March 31, |
Canada |
|
$2,550,785 |
|
$2,625,851 |
United States |
|
19,542,437 |
|
19,542,437 |
Total goodwill |
|
$22,093,222 |
|
$22,168,288 |
Assets held for sale by the Corporation are located in the following geographical location:
|
|
June 30, |
|
March 31, |
Canada |
|
$21,834,039 |
|
$— |
Total assets held for sale |
|
$21,834,039 |
|
$— |
The Corporation derives revenue from the sales of goods which are recognized at a point in time as follows:
|
|
|
Three-month periods ended |
||
|
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
Nutraceutical products |
|
|
$5,126,114 |
|
$3,200,668 |
Cannabis and hemp products |
|
|
2,699,970 |
|
939,065 |
Food and beverages products |
|
|
8,142,014 |
|
5,647,427 |
Innovation products |
|
|
— |
|
34,480 |
|
|
|
$15,968,098 |
|
$9,821,640 |
17. Related parties:
Related party transactions and balances not disclosed elsewhere in these notes of the financial statements are as follows:
27
neptune wellness solutions inc.
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
For the three-month periods ended June 30, 2022 and 2021
On November 11, 2019, Neptune announced that the Corporation entered into a collaboration agreement with International Flavors & Fragrances Inc. (“IFF”) to co-develop hemp-derived products for the mass retail and health and wellness markets. App Connect Service, Inc. (“App Connect”), a company indirectly controlled by Michael Cammarata, CEO and Director of Neptune, is also a party to the agreement to provide related branding strategies and promotional activities.
Neptune will be responsible for the marketing and the sales of the products and will receive the amounts from the product sales. Neptune will in turn pay a royalty to IFF and App Connect associated with the sales of the co-developed products. The payment of royalties to App Connect, subject to certain conditions, has been approved by the TSX.
During the three-month periods ended June 30, 2022 and 2021, the Corporation recorded a negligible amount of royalty expense pursuant to the co-development contract and no royalties were paid to date.
18. Subsequent event:
On July 13, 2022, Neptune announced that Sprout Foods Inc. ("Sprout"), the Corporation's organic plant-based baby food and toddler snack company, has entered into an amendment of each of its existing Secured Promissory Notes. In connection with this amendment, investment funds managed by Morgan Stanley Expansion Capital ("Morgan Stanley" or "MSEC") have agreed to immediately commit an additional $3 million in Secured Promissory Notes to Sprout. The maturity date of the note facility of February 1, 2024 is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The $13.0 million of amended Secured Promissory Notes have a 10% interest rate per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. The amended Secured Promissory Notes may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Corporation and MSEC, into common shares of the Corporation. MSEC was issued 372,670 common shares of Neptune, of an approximate value of $570,000, in connection with this commitment.
28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis together with our consolidated financial statements and related notes in Part I, Item 1. The following discussion contains forward-looking statements, which statements are subject to considerable risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption “Risk Factors” in Part II, Item 1A.
Certain statements contained in this Quarterly Report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, and are subject to the “safe harbor” created by these sections. Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements can be found under the caption “Risk Factors” in Part II, Item 1A, and elsewhere in this Quarterly Report. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.
All amounts in the tables contained in this MD&A are in millions of dollars, except for basic and diluted income (loss) per share which are shown in dollars.
29
Management’s Discussion and Analysis of Financial Condition and Results of Operations
GOING CONCERN
The Company's condensed consolidated interim financial statements have been prepared on a going concern basis, which presumes that the Company will continue realizing its assets and discharging its liabilities in the normal course of business for the foreseeable future. The Company has incurred significant operating losses and negative cash flows from operations since inception. To date, the Company has financed its operations through the public offering and private placement of Common Shares, units consisting of Common Shares and warrants, and convertible debt, the proceeds from research grants and research tax credits, and the exercises of warrants, rights and options. For the three-month period ended June 30, 2022, the Company incurred a net loss of $6.5 million and negative cash flows from operations of $7.2 million, and had an accumulated deficit of $327.5 million as at June 30, 2022. For the year ended March 31, 2022, the Corporation incurred a net loss of $84.4 million and negative cash flows from operations of $54.3 million. Furthermore, as at June 30, 2022, the Company’s current liabilities and expected level of expenses for the next twelve months exceed cash on hand of $6.2 million. The Company currently has no committed sources of financing available.
As of the date of this Quarterly Report, the Company is required to actively manage its liquidity and expenses. The Company currently has minimal available cash balances. Payables are now in excess of available cash balances and payments of payables are not being made as the amounts become due for certain suppliers. The Company requires immediate funding in order to continue its operations. As of the date of this Quarterly Report, the cash balance is expected to be sufficient to operate the business for only the next two to three months under the current business plan. The Company requires funding in the very near term in order to continue its operations. If the Company is unable to obtain funding in the upcoming days, it may have to liquidate its assets.
These conditions cast substantial doubt about the Corporation's ability to continue as a going concern.
Going forward, the Company will seek additional financing in various forms as part of its plan to have the right funding structure in place to support its growth trajectory and path to profitability. To achieve the objectives of its business plan, Neptune plans to raise the necessary funds through additional securities offerings and the establishment of strategic alliances as well as additional research grants and research tax credits. While the Company has limited debt, all of which is subordinated, assets available for financing include real estate, accounts receivable and inventories. The ability of the Company to complete the needed financing and ultimately achieve profitable operations is dependent on a number of factors outside of the Company’s control. The Company’s business plan is dependent upon, amongst other things, its ability to achieve and maintain profitability, and/or continue to obtain adequate ongoing debt and/or equity financing with creditors, officers, directors and stakeholders to finance operations within and beyond the next twelve months.
While the Company has been successful in obtaining financing from public issuances, private placements, and related parties in the past, there is no certainty as to future financings.
Neptune announced on June 8, 2022 the intended divestiture of the cannabis business, which would include the sale of the Mood Ring™ and PanHash™ brands, along with the Company's Sherbrooke, Quebec facility, in one or more transactions. The value of the facility was recently appraised at $16.6 million by a third-party appraisal company. In order to accelerate its cost savings, the Company will focus on winding up its cannabis operations pending a transaction. This planned action is intended to provide significant cost savings and help maximize operational efficiencies, which is planned to result in a 50% reduction in workforce, over 30% reduction of total payroll costs and additional cost savings from corresponding reductions in corporate overhead costs and professional fees. Finally, the exit of the Canadian cannabis business is expected to reduce the amount of financing the Company seeks and is expected to facilitate working with a broader set of financing sources.
On June 22, 2022, Neptune announced that it entered into definitive agreements with several institutional investors for the purchase and sale of an aggregate of 1,945,526 common shares (including common share equivalents) of the Company, and accompanying two series of warrants to purchase up to an aggregate of 3,891,052 common shares per series of warrants, at an offering price of $2.57 per share and accompanying warrants in a registered direct offering priced at-the-market under Nasdaq rules. Each series of warrants have an exercise price of $2.32 per share and are immediately exercisable upon issuance. One series of warrants will expire two years following the date of issuance and one series of warrants will expire five years following the date of issuance. The gross proceeds from the offering are $5 million, prior to deducting placement agent's fees and other offering expenses payable by Neptune and assuming none of the warrants issued in the offering are exercised for cash. Neptune intends to use the net proceeds from the offering for working capital and other general corporate purposes. The offering closed on June 23, 2022.
The consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the going concern basis not be valid. These adjustments could be material.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
GENERAL
Neptune Wellness Solutions Inc. (“Neptune”, the “Company”, “we”, “us” or “our”) is a modern consumer packaged goods ("CPG") company driven by a singular purpose: to transform the everyday for a healthier tomorrow. Neptune is a diversified and fully integrated health and wellness company with multiple brand units. With a mission to redefine health and wellness, Neptune is focused on building a broad portfolio of high quality, affordable consumer products in response to long-term secular trends and market demand for natural, plant-based, sustainable and purpose-driven lifestyle brands. The Company utilizes a highly flexible, cost efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation, Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods. Neptune has expanded its operations since June 2020 into several brand units in order to better address its markets. The main brand units are the following: Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages. All amounts in this Quarterly Report are in US dollars, unless otherwise noted.
HISTORY
Neptune was incorporated under Part IA of the Companies Act (Québec) on October 9, 1998 under the name Neptune Technologies & Bioressources Inc. Since its incorporation, Neptune has amended its articles of incorporation on numerous occasions. The Company first amended its articles on May 30, 2000 to convert its then issued and outstanding shares into newly-created classes of shares. The Company’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000, the Company converted all its issued and outstanding Class A shares into Class B subordinate shares. On September 25, 2000, the Company further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. On November 1, 2013, the Company amended its articles of incorporation to reflect certain changes to items relating to board matters. The Company’s Common Shares are listed and posted for trading on the Toronto Stock Exchange (“TSX”) and on the NASDAQ Stock Market LLC (“NASDAQ”) under the symbol, “NEPT”.
On June 9, 2022, we effected a one for thirty five (1-for-35) reverse split of our common shares, which we refer to as the “Share Consolidation,” as approved by our Board of Directors. Trading of our common shares on both the TSX and NASDAQ on a post-consolidated basis commenced as of the open of markets on June 13, 2022. Neptune's common shares will be delisted from the TSX at the close of trading on August 15, 2022.
OUR PROPERTIES AND OPERATIONS
Our headquarters is located in leased offices in Laval, Québec, where our general and administrative departments primarily operate. We also lease laboratory space in Laval, Quebec where testing and development of many of our products takes place. We lease offices in Jupiter, Florida which will serve as the U.S. headquarters once leasehold improvements are completed which is expected to be in the second quarter of fiscal year 2023.
