UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
(Check one)
☐ |
Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934 |
or
☒ |
Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended: March 31, 2021
Commission File Number: 001-33526
NEPTUNE WELLNESS SOLUTIONS INC.
(Exact name of Registrant as specified in its charter)
Québec |
2836 |
Not Applicable |
(Province or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number (if applicable)) |
(I.R.S. Employer Identification Number (if applicable)) |
545 Promenade du Centropolis
Suite 100
Laval, Québec,
Canada H7T 0A3
(450) 687-2262
(Address and telephone number of Registrant’s principal executive offices)
CT Corporation System
28 Liberty Street, New York, NY 10005
(212) 894-8940
(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Shares |
NEPT |
The Nasdaq Stock Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
For annual reports, indicate by check mark the information filed with this Form:
☒ Annual Information Form |
☒ Audited Annual Financial Statements |
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Common Shares outstanding as of March 31, 2021: 165,622,944
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 an emerging growth company as defined in Rule 12b-2 of the Exchange Act.
Emerging Growth Company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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. ☒
Neptune Wellness Solutions Inc. (the “Company” or “Neptune”) is a “foreign private issuer” as defined in Rule 3b-4 under Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is a Canadian issuer eligible to file its annual report pursuant to Section 13 of the Exchange Act on Form 40-F pursuant to the multi-jurisdictional disclosure system (the “MJDS”) adopted by the United States Securities and Exchange Commission (the “SEC”). The Company’s common shares are listed on the Toronto Stock Exchange and the Nasdaq Stock Market under the trading symbol “NEPT”.
In this annual report, references to “we”, “our”, “us”, the “Company” or “Neptune”, mean Neptune Wellness Solutions Inc. and our wholly owned subsidiaries, unless the context suggests otherwise.
Unless otherwise indicated, all amounts in this annual report are in Canadian dollars and all references to “$” mean Canadian dollar and references to “U.S. dollars” or “US$” are to United States dollars.
AUDITED FINANCIAL STATEMENTS, MANAGEMENT’S DISCUSSION AND ANALYSIS
AND ANNUAL INFORMATION FORM
The following principal documents are filed as exhibits to, and incorporated by reference into, this Annual Report:
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Document |
Exhibit No. |
Annual Information Form of the Company for the year ended March 31, 2021 (the “AIF”) |
99.1 |
Audited consolidated financial statements of the Company and notes thereto as at and for the years ended March 31, 2021 and 2020, together with the reports thereon of the independent registered public accounting firms |
99.2 |
Management’s Discussion and Analysis of the Company for the year ended March 31, 2021 (the “2021 MD&A”) |
99.3 |
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The information provided in the section entitled “Internal Controls over Financial Reporting” under the sub-heading “Disclosure Controls and Procedures (“DC&P”)” contained in the 2021 MD&A filed as Exhibit 99.3 to this Annual Report on Form 40-F is incorporated by reference herein.
Management’s Annual Report on Internal Controls over Financial Reporting
The information provided in the section entitled “Internal Controls Over Financial Reporting” under the sub-heading “Internal Control over Financial Reporting (“ICFR”)” contained in the 2021 MD&A filed as Exhibit 99.3 to this Annual Report on Form 40-F is incorporated by reference herein.
Attestation Report of the Registered Public Accounting Firm
The disclosure provided under the heading “Report of Independent Registered Public Accounting Firm to the Shareholders and Board of Directors of Neptune Wellness Solutions Inc. - Opinion on Internal Control over Financial Reporting” contained in the Company’s audited annual financial statements filed as Exhibit 99.2 to this Annual Report on Form 40-F is incorporated by reference herein.
Changes in Internal Control over Financial Reporting
The information provided in the section entitled “Internal Controls Over Financial Reporting (“ICFR”)” under the sub-heading “Changes to the Control Environment and Other Matters” contained in the 2021 MD&A filed as Exhibit 99.3 to this Annual Report on Form 40-F is incorporated by reference herein.
AUDIT COMMITTEE FINANCIAL EXPERT
The Registrant’s board of directors has determined that it has at least one audit committee financial expert serving on its audit committee. Mr. Frank P. Rochon has been determined to be such audit committee financial expert and is independent, as that term is defined by the NASDAQ’s listing standards applicable to the Registrant. The Securities and Exchange Commission has indicated that the designation of Mr. Rochon as an audit