We own a production facility in Sherbrooke, Quebec where we conduct our cannabis operations including laboratory testing. On June 8, 2022, we announced the planned divestiture of our cannabis business which would include the sale of our cannabis brands and the Sherbrooke building in one or more transactions.
We also lease a production facility in Conover, North Carolina and have leased offices in Vaudreuil, Province of Québec, Canada and leased offices in Montvale, New Jersey. All of these facilities are unoccupied. The Conover facility housed our SugarLeaf operations, and we are in the process of selling the remaining equipment and prepare the building to be returned to the lessor in the third quarter of our fiscal year 2023. The Vaudreuil offices were previously used for the Company’s Biodroga business. The Montvale offices previously served as the headquarters for Sprout. The Company is attempting to sub-lease the Vaudreuil and Montvale offices.
BUSINESS STRATEGY
Neptune’s vision is to change consumer habits through the creation and distribution of environmentally friendly, ethical and innovative consumer product goods. Our mission is to redefine health and wellness and help humanity thrive by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreak of the COVID-19 virus, Neptune has taken transformative, and successful, actions to increase its sales, distribution and reach in both the business-to-business (“B2B”) and business-to-consumer (“B2C”) model in the consumer-packaged goods (“CPG”) market. Neptune has a dual go-to market B2B and B2C strategy focused on expanding its global distribution reach. The strategy sets Neptune apart from its competition and has started to yield consistent, long-term revenue opportunities for the Company.
The Company's long-term strategy is focused on the health and wellness sector with an emphasis on select CPG verticals, including Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages. Neptune's current brand portfolio across these verticals include Sprout®, Neptune Wellness™, Forest Remedies®, and MaxSimil®.
On June 9, 2021, Neptune announced a multi-year licensing agreement between Sprout and CoComelon, the world's leading children's entertainment brand, owned and operated by Moonbug Entertainment. In addition, on July 27, 2021, an initial launch was announced for Sprout products into Canada, in Metro grocery stores in the province of Ontario.
Neptune’s future will be focused on brand creation, accelerating organic growth with emphasis on increased efficiency and margin expansion. This will be complimented by accretive acquisitions with a proven track record of operational excellence. On July 22, 2021, the Company launched Forest Remedies’ plant-based Omega 3-6-9 gummies and soft gels. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical. The MaxSimil® product lineup will be expanded with the launch of two new consumer products: MaxSimil® with CoQ10 and MaxSimil® with Curcumin. Additionally, the Company launched a new consumer line of Vitamin Sprays and Pumps for both children and adults with selected retail partners. To support anticipated accelerated growth, the Nutraceuticals U.S. sales force has been expanded to maximize awareness and distribution of the capabilities and expertise in CBD formulation, prebiotics and probiotics, and proteins within this important vertical.
31
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PRODUCTS, PRINCIPAL MARKETS, METHODS OF DISTRIBUTION AND BRANDS
Products
Our Nutraceutical, Beauty and Personal care products and Organic Foods and Beverages are manufactured by third party manufacturers. In order to meet demand for our products, we have developed relationships with selected contract manufacturers. We believe that we are not dependent on any single contract manufacturer and that, if necessary, our current selected contract manufacturers could be replaced with minimal disruption to our operations.
We currently purchase raw materials for the manufacturing of our products from suppliers recognized for their quality and consistency. Our quality control staff requires full disclosure on the part of our suppliers and we periodically conduct on-site audits of their facilities. For strategic reasons, certain of our key raw materials are sourced from single suppliers. However, in the event that we were unable to source an ingredient from a current supplier, we believe that we could generally obtain the same ingredient or an equivalent from an alternative supplier, with minimal disruption to our operations.
Canadian Cannabis Products - Extracts and Formulations
We retrofitted our existing production facility located in Sherbrooke, Province of Québec, Canada to comply with Health Canada requirements under the Cannabis Act, in order to produce our cannabis extracts and formulations at our existing site. Our GMP (Good Manufacturing Practices, mandated by the Natural Health Products Directorate of Health Canada) production facility features robust safety measures and equipment, which allows for enhanced manufacturing practices. We also operate a laboratory at our facility, which allows us to conduct research, new product development and quality control analysis in-house.
As a condition for obtaining our license to produce cannabis oil under the Cannabis Act, Health Canada required multiple compliance measures to be taken, including the addition of physical barriers, visual monitoring, recording devices, intrusion detection, as well as other important controls around access to the Company’s existing Sherbrooke facility.
On June 8, 2022, the Company announced a planned divestiture of the Canadian cannabis business including the sale of our cannabis brands and the Sherbrooke building in one or more transactions.
MARKETS
Nutraceuticals
Neptune offers a variety of specialty ingredients, including our licensed specialty ingredient MaxSimil®, a technology that helps increase digestion and absorption of fat-soluble and nutritional ingredients. Additionally, the Company sources a variety of other marine oils, seed oils and specialty ingredients that are available for sale as raw material or transformed into finished products. The Company has recently launched a new line of Vitamin Sprays and Pumps for both children and adults. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical through its brand Biodroga.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays, roll-ons and CBD enhancements. All of Neptune’s Nutraceutical products are available under distributors’ private labels, primarily sold in the Canadian and U.S. nutraceutical markets. Neptune, through its nutraceuticals products business, also formulates, develops and provides customers with turnkey nutrition solutions.
Beauty & Personal Care
The Company sells wellness products to the Beauty & Personal Care market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free. Neptune announced, on March 10, 2022, the launch of its Forest Remedies Multi Omega 3-6-9 line of supplements into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Organic Foods and Beverages
In February 2021, Neptune acquired a controlling interest in Sprout Foods, Inc., an organic plant-based baby food and toddler snack company. Sprout is an integral piece of Neptune’s health and wellness portfolio and represents a key brand within the Organic Foods and Beverages vertical. Since completing the Sprout acquisition, the Company has begun expansion efforts in Sprout’s distribution across substantially all of Target’s U.S. retail stores. The Company also announced, on July 27, 2021, the initial launch of Sprout products into Canada, in Metro grocery stores in the province of Ontario. Neptune further expects to launch Sprout products in North America throughout the remainder of the fiscal year. The Company expects the Neptune/Sprout combination to result in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified within Neptune’s existing relationships and current sales channels. As described above, Neptune also announced on June 9, 2021, an exclusive multi-year licensing agreement between Sprout and CoComelon, the #1 children’s entertainment and educational show in the world with more than 110 million subscribers worldwide. We expect to announce product availability and provide additional information about the rollout of CoComelon licensed products in the near future.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
SALES AND DISTRIBUTION
Nutraceutical Products
The Company sells its nutraceutical products mainly in bulk softgels or liquids to multiple distributors and customers, who commercialize these products under their private label. While the Company may have orders in place with approximately 100 different distributors and customers at any one time, the majority of the Company’s sales are concentrated with a small group of distributors and customers. Agreements with these distribution partners may be terminated or altered by them unilaterally in certain circumstances.
Beauty & Personal Care
The Company sells its Beauty and Personal Care products through distributors and directly to retail outlets in the United States. It also sells its products online through its own website forestremedies.com as well as e-commerce sites.
Organic Foods and Beverages
The Company, though its Sprout subsidiary, sells its products to mass retailers, grocery stores and other retail outlets, as well as online through e-commerce sites and its own website sproutorganics.com.
OUR B2C BRAND PORTFOLIO STRATEGY
We are currently working on accelerating brand equity for our brand portfolio:
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Biodroga™. Neptune, through its Biodroga subsidiary, provides product development and turnkey solutions (4PL) to its customers throughout North America. Biodroga offers a full range of services, whether it is leveraging our global network of suppliers to find the best ingredients or developing unique formulations that set our customer apart from their competition. Biodroga’s core products are MaxSimil, various Omega-3 fish oils and a line of CBD enhanced products, as well as softgel solutions. |
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MaxSimil. Neptune’s patented MaxSimil is an omega-3 fatty acid delivery technology that uses enzymes that mimic the natural human digestive system to predigest omega-3 fatty acids. The Journal of Nutrition by the Oxford University Press, recently released the results of a clinical study that evidences MaxSimil’s superior absorption as compared with standard fish oil supplements. MaxSimil was first introduced to the market in 2018, and is sold as a straight omega-3 supplement with standard and unique concentration of EPA/DHA. MaxSimil is also starting to be presented in combination with specialty ingredients such as Curcumin, Vitamin K2 and CBD. |
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Forest Remedies®. Under our Forest Remedies® brand, we offer first-of-their kind vegan multi-omega gummies and soft gels with packaging that is 100% plastic-free. Launched on March 10, 2022, our Forest Remedies Multi Omega 3-6-9 line of supplements is available into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company. |
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Sprout®. Neptune entered a new market with the Neptune/Sprout combination. Sprout has created a trusted organic baby food brand with a comprehensive range of products that are always USDA certified organic, non-GMO and contain nothing artificial. Sprout’s products target four segments: Stage 2 (children 6 months and up), Stage 3 (children 8 months and up), Toddler (children aged 12 months and up) and Snacks (children 8 months and up). Since our acquisition of a controlling interest in Sprout, the Company has begun expansion efforts in Sprouts’ distribution substantially in all of Target’s U.S. retail stores. The Company also announced on July 27, 2021, its initial launch into the Canadian market through its partnership with food retailer Metro Inc. Certain toddler snacks under this brand label are now available in Metro grocery stores in the province of Ontario. |
COMPETITION
The nutraceutical, beauty & personal care and organic foods and beverages industries are highly competitive. There are many companies, public and private universities, and research organizations actively engaged in the research and development of products that may be similar to our products. It is probable that the number of companies seeking to develop products similar to our products will increase. Many of these and other existing or potential competitors have substantially greater financial, technical and human resources than we do and may be better equipped to develop, manufacture and market products.
We seek to differentiate our products and marketing from our competitors based on product quality, customer service, marketing support, pricing and innovation, and believe that our strategy enables us to effectively compete in the marketplace. For additional information regarding the competitive nature of our businesses, see “Risks Related to Our Business” under the heading “Risk Factors” of this Form 10-Q.
33
Management’s Discussion and Analysis of Financial Condition and Results of Operations
REGULATORY
Our Nutraceutical, Beauty, Personal Care and Organic Food and Beverage businesses are subject to varying degrees of regulation by a number of government authorities in Canada and the U.S., including Health Canada, the FDA, the Federal Trade Commission (FTC), the Consumer Product Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. Various provincial, state and local agencies in areas where we operate and in which our products are sold also regulate our business. The areas of our business regulated by both these and other authorities include, among others:
Health Canada and the FDA, in particular, regulate the formulation, manufacturing, packaging, storage, labeling, promotion, distribution and sale of vitamins and other nutritional supplements in Canada and the U.S., while other agencies regulate marketing and advertising claims. Under Health Canada and FDA rules, companies that manufacture, package, label, distribute or hold nutritional supplements are required to meet certain GMP’s to ensure such products are of the quality specified and are properly packaged and labeled. We are committed to meeting or exceeding the standards set by Health Canada and the FDA and believe we are currently operating within the mandated GMP.
Health Canada and he FDA also regulate the labeling and marketing of dietary supplements and nutritional products, including the following:
We are also subject to a variety of other regulations in Canada and the U.S., including those relating to health, safety, bioterrorism, taxes, labor, employment, import and export, the environment and intellectual property. All of these regulations require significant financial and operational resources to ensure compliance, and we cannot assure you we will always be in compliance despite our best efforts to do so or that being in compliance will not become prohibitively costly to our business.
Cannabis Regulatory Framework
On June 8, 2022, we announced the planned divestiture of our cannabis business including the sale of our brands as well as the Sherbrooke building in one or more transactions.
On October 17, 2018, the Cannabis Act (Canada) and the Cannabis Regulations came into force in Canada, legalizing the sale of cannabis for adult recreational use. Prior to the promulgation of the Cannabis Act and the Cannabis Regulations, only the sale of cannabis for medical purposes was legal, which was regulated by the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) under the Controlled Drugs and Substances Act (“CDSA”). The Cannabis Act and the Cannabis Regulations replaced the CDSA and the ACMPR as the governing laws and regulations in respect of the production, processing, sale and distribution of cannabis for medical and adult recreational use.
The Cannabis Regulations, among other things, set out regulations relating to the following matters: (1) licenses, permits and authorizations; (2) security clearances and physical security measures; (3) good production practices; (4) cannabis products; (5) packaging and labelling; (6) cannabis for medical purposes; (7) drugs containing cannabis; (8) combination products and devices; (9) importation and exportation for medical or scientific purposes; (10) document retention; and (11) reporting and disclosure.
34
Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTELLECTUAL PROPERTY
We constantly evaluate the importance of obtaining intellectual property protection for our technology brands, products, applications and processes and maintaining trade secrets. When applicable to our business and products, we seek to obtain, license and enforce patents, protect our proprietary information and maintain trade secret protection without infringing the proprietary rights of third parties. We also make use of trade secrets, proprietary unpatented information and trademarks to protect our technology and enhance our competitive position.
Brand Names and Trademarks
Mood Ring™, PanHash™, Sprout®, NurturMe®, Nosh!®, Neptune Wellness™, MaxSimil®, Forest Remedies®, and Ocean Remedies® are trademarks of the Company. On June 8, 2022 we announced the planned divestiture of our cannabis business including the sale of our Cannabis Brands, Mood Ring and PanHash, as well as the Sherbrooke building in one or more transactions
Patent Applications
On August 9, 2018, Neptune filed two applications with the United States Patent and Trademark Office (USPTO) for patents related to the extraction of cannabis material. The extraction processes provide highly-efficient methods to obtain cannabinoids and other desired compounds from the cannabis plant at a greater purity than conventional methods. Both processes are applicable to marijuana and hemp and have been incorporated into the Company’s GMP-certified extraction facility in Sherbrooke. The first patent application outlines a method of extracting and isolating compounds from plants of the Cannabis genus at low temperature by using a cold organic solvent. The second patent application similarly provides for a method for extracting compounds from cannabis at low temperature, but without the use of organic solvents. Specifically, this patent relates to a process for high recovery of cannabinoids and terpenes by using natural solvents.
Licenses
On November 27, 2017, Neptune entered into an exclusive, worldwide, and royalty-bearing licensing agreement for the use of the MaxSimil® technology, in combination with cannabis-derived products. This new agreement allows Neptune to research, manufacture, formulate, distribute, and sell monoglyceride omega-3-rich ingredients in combination with cannabis and/or cannabinoid-rich or hemp derived ingredients for medical and adult use applications. The Company believes the MaxSimil® technology has the ability to enhance absorption of lipidbased and lipid soluble ingredients such as cannabinoids, essential fatty acids including EPA and DHA omega-3s, vitamins A, D, K and E, CoQ10 and others. This could be especially beneficial in increasing the absorption of ingredients which are not easily absorbed, such as CBD.
On June 9, 2021, Sprout Foods entered into a multi-year licensing agreement with Moonbug, providing Sprout with an exclusive license to utilize certain properties relating to CoComelon®, the world's leading children's entertainment brand, owned and operated by Moonbug, with Sprout products.
EMPLOYEES
As of June 30, 2022, we had 155 employees working at our business offices in Laval , at our facility in Sherbrooke or remotely. Our employees possess specialized skills and knowledge in the following fields, which we believe are valuable assets of the Company. As of June 30, 2022, 119 of our employees were in Canada while 36 were in the United States. We also had 10 temporary personnel. Twenty-six of our employees were represented by a union. We consider our relations with our employees to be good and our operations have never been interrupted as the result of a labor dispute.
SEASONALITY
In addition to general economic factors, we are impacted by seasonal factors and trends such as major cultural events and other unpredictable matters. Although we believe the impact or seasonality on our consolidated results of operations is minimal, our quarterly results may vary significantly in the future due to the timing of nutraceutical contract manufacturing orders as well promotions and ordering patterns of our other customers. We cannot provide assurance future revenues will follow historical patterns. The market price of our common shares may be adversely affected by these factors.
35
Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS UPDATE
Financial Positioning
We are taking the steps necessary to shore up cash reserves in the immediate term and position our balance sheet properly to fund our growth initiatives as we push towards profitability. To this end, we have explored multiple options to balance the need for providing near-term financial stability while ensuring we continue to build long-term shareholder value. As a result, we have entered into two agreements for the purchase and sale of shares of our common stock and pre-funded warrants in June 2022 and March 2022. Taking into account all considerations, we believe these actions are in the best interest of the company and will benefit shareholders in the long-term. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Going Concern. Unless otherwise specified, all dollar amounts are in US dollars ("USD").
Closing of a $8,000,000 Registered Direct Offering
On March 14, 2022, Neptune announced that it had closed a registered direct offering with a single strategic consumer-focused institutional investor for the purchase and sale of (i) 528,572 common shares of the Company ("Common Shares") and (ii) 185,714 pre-funded warrants (the "Pre-Funded Warrants"), with each Pre-Funded Warrant exercisable for one Common Share. The Common Shares and the Pre-Funded Warrants were sold together with Series A Warrants (the "Series A Warrants") to purchase up to an aggregate of 714,286 Common Shares and Series B Warrants (the "Series B Warrants" and collectively with the Series A Warrants, the "Common Warrants") to purchase up to an aggregate of 714,286 Common Shares. Each Common Share and the accompanying Common Warrants were sold together at a combined offering price of $11.20, and each Pre-funded Warrant and accompanying Common Warrants were sold together at a combined offering price of $11.20 , for aggregate gross proceeds of $8.0 million before deducting fees and other offering expenses. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $0.0035 and were exercisable commencing on the closing date. The Series A Warrants have an exercise price of $11.20 per share and are exercisable six months after the closing date, and will expire five and one half years from the date of issuance. The Series B Warrants have an exercise price of $11.20 per share and are exercisable six months after the closing date, and expire 18 months from the closing date (collectively the "March Offering"). The Pre-Funded Warrants were exercised in full on March 29, 2022 for gross proceeds of $650.
Closing of a $5,000,000 Registered Direct Offering Priced At-The-Market Under Nasdaq Rules
On June 23, 2022, Neptune announced that it had closed a registered direct offering with certain institutional investors for the purchase and sale of an aggregate of 1,945,526 common shares (or common share equivalents) of the Company, and accompanying two series of warrants to purchase up to an aggregate of 3,891,052 common shares per series of warrants, at an offering price of $2.57 per share and accompanying warrants in a registered direct offering priced at-the-market under Nasdaq rules. Each series of warrants have an exercise price of $2.32 per share and are immediately exercisable upon issuance. One series of warrants will expire two years following the date of issuance and one series of warrants will expire five years following the date of issuance, for aggregate gross proceeds of $5 million before deducting fees and other offering expenses. The pre-funded warrants issued in the offering were fully exercised on June 24, 2022 for $65.
Expansion of the Existing Secured Promissory Notes
On July 13, 2022, Neptune announced that Sprout Foods Inc. ("Sprout"), the Corporation's organic plant-based baby food and toddler snack company, has entered into an amendment of each of its existing Secured Promissory Notes to expand from $22.5 million to a maximum of $37.5 million, allowing for up to $13 million of future lending. In connection with this amendment, investment funds managed by Morgan Stanley Expansion Capital ("Morgan Stanley" or "MSEC") have agreed to immediately commit an additional $3 million under the expanded Secured Promissory Notes to Sprout. The maturity date of the note facility of February 1, 2024 is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The funds from the expanded facility are intended to be used for the general working capital needs of Sprout and the repayment of certain existing Sprout debt payable to Neptune. MSEC was issued 372,670 common shares of Neptune, of an approximate value of $0.6 million in connection with this expansion.
Growth Drivers
We remain enthusiastic about the growth prospects of our business, with opportunity across all three of our core verticals. We have successfully made the transition to a fully-integrated consumer packaged goods company with a diverse suite of better-for-you brands, available in some of the country's largest retail chains. At the same time, we are driving consumer relevance by pursuing the right strategic partnerships for co-branded product lines and expanding our product offerings in key wellness categories.
Major Distribution Gains
Since acquiring a majority stake in Sprout Organics in February 2021 , we have expanded Sprout baby foods and toddler snacks substantially, both online and in store at major retailers like Target and Wal-Mart. Earlier in March 2022, we announced the launch of our Forest Remedies Multi Omega 3-6-9 line of supplements into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Strategic Partnerships
In February 2022, we brought Walmart a first-of-its-kind collaboration between Sprout Organics and popular kids' entertainment platform CoComelon. This co-branded product line is now available on Walmart.com and in 900 Walmart stores expected in September 2022, and has been very well-received. With this launch, Sprout Organics now sells into the top organic baby food retailers in the U.S., accounting for approximately 90 percent of the overall market.
Investing in Our Prospects
On November 15, 2021 we initiated a strategic review and made some big changes to get on track to becoming a profitable diversified CPG company. These actions have taken effect, and we are starting to see the results. The third quarter of fiscal year 2022 was the first quarter where we posted a positive gross margins since transitioning to a CPG-focused model. We also delivered four consecutive quarter of sequential revenue growth before a decrease in the fourth quarter of the year ended March 31, 2022. We expect these positive trends to continue in fiscal year 2023, however there can be no assurances that revenue growth will continue.
36
Management’s Discussion and Analysis of Financial Condition and Results of Operations
While the global market can be unstable during turbulent times, we are taking steps to ensure we remain well-positioned to execute against our stated plan: controlling our costs while pursuing high-growth opportunities. To that effect, Neptune announced on June 8, 2022 the launch of a new Consumer Packaged Goods ("CPG") focused strategic plan to reduce costs, improve the Company's path to profitability and enhance current shareholder value. This plan focuses on two primary actions: (1) planned divestiture of the Canadian cannabis business and (2) a realignment of focus and operational resources toward increasing the value of Neptune's consumer products business. With the planned divestiture of its cannabis business, Neptune is renewing its focus on the core brands – Sprout Organics and Biodroga Solutions – that align closely with future consumer trends and show a greater potential for future growth and profitability.
The intended divestiture of the cannabis business would include the sale of the Mood Ring™ and PanHash™ brands, along with the Company's Sherbrooke, Quebec facility, in one or more transactions. The value of the facility was recently appraised at $21 million CAD ($16.3 million USD) by a third-party appraisal company. Neptune has retained Stifel GMP to support the divestiture efforts, with a focus on maximizing the value to Neptune shareholders. In order to accelerate its cost savings, the Company will focus on winding up its cannabis operations pending a transaction. This planned action is intended to provide significant cost savings and help maximize operational efficiencies, resulting in a 50% reduction in workforce, over 30% reduction of total payroll costs and an estimated annual cost savings of $5.8 million CAD ($4.5 million USD). In addition, the Company expects to see additional cost savings from corresponding reductions in corporate overhead costs and professional fees.
Finally, the exit of the Canadian cannabis business may impact the amount and structure of financing the company is currently seeking. If and when we complete a transaction to exit cannabis business, it is expected to reduce the amount of financing the Company seeks, given a lower anticipated expense structure, along with anticipated cash inflows from the planned divestiture. Additionally, the divestiture is expected to facilitate working with a broader set of financing sources – including traditional banks and financial institutions that have policies restricting dealing with businesses exposed to regulated cannabis operation. There is no assurance that planned divestiture will occur on a timely basis, or at all, or that proceeds will be in line with appraisals and company expectations.
37
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RECENT CORPORATE DEVELOPMENTS
Neptune’s Presence in Canada’s Cannabis Market
During the year ended on March 31, 2022, Neptune supplied the market with premium cannabis extracts and dried flower, under its Mood Ring™ and PanHash™ brands, and completed its launch of all significant regulated product categories. All cannabis products were manufactured and packaged at the Company’s purpose-built facility in Sherbrooke, Quebec. On June 8, 2022, the Company announced a planned divestiture of the Canadian cannabis business and the Company will focus on winding up its cannabis operations pending one or more sales transactions. Following this announcement, all assets and liabilities related to the Canadian cannabis business are now respectively shown under assets held for sale and liabilities directly associated with assets held for sale on Neptune's balance sheet. Further information on those assets and liabilities can be found in note 2(d) of the condensed consolidated interim financial statements for the three-month period ended June 30, 2022.
Launch of a New CPG Focused Strategic Plan
On June 8, 2022, Neptune announced the launch of a new Consumer Packaged Goods ("CPG") focused strategic plan to reduce costs, improve the Company's path to profitability and enhance current shareholder value. This plan builds on the Company's initial strategic review that took place in fall of 2021 and focuses on two primary actions: (1) planned divestiture of the Canadian cannabis business and (2) a realignment of focus and operational resources toward increasing the value of Neptune's consumer products business. With the planned divestiture of its cannabis business, Neptune is renewing its focus on the core brands – Sprout Organics and Biodroga Solutions – that align closely with future consumer trends and show a greater potential for future growth and profitability. The strategic plan is expected to lower costs and reduce global headcount by approximately 50%.
Neptune Announces New Line of CoComelon® Co-Branded Products
Neptune announced on May 26, 2022 a new line up of CoComelon co-branded organic snack bars for toddlers. The snack bars are the latest innovation in the Sprout Organics x CoComelon product line launched earlier this year, which features a range of organic baby and toddler food pouches and toddler snacks. New snack bars will be available online and at select retailers nationwide. Sprout Organics CoComelon Snack Bars are available in two flavor combinations: Banana and Banana with Peas and Carrots. Each snack bar contains a blend of unsweetened fruits, veggies and gluten-free oats and packs an impressive 4g of plant-based protein and 2g of dietary fiber to help fuel growing bodies.
Changes to Management
As part of the Company's renewed focus on its CPG brands and Sprout Organics in particular, Neptune announced on June 8, 2022 that Sarah Tynan, Sprout's Chief Customer Officer, was promoted to CEO of Sprout. Ms. Tynan has been instrumental in garnering big distribution gains for Sprout, including Walmart and Target, and leading the highly successful CoComelon partnership. She brings deep sales experience and business acumen, including previous roles at Newell Brands and Unilever, and will continue to drive the Sprout business forward.
On June 14, 2022, Neptune announced the appointment of Raymond Silcock as Chief Financial Officer, effective July 25, 2022. Mr. Silcock, who is based out of Neptune's Jupiter, Florida office, previously served as Executive Vice President and Chief Financial Officer at Perrigo Plc, as well as CFO at Diamond Foods, The Great Atlantic and Pacific Tea Company, US Tobacco Inc., and Cott Corporation. In addition, he has previously served as Chair of both Audit and Strategy Committees on several Boards including Pinnacle Foods Inc, American Italian Pasta Company, Prestige Brands and Bacardi Limited. Mr. Silcock replaces Randy Weaver who was Interim CFO up to July 22, 2022.
38
Management’s Discussion and Analysis of Financial Condition and Results of Operations
SELECTED CONSOLIDATED ANNUAL AND QUARTERLY INFORMATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION (in millions)
The following table sets out selected consolidated financial information.
|
|
Three-month periods ended |
||
|
|
June 30, |
|
June 30, |
|
|
$ |
|
$ |
Total revenues |
|
16.272 |
|
10.079 |
Adjusted EBITDA1 |
|
(9.779) |
|
(12.916) |
Net loss |
|
(6.504) |
|
(18.856) |
Net loss attributable to equity holders of the |
|
(4.284) |
|
(16.908) |
Net loss attributable to non-controlling interest |
|
(2.220) |
|
(1.948) |
Basic and diluted loss per share |
|
(1.09) |
|
(3.97) |
Basic and diluted loss per share attributable |
|
(0.72) |
|
(3.56) |
Basic and diluted loss per share attributable |
|
(0.37) |
|
(0.41) |
|
|
As at |
|
As at |
|
As at |
|
|
$ |
|
$ |
|
$ |
Total assets |
|
97.756 |
|
104.955 |
|
186.948 |
Working capital2 |
|
20.981 |
|
7.071 |
|
54.718 |
Non-current financial liabilities |
|
13.768 |
|
13.800 |
|
14.593 |
Equity attributable to equity holders of the Corporation |
|
43.277 |
|
48.116 |
|
115.368 |
Equity attributable to non-controlling interest |
|
10.502 |
|
12.722 |
|
22.178 |
1 The Adjusted EBITDA is a non-GAAP measure. It is not a standard measure endorsed by US GAAP requirements. A reconciliation to the Company’s net loss is presented below.
2 Working capital is calculated by subtracting current liabilities from current assets. Because there is no standard method endorsed by US GAAP, the results may not be comparable to similar measurements presented by other public companies. Current assets as at June 30, 2022, March 31, 2022 and March 31, 2021 were $51.190, $37.388 and $89.528 respectively, and current liabilities as at June 30, 2022, March 31, 2022 and March 31, 2021 were $30.209, $30.317 and $34.809 respectively.
39
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CONSOLIDATED FINANCIAL ANALYSIS
NON-GAAP FINANCIAL PERFORMANCE MEASURES
The Company uses one adjusted financial measure, Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) to assess its operating performance. This non-GAAP financial measure is presented in a consistent manner, unless otherwise disclosed. The Company uses this measure for the purposes of evaluating its historical and prospective financial performance, as well as its performance relative to competitors. The measure also helps the Company to plan and forecast for future periods as well as to make operational and strategic decisions. The Company believes that providing this information to investors, in addition to GAAP measures, allows them to see the Company’s results through the eyes of Management, and to better understand its historical and future financial performance. Neptune’s method for calculating Adjusted EBITDA may differ from that used by other corporations.
A reconciliation of net loss to Adjusted EBITDA is presented below.
ADJUSTED EBITDA
Although the concept of Adjusted EBITDA is not a financial or accounting measure defined under US GAAP and it may not be comparable to other issuers, it is widely used by companies. Neptune obtains its Adjusted EBITDA measurement by removing from net loss, net finance costs (income) and depreciation and amortization, and income tax expense (recovery). Other items such as equity classified stock-based compensation, non-employee compensation related to warrants, litigation provisions, business acquisition and integration costs, signing bonuses, severances and related costs, impairment losses on non-financial assets, write-downs of non-financial assets, revaluations of derivatives, system migration, conversion and implementation, CEO directors and officers insurance, costs related to conversion from IFRS to US GAAP and other changes in fair values are also added back. The exclusion of net finance costs (income) eliminates the impact on earnings derived from non-operational activities. The exclusion of depreciation and amortization, stock-based compensation, non-employee compensation related to warrants, litigation provisions, impairment losses, write-downs revaluations of derivatives and other changes in fair values eliminates the non-cash impact, and the exclusion of acquisition costs, integration costs, signing bonuses, severance and related costs, costs related to cybersecurity and costs related to conversion from IFRS to US GAAP present the results of the on-going business. From time to time, the Company may exclude additional items if it believes doing so would result in a more effective analysis of underlying operating performance. In Q4 2022, the Company added the costs related to the conversion from IFRS to US GAAP as an adjustment to the definition of Adjusted EBITDA. Adjusting for these items does not imply they are non-recurring. For purposes of this analysis, the Net finance costs (income) caption in the reconciliation below includes the impact of the revaluation of foreign exchange rates.
Adjusted EBITDA1 reconciliation, in millions of dollars
|
|
Three-month periods ended |
||
|
|
June 30, |
|
June 30, |
|
|
|
|
|
Net loss for the period |
|
$(6.504) |
|
$(18.856) |
Add (deduct): |
|
|
|
|
Depreciation and amortization |
|
1.039 |
|
1.344 |
Revaluation of derivatives |
|
(9.524) |
|
(1.933) |
Net finance costs |
|
1.635 |
|
1.638 |
Equity classified stock-based compensation |
|
2.706 |
|
3.080 |
Non-employee compensation related to warrants |
|
— |
|
0.093 |
Litigation provisions |
|
(0.263) |
|
0.116 |
Business acquisition and integration costs |
|
— |
|
1.048 |
CEO D&O insurance |
|
(3.154) |
|
— |
Signing bonuses, severances and related costs |
|
0.390 |
|
— |
Write-down of inventories and deposits |
|
3.080 |
|
— |
Impairment loss on long-lived assets |
|
0.816 |
|
0.530 |
Change in revaluation of marketable securities |
|
— |
|
0.012 |
Income tax expense (recovery) |
|
— |
|
0.012 |
Adjusted EBITDA1 |
|
$(9.779) |
|
$(12.916) |
1 The Adjusted EBITDA is not a standard measure endorsed by US GAAP requirements.
40
Management’s Discussion and Analysis of Financial Condition and Results of Operations
OPERATING SEGMENTS
The Company’s management structure and performance is measured based on a single segment, which is the consolidated level, as this is the level of information used in internal management reports that are reviewed by the Company’s Chief Operating Decision Maker.
Geographical information
Revenue is attributed to geographical locations based on the origin of customers’ location.
|
|
Three-month periods ended |
||
|
|
June 30, |
|
June 30, |
|
|
Total |
|
Total |
|
|
|
|
|
Canada |
|
$5.056 |
|
$2.283 |
United States |
|
10.932 |
|
7.560 |
Other countries |
|
0.284 |
|
0.236 |
|
|
$16.272 |
|
$10.079 |
The Company’s property plant and equipment, intangible assets and goodwill are attributed to geographical locations based on the location of the assets.
|
|
|
|
|
|
|
|
As at |
|
|
|
|
|
|
|
|
June 30, 2022 |
|
|
Property, plant and equipment |
|
Goodwill |
|
Intangible assets |
|
Assets held |
Canada |
|
$0.309 |
|
$2.551 |
|
$2.066 |
|
$21.834 |
United States |
|
1.103 |
|
19.542 |
|
18.948 |
|
— |
Total |
|
$1.412 |
|
$22.093 |
|
$21.014 |
|
$21.834 |
|
|
|
|
|
|
|
|
As at |
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
Property, plant and equipment |
|
Goodwill |
|
Intangible assets |
|
Assets held |
Canada |
|
$20.725 |
|
$2.626 |
|
$2.353 |
|
$— |
United States |
|
0.723 |
|
19.542 |
|
19.302 |
|
— |
Total |
|
$21.448 |
|
$22.168 |
|
$21.655 |
|
$— |
41
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RESULTS ANALYSIS
Adoption of US GAAP - Comparative Period Amounts
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). Comparative figures, which were previously presented in accordance with International Financial Reporting Standards (”IFRS”) as issued by the International Accounting Standards Board, have been adjusted as required to be compliant with the Company’s accounting policies under US GAAP.
Revenues
Consolidated revenue summary, in millions of dollars:
|
|
June 30, |
Changes |
||
|
|
2022 |
2021 |
Changes in $ |
Changes in % |
Three-month periods ended |
|
16.3 |
10.1 |
6.2 |
61% |
Total consolidated revenues for the three-month period ended June 30, 2022 amounted to $16.3 million representing an increase of $6.2 million or 61% compared to $10.1 million for the three-month period ended June 30, 2021.
When compared to the previous quarter, the consolidated revenues increased by $4.7 million or 41%, which was mainly attributable to timing of shipping of nutraceuticals products (increase of $2.5 million) as well as increase in food and beverages products sales ($1.9 million) partially derived from the CoComelon partnership as well as organic growth.
Food and beverages revenues represented a $2.5 million increase in comparison to the three-month period ended June 30, 2021, resulting from organic sales growth as well as derived from the CoComelon partnership. Nutraceutical products sales increased by $1.9 million due to timing of shipping as well as sales growth. Revenues for the cannabis market increased by $1.7 million as Neptune had expanded its product portfolio in its existing markets with new cannabis products in comparison to last year. On June 8, 2022, the Company announced the planned divestiture of the Canadian cannabis business and the Company will focus on winding up its cannabis operations pending one or more sales transactions. Revenues from cannabis products will decrease in the future.
Geographic Revenues
From a geographic point of view, revenues for the current quarter increased by $2.8 million or 121% in Canada, increased by $3.4 million or 45% in the United States and increased by $0.048 million or 20% for other countries (all royalty revenues) compared to the quarter ended June 30, 2021.
The increase of revenue in Canada for the quarter variance is mainly due to the cannabis product sales. However, the Company announced its planned divestiture of Cannabis business in June 2022. The increase of revenue in the United States for the quarter variance is derived from timing of shipments and sales growth of nutraceutical products as well as food and beverages products.
Gross Profit (Loss)
Gross profit (loss) is calculated by deducting the cost of sales from total revenues. Cost of sales consists primarily of costs incurred to manufacture products, including sub-contractors, freight expenses and duties on raw materials, storage and handling costs and lab testing on raw materials, and to acquire finished goods.
Consolidated gross profit (loss) summary, in millions of dollars
|
|
June 30, |
Changes |
||
|
|
2022 |
2021 |
Changes in $ |
Changes in % |
Three-month periods ended |
|
(2.9) |
(2.3) |
(0.6) |
-25% |
The consolidated gross profit (loss) for the three-month period ended June 30, 2022 amounted to $(2.9) million compared to $(2.3) million for the three-month period ended June 30, 2021, a deterioration of $0.6 million or 25%.
The gross loss net increase was mainly attributable to two factors. Stronger product mixes from cannabis, nutraceuticals, and food and beverages products as well as continued cost controls measures improved gross margin for the quarter, which was offset by write-downs of inventories for cannabis products of $3.1 million, resulting in the net gross loss of $(2.9) million. The write-down of inventories during the quarter ended June 30, 2022 is related to assets held for sale inventories from the cannabis disposal group that are not expected to be realized.
42
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross Margin Percentage
For the three-month periods ended June 30, 2022 and 2021, the consolidated gross margin went from (23.0)% in 2021 to (17.8)% in 2022, an increase of 5.3%.
All changes in gross margins result from the changes in revenues and gross profit (loss), and are described above.
Research and Development (“R&D”) Expenses
three-month period ended June 30, 2022 compared to June 30, 2021
For the quarter ended June 30, 2022, the consolidated R&D expenses net of tax credits and grants amounted to $0.2 million, compared to $0.3 million for the quarter ended June 30, 2021, a decrease of $0.045 million or 17% mainly due to the vesting in prior fiscal year of the warrants issued to non-employees.
Selling, General and Administrative (“SG&A”) Expenses
Consolidated SG&A expenses net of subsidies for the quarter ended June 30, 2022 amounted to $10.6 million compared to $16.0 million for the same period the prior year, a decrease of $5.5 million or 34%. The decrease is mainly explained by decreases in legal fees by approximately $1.5 million as well as decreases in integration costs of $1.0 million related to the acquisition of Sprout that occurred in the last quarter of fiscal 2021. Further decreases in SG&A expenses are due to the benefits of the strategic review and continued cost controls.
Finance costs
Net finance costs, foreign exchange and derivatives revaluations amounted to a gain of $10.0 million for the quarter ended June 30, 2022, compared to a gain of $0.3 million for the three-month period ended June 30, 2021, a change of $9.7 million for the quarter ended June 30, 2022. The variation for this period is mainly attributable to the revaluation of warrant liabilities as well as foreign exchange impact. The gain on revaluation of the warrants was primarily driven by the decrease in the Company's stock price.
Income taxes
For the three-month periods ended June 30, 2022 and 2021, income tax expense (recovery) were nil. As the other entities are in carry forward loss positions, there is no impact to income taxes for the three-month period ended June 30, 2022.
Adjusted EBITDA
Consolidated Adjusted EBITDA loss decreased by $3.1 million or 24% for the quarter ended June 30, 2022 to an Adjusted EBITDA loss of $9.8 million compared to $12.9 million for the quarter ended June 30, 2021. The decrease in Adjusted EBITDA loss for the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021 was driven by the quarter's improved performance over the comparative quarter as explained in the net loss section.
Net loss
For the quarter ended June 30, 2022, the net loss amounted to $6.5 million compared to $18.9 million for the quarter ended June 30, 2021, a decrease of $12.4 million or 66%. Foreign exchange and derivatives revaluations contributed significantly to the improvement of the net loss. The Company's continuous execution of its strategic review plan by refocusing on its core businesses is additionally responsible for the lower loss.
43
Management’s Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL AND CAPITAL MANAGEMENT
USE OF PROCEEDS
The use of proceeds for the three-month periods ended June 30, 2022 and 2021, in millions of dollars, was as follows:
|
|
Three-month periods ended |
||
|
|
June 30, |
|
June 30, |
|
|
2022 |
|
2021 |
|
|
|
|
|
Sources: |
|
|
|
|
Proceeds from the issuance of shares through a Direct Offering |
|
$5.000 |
|
$— |
Foreign exchange gain on cash and cash equivalents held in foreign |
|
0.169 |
|
0.133 |
|
|
5.169 |
|
0.133 |
|
|
|
|
|
Uses: |
|
|
|
|
Acquisition of property, plant and equipment |
|
— |
|
0.470 |
Acquisition of intangible assets |
|
— |
|
0.074 |
Costs of issuance of shares |
|
0.465 |
|
— |
Withholding taxes paid pursuant to the settlement of non-treasury RSUs |
|
— |
|
0.979 |
Cash flows used in operating activities |
|
7.198 |
|
19.270 |
|
|
7.663 |
|
20.793 |
|
|
|
|
|
Net cash (outflows) |
|
$(2.494) |
|
$(20.660) |
Sources and Uses of Funds
For the three-month period ended June 30, 2022, gross proceeds from a direct offering totaling $5.0 million were raised, and the proceeds were used for operating activities, primarily inventory procurement, salaries and professional fees, resulting in net cash outflows of $2.5 million.
For the three-month period ended June 30, 2021, there were no significant sources of funds. In the same period, uses of funds were used for operating activities, primarily inventory procurement, payments for legacy Health and Wellness COVID-19 related products, salaries and professional fees, as well as acquisition and integration costs, resulting in net cash outflows of $20.7 million.
Direct Offering
On June 23, 2022, Neptune closed agreements with several institutional investors for the purchase and sale of an aggregate of 1,300,000 common shares of the Corporation, 645,526 pre-funded warrants and accompanying series of warrants to purchase up to an aggregate of 2,591,052 common shares warrants, at an offering price of $2.57 per share and accompanying warrants in a registered direct offering priced at-the-market under Nasdaq rules. Each series of warrants have an exercise price of $2.32 per share and are immediately exercisable upon issuance. One series of warrants will expire two years following the date of issuance and one series of warrants will expire five years following the date of issuance. The gross proceeds from the offering are $5 million, prior to deducting placement agent's fees and other offering expenses payable by Neptune. The pre-funded warrants were fully exercised on June 24, 2022 for $65.
44
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAPITAL RESOURCES
Liquidity position
As at June 30, 2022, the Company’s liquidity position, consisting of cash and cash equivalents, was $6.2 million. The Company also has a short-term investment of $0.02 million.
Liquidity and Capital Resources
Cash flows and financial condition between the three-month periods ended June 30, 2022 and 2021
Summary
As at June 30, 2022, cash and cash equivalent totaled $6.2 million, a decrease of $2.5 million or 29% compared to cash and cash equivalents totaling $8.7 million as at June 30, 2021.
Operating activities
During the three-month period ended June 30, 2022 our operating activities used cash of $7.2 million compared to $19.3 million in the three-month period ended June 30, 2021. The main sources of decrease in cash flows used in operating activities of $13.1 million are derived from payments related to legacy Health and Wellness COVID-19 related products as well as acquisition and integration costs during the first quarter of fiscal 2022.
Investing activities
The Company's business models require low capital expenditures ("CAPEX") future investments. For the quarter ended June 30, 2022, $0.0 million was used for investing activities. In the same period the prior year, $0.5 million was used for investing activities.
Financing activities
The Company has been successful in obtaining financing from public issuances, private placements, and related parties. The Company also previously had a term facility for one of its subsidiaries, which was repaid in its entirety during the last quarter of fiscal year 2021 and since then, it has not incurred financing until the Registered Direct Offerings closed on March 14, 2022 ($8.0 million) and June 23, 2022 ($5.0 million). The Company has limited debt, all of which is subordinated.
On January 28, 2022, a shelf registration statement on Form F-3 (the "Form F-3") was filed with the SEC, allowing the Company to issue up to $50 million in publicly traded securities within a three-year timeframe. In connection with the Company's loss of foreign private issuer status, the Company has withdrawn the Form F-3. The Company has preferred shares authorized (none issued) as well unlimited class A shares. As part of financing options, we may choose to issue such classes of shares subject to securities laws restrictions.
The Company's current cash position will be sufficient to support its financial needs for two to three months. Should the Company's various financing initiatives such as potential public issuances, private placements, related parties financings, preferred shares issuances, or debt financings not materialize, further actions such as further cost reduction initiatives and Company spinoffs of subsidiaries remain as viable options. These represent short-term and long-term financing options to management. Management believes that, absent any unexpected economic circumstances or other unknown factors, Neptune will be able to obtain sufficient financial resources to fund its current operations to make the investments needed to execute on the Company's strategic plans. See the Going Concern section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The financial commitments and debt of the Company are limited. Furthermore, certain liabilities, such as the warrant liabilities, are dependent on Neptune’s share price and would only become payable if they are in the money. The warrants, if exercised, settle in common shares of the Company and therefore do impact on the Company’s cash. Indeed, warrant holders are required to pay the cash strike price to exercise the warrant and thus the exercise of warrants would result in a cash infusion to the Company.
Loans and borrowings
On February 10, 2021, as part of the Sprout acquisition, Sprout issued a promissory note of $10.0 million guaranteed by the Company and secured by a first-ranking mortgage on all movable assets of Sprout current and future, corporeal and incorporeal, and tangible and intangible. The outstanding principal balance bears interest at the rate of 10.0% per annum. Interest is accrued and added to the principal amount of the loan. The principal is payable on February 1, 2024.
On July 13, 2022, Neptune announced that Sprout Foods Inc. ("Sprout"), the Corporation's organic plant-based baby food and toddler snack company, has entered into an amendment of each of its existing Secured Promissory Notes. In connection with this amendment, investment funds managed by Morgan Stanley Expansion Capital ("Morgan Stanley" or "MSEC") have agreed to immediately commit an additional $3 million in Secured Promissory Notes to Sprout. The maturity date of the note facility of February 1, 2024 is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The $13.0 million of amended Secured Promissory Notes have a 10% interest rate per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. The amended Secured Promissory Notes may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Corporation and MSEC, into common shares of the Corporation. MSEC was issued 372,670 common shares of Neptune, of an approximate value of $500,000, in connection with this commitment.
45
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Equity
Equity consists of the following items:
|
|
June 30, |
|
March 31, |
|
|
2022 |
|
2022 |
|
|
|
|
|
Share capital |
$ |
318.922 |
$ |
317.051 |
Warrants |
|
6.080 |
|
6.080 |
Additional paid-in capital |
|
56.347 |
|
55.981 |
Accumulated other comprehensive loss |
|
(10.606) |
|
(7.814) |
Deficit |
|
(327.466) |
|
(323.182) |
Total equity attributable to equity holders of the Corporation |
$ |
43.277 |
$ |
48.116 |
Total equity attributable to non-controlling interest |
|
10.502 |
|
12.722 |
Total equity |
$ |
53.779 |
$ |
60.838 |
CONTRACTUAL OBLIGATIONS
The following are the contractual obligations as at June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
Required payments per year |
|
Carrying |
|
Contractual |
|
Less than |
|
1 to |
|
4 to |
|
More than |
Trade and other payables and long-term payables |
|
$21.296 |
|
$21.296 |
|
$21.296 |
|
$— |
|
$— |
|
$— |
Lease liabilities1 |
|
2.501 |
|
2.900 |
|
0.673 |
|
1.130 |
|
0.273 |
|
0.824 |
Loans and borrowings2 |
|
11.882 |
|
10.496 |
|
— |
|
10.496 |
|
— |
|
— |
Other liability3 |
|
0.013 |
|
15.000 |
|
— |
|
— |
|
— |
|
15.000 |
|
|
$35.692 |
|
$49.692 |
|
$21.969 |
|
$11.626 |
|
$0.273 |
|
$15.824 |
(1) Includes interest payments to be made on lease liabilities corresponding to discounted effect.
(2) Includes interest payments to be made on loans and borrowings.
(3) According to the employment agreement with the CEO, a long-term incentive is payable if the Company reaches a level of market capitalization.
Liabilities related to warrants are excluded from the table above, as they are to settle in shares.
Under the terms of its financing agreements, the Company is not required to meet financial covenants.
On November 14, 2021, the Company and its CEO entered into an agreement pursuant to which the CEO’s existing employment agreement was amended to waive the Company’s obligation to procure directors and officers insurance coverage of up to $15 million for the period covering July 1, 2021 to July 31, 2022. The parties agreed that if the Company had successfully completed a strategic partnership prior to December 31, 2021, the CEO would have been entitled to approximately $6.9 million in cash and would have been granted fully vested options to purchase 8.5 million shares of the Company’s common stock. As the strategic partnership was not consummated by December 31, 2021, the CEO will be entitled to a grant of vested RSUs with a value of approximately $0.8 million. The balance of the liability accrual to the CEO is $833,786 as at June 30, 2022, in trade and other payables. The revaluation of the liability amounted to a gain of $3,154,328 for the three-month period ended June 30, 2022 and was recorded into SG&A. During the three-months ended June 30, 2022, settlement in RSUs was of $1,187,221. The compensation to be settled in RSUs or if the Corporation is unable to grant such RSUs, then a combination of cash and vested RSUs with equivalent value, is not reflected in the number of RSUs outstanding above.
The Company is required to pay royalties of 1% of its revenues in semi-annual instalments, for an unlimited period to the former CEO. A provision of $0.5 million for royalty payments is included in the table above for amounts currently due and is not otherwise included in table above.
Refer also to provisions disclosed in note 7, commitments disclosed in note 15(a) and legal proceedings in note 15(b) of the condensed consolidated interim financial statements for the three-month periods ended June 30, 2022 and 2021.
The Company has no significant off-balance sheet arrangements as at June 30, 2022, other than those mentioned above and the commitments disclosed in note 15 of the condensed consolidated interim financial statements for the three-month periods ended June 30, 2022 and 2021.
46
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ACCOUNTING POLICIES
OUR ACCOUNTING POLICIES
Please refer to Note 3 of the annual consolidated financial statements as at March 31, 2022 for more information about significant accounting policies used to prepare the financial statements.
When preparing the financial statements in accordance with US GAAP, the management of Neptune must make estimates and judgements that affect the amounts reported in the financial statements and the notes thereto. Such estimates are based on Management’s knowledge of current events and actions that the Company may take in the future.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The condensed consolidated interim financial statements are prepared in accordance with US GAAP. In preparing the condensed consolidated interim financial statements for the three-month periods ended June 30, 2022 and 2021, Management made estimates in determining transaction amounts and statement of financial position balances. Certain policies have more importance than others. We consider them critical if their application entails a substantial degree of judgment or if they result from a choice between numerous accounting alternatives and the choice has a material impact on reported results of operation or financial position. Please refer to the annual consolidated financial statements as at March 31, 2022 for more information about the Company’s most significant accounting policies and the items for which critical estimates were made in the financial statements and should be read in conjunction with the notes to the consolidated financial statements for the years ended March 31, 2022 and 2021.
Estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Critical accounting estimates are:
Estimating the write down of inventories
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. As necessary, the Corporation records write-downs for excess, slow moving and obsolete inventory. To determine these amounts, the Corporation regularly reviews inventory quantities on hand and compares them to estimates of historical utilization, future product demand, and production requirements. Write-downs of inventories to net realizable value are recorded in cost of sales in the consolidated financial statements.
In the quarter ended June 30, 2022 and 2021, inventories have been reduced by $3.1 million and $0 million respectively, as a result of a write-down to their net realizable value, which is included in cost of sales.
The write-off of inventory in the quarter ended June 30, 2022 was related to cannabis products. The write-down of inventories during the quarter ended June 30, 2022 is related to assets held for sale inventories that are not expected to be realized.
Net realizable value is subject to measurement uncertainty because it can be difficult to predict market demands and timing of supply due to logistics.
An allowance for current expected credit losses is maintained to reflect credit risk for trade accounts receivable based on a current expected credit loss model which factors in changes in credit quality since the initial recognition of trade accounts receivable based on customer risk categories. Current expected credit losses also consider collection history and specific risks identified on a customer-by-customer basis. Trade accounts receivable are presented net of allowances for current expected credit losses.
Most of the Corporation's customers are distributors for a given territory and are privately-held, provincially owned and publicly owned companies. The profile and credit quality of the Corporation’s customers vary significantly. Adverse changes in a customer’s financial position could cause the Corporation to limit or discontinue conducting business with that customer, require the Corporation to assume more credit risk relating to that customer’s future purchases or result in uncollectible accounts receivable from that customer. Such changes could have a material adverse effect on business, consolidated results of operations, financial condition and cash flows.
The Corporation’s extension of credit to customers involves judgment and is based on an evaluation of each customer’s financial condition and payment history. From time to time, the Corporation will temporarily transact with customers on a prepayment basis where circumstances warrant. The Corporation’s credit controls and processes cannot eliminate credit risk.
The expected credit loss for the quarter ended June 30, 2022 and 2021 $0.02 million and $0.04 million respectively. Expected credit loss is subject to estimation risk and measurement uncertainty because the financial health of certain customers is difficult to predict.
47
Management’s Discussion and Analysis of Financial Condition and Results of Operations
There were no impairment triggers identified in quarter ended June 30, 2022 and no impairment losses on goodwill, intangibles, and property, plant and equipment recorded, except as noted in following paragraph.
On June 8, 2022, the Company announced a planned divestiture of the Canadian cannabis business and the Corporation will focus on winding up its cannabis operations pending one or more sales transactions. Following this announcement, the Corporation had Canadian disposal group assets that met the criteria to be classified as held for sale. As at June 30, 2022, all assets and liabilities related to the Canadian cannabis business are now respectively shown under assets held for sale and liabilities directly associated with assets held for sale on Neptune's balance sheet. Comparative balance sheet amounts have not been reclassified. The disposal group has been measured at fair value less cost to sell using market prices for comparative assets (level 3) and an estimate of disposal costs which resulted in an impairment loss of $815,661 for the three-month period ended June 30, 2022.
The Corporation’s revenue-generating activities from the sale of products in the course of ordinary activities are recognized at a point in time when control of the products is transferred to the customer and the Corporation’s obligations have been fulfilled. The Corporation transfers control generally on shipment of the goods or in some cases, upon reception by the customer. Revenue is measured as the amount of consideration the Corporation expects to receive in exchange for the Corporation’s product as specified in the customer contract. Certain of the Corporation’s customer contracts, most notably those with the Canadian provincial and territorial agencies, may provide the customer with a right of return. In certain circumstances, the Corporation may also provide a retroactive price adjustment to a customer. These items give rise to variable consideration, which is recognized as a reduction of the transaction price based upon the expected amounts of the product returns and price adjustments at the time revenue for the corresponding product sale is recognized. The determination of the reduction of the transaction price for variable consideration requires that the Corporation make certain estimates and assumptions that affect the timing and amounts of revenue recognized. The Corporation estimates this variable consideration by taking into account factors such as historical information, current trends, forecasts, provincial and territorial inventory levels, availability of actual results and expectations of demand.
The Corporation recognizes a liability for sales refunds within other current liabilities with a corresponding decrease in revenues. Furthermore, the Corporation recognizes an asset for the value of inventory which is expected to be returned within prepaid expenses and other assets on the consolidated balance sheets with a corresponding reduction of cost of sale.
The Corporation may be involved with other parties, including suppliers of products, in providing goods or services to a customer when it enters into revenue transactions for the sale of products that it does not manufacture. In these instances, the Corporation must determine whether it is a principal in these transactions by evaluating the nature of its promise to the customer. The Corporation is a principal and records revenue on a gross basis if it controls a promised good before transferring that good to the customer. On the other hand, the Corporation records revenue as the net amount when it does not meet the criteria to be considered a principal.
According to the employment agreement with the CEO, a long-term incentive of $15 million is payable if the Corporation’s US market capitalization is at least $1 billion. The Corporation uses a risk-neutral Monte Carlo simulation to estimate the fair-value of this instrument and recognizes the incentive over the estimated period to reach the market capitalization. The incentive is being recognized over the estimated period to reach the market capitalization. The risk-neutral Monte-Carlo simulation uses level 3 inputs. The assumptions used in the simulation include a risk free-rate of 2.98% and a volatility of 70.32% for the quarter ended June 30, 2022 (respectively 1.45% and 65.48% for the quarter ended June 30, 2021). An increase or decrease in the volatility assumption significantly impacts the fair value of the long-term incentive.
On July 8, 2019, the Corporation granted 157,143 market performance options under the Corporation stock option plan at an exercise price of $4.43 per share to the CEO, expiring on July 8, 2029. The options were vest after the attainment of market performance conditions within the following ten years. The market condition was factored into the fair value. Some of these market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revaluated up to the date of approval of the amendments (grant date).
On July 8, 2019, the Corporation granted 100,000 non-market performance options under the Corporation stock option plan at an exercise price of $4.43 per share to the CEO, expiring on July 8, 2029. These options vest after the attainment of non-market performance conditions within the following ten years. These non-market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revalued up to the date of approval of the amendments (grant date) These options are valued based on level 3 inputs. During the twelve-month period ended March 31, 2022, changes in estimated probability of achievement of the non-market performance conditions or the expected number of years to achieve the performance conditions resulted in a recovery of stock-based compensation recognized under this plan None of these non-market performance options have vested as at June 30, 2022. Changes in these assumptions would impact the timing of which the expense is recognized. These options were not exercisable as at June 30, 2022 and March 31, 2022.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
On June 23, 2022, Neptune issued a total of 645,526 pre-funded warrants (“Pre-Funded Warrants”), along with 1,300,000 common shares of the Corporation, as part of a registered direct offering ("June 2022 Direct Offering"). Each Pre-Funded Warrant was exercisable for one Common Share. The common shares and the Pre-Funded Warrants were sold together with 1,945,526 Series C Warrants (the "Series C Warrants"), and 1,945,526 Series D Warrants (the "Series D Warrants") and collectively, the "June 2022 Common Warrants". Each common share and Pre-Funded Warrants and the accompanying June 2022 Common Warrants were sold together at a combined offering price of $2.57, for aggregate gross proceeds of $5.0 million before deducting fees and other estimated offering expenses. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $0.0001 and are exercisable commencing on the Closing Date and will terminate when such Pre-Funded Warrants are exercised in full. The Series C Warrants and the Series D Warrants have an exercise price of $2.32 per share and can be exercised for a period of 5 years and 2 years respectively from the date of issuance.
Proceeds of the June 2022 Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. The fair value of the liability-classified warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $4,046,836 for the Series C Warrants and $3,080,121 for the Series D Warrants. Because the fair value of the liability classified warrant exceeds the total proceeds, no consideration was allocated to the Common Shares and Pre-Funded Warrants and a loss of $2,126,955 was immediately recognized in the net loss of the period as there were no additional rights or privileges identified. Total issue costs related to this private placement of $465,211, was recorded under finance costs.
CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING CHANGES
The accounting policies and basis of measurement applied in the condensed consolidated interim financial statements for the three-month periods ended June 30, 2022 and 2021 are the same other than as disclosed, if any, in note 3 to the condensed consolidated interim financial statements.
ISSUED AND OUTSTANDING SECURITIES
The following table details the number of issued and outstanding securities as at the date of this MD&A:
|
|
Number of Securities |
|
|
|
Common shares |
|
7,989,800 |
Share options |
|
510,526 |
Deferred share units |
|
4,308 |
Restricted share units |
|
18,375 |
Warrants |
|
5,993,414 |
Total number of securities |
|
14,516,423 |
The Company’s common shares are being traded on on NASDAQ Capital Market under the symbol ‟NEPT”. Effective August 15, 2022, the Company's common shares no longer trade on the TSX. Each option, restricted share, restricted share unit, deferred share unit and warrant is exercisable into one common share to be issued from the treasury of the Company.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information otherwise required under this item.
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Item 4. Controls and Procedures.
INTERNAL CONTROLS DISCLOSURE
Disclosure Controls and Procedures ("DC&P") and Internal Control Over Financial Reporting ("ICFR")
As required by applicable rules of the SEC, Management is responsible for the establishment and maintenance of DC&P and ICFR. Our DC&P and ICFR has been designed based on the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with US GAAP. Regardless of how well the DC&P and ICFR are designed, internal controls have inherent limitations and can only provide reasonable assurance that the controls are providing reliable financial reporting information in accordance with US GAAP. These inherent limitations include, but are not limited to, human error and circumvention of controls and as such, there can be no assurance that the controls will prevent or detect all misstatements due to errors or fraud, if any.
Evaluation of DC&P
The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have evaluated the design and effectiveness of our Disclosure Controls and Procedures as of June 30, 2022 and, based on their evaluation, have concluded that the Disclosure Controls and Procedures were not effective as of that date due to a material weaknesses disclosed below.
Internal controls over financial reporting ("ICFR")
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with US GAAP.
Internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error or overriding of controls. Because of the inherent limitations, only reasonable assurance with respect to financial statement preparation and presentation can be provided and misstatements may not be prevented or detected. Management evaluated the design and effectiveness of the Company’s internal control over financial reporting as of March 31, 2022 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework 2013. Based on its evaluation, management concluded that our internal control over financial reporting was not effective as of March 31, 2022 due to material weaknesses in our internal control over financial reporting. This conclusion remains accurate at June 30, 2022. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
The Company did not effectively design, implement and operate effective process-level control activities related to various processes, account level assertions and disclosures such as inventory, journal entry, cutoff and purchasing processes, including entity level controls and information technology general controls (“ITGCs”).
Further, there were inadequate controls over user and privileged access to information technology (IT) systems for multiple components to adequately restrict access to appropriate finance and IT personnel and enforce appropriate segregation of duties. As a result, process-level automated control activities and manual control activities that are dependent upon information derived from IT systems were also ineffective. The pervasive nature of these deficiencies contributed to the other material weaknesses below:
As a result of these deficiencies, material misstatements were identified and corrected in the consolidated financial statements as of and for the year ended March 31, 2021. Because there is a reasonable possibility that material misstatement of the consolidated financial statements will not be prevented or detected on a timely basis, we concluded the deficiencies represent material weaknesses in our internal control over financial reporting and our internal control over financial reporting was not effective as of March 31, 2022. This conclusion remains accurate at June 30, 2022.
Changes in ICFR
We have been and are actively engaged in the implementation of remediation efforts discussed below to address the material weaknesses in our internal control over financial reporting identified as of March 31, 2021. Under the direction of our CEO and CFO, we developed a comprehensive plan to remediate those material weaknesses. We are in the process of implementing this plan. The Company has no change in its ICFR that has materially affected or is reasonably likely to materially affect the Company's ICFR for the three-month period ended June 30, 2022. Our CEO and CFO have taken additional steps to assure that the financial statements as of and for the three-month period ended June 30, 2022 are presented fairly in accordance with US GAAP.
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Remediation Plan
The above material weaknesses also existed at March 31, 2021. During the year ended March 31, 2021, we began implementing certain measures as part of the remediation plan including: (i) development of a detailed remediation plan addressing the material weaknesses related to the control environment, risk assessment and monitoring, (ii) institution of policies and processes to support the functioning of internal controls over financial reporting, (iii) design of a comprehensive risk assessment process, (iv) process level and IT general controls design enhancement and (v) hiring of individuals with appropriate skills and experience. The material weaknesses being addressed by the above-mentioned remediation plan will not be considered remediated until the applicable controls operate for a sufficient period of time, and management concludes, through testing, that these controls are operating effectively. This has not occurred to date.
We remain committed to the identification, design and implementation of steps still needed to remediate the material weaknesses in our internal controls identified as of March 31, 2021, and to ensure that our internal controls over financial reporting will be designed and operating effectively by:
Although we have commenced the remediation process and intend to complete it as promptly as possible, we cannot estimate how long it will take to remediate these material weaknesses. In addition, new material weaknesses may be discovered that require additional time and resources to remediate. Until the remediation is complete, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with US GAAP.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is engaged from time-to-time in various legal proceedings and claims. The outcome of such proceedings and claims against the Company is subject to future resolution, including the uncertainties of litigation. Regardless of the outcome, resolving legal proceedings and other disputes can have an adverse impact on us because of legal costs, diversion of management's time and resources, and other factors.
Refer to Note 15, “Commitments and Contingencies,” of our condensed consolidated interim financial statements in Part I, Item 1 within this Quarterly Report, for further information on our legal proceedings.
Item 1A. Risk Factors.
An investment in our common shares, or in securities convertible into or exchangeable for our common shares, involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Quarterly Report, as well as in our other filings with the SEC, in evaluating our business. If any of the following risks actually occur, our business, financial condition, operating results and future prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline and you might lose all or part of your investment. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business, financial condition, operating results, liquidity, and future prospects. Certain statements below are forward-looking statements. For additional information, see Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report.
During the three-month period ended June 30, 2022, there were no material changes to the risks and uncertainties described in Part I, Item 1A, “Risk Factors,” of our Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On June 15, 2022, we issued 7,104 common shares to Stifel Nicolaus Canada Inc. ("Stifel") in connection with the engagement of Stifel as our financial advisor in connection with the proposed divestiture of our cannabis business and assets. The issuance was made in reliance on an exemption from registration under the Securities Act by virtue of Section 4(a)(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
Refer to Part I, “Consolidated Financial Statements,” on page F-1 within this Quarterly Report for our Consolidated Financial Statements.
EXHIBIT INDEX
Exhibit No. |
|
Description of Exhibit |
10.1* |
|
|
10.2* |
|
|
31.1* |
|
Certification by Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* |
|
|
32** |
|
|
101.INS* |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104* |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
# |
|
Indicates a management contract or compensatory plan or arrangement. |
† |
|
Certain identified information has been excluded from the exhibit pursuant to Item 601(a) (6) and/or Item 601(b) (10) (iv) of Regulation S-K |
* |
|
Filed herewith |
** |
|
Furnished herewith |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Neptune Wellness Solutions Inc. |
|
|
|
|
|
Date: August 15, 2022 |
|
By: |
/s/ Michael Cammarata |
|
|
|
Michael Cammarata |
|
|
|
President, Chief Executive Officer and Director (Principal Executive Officer) |
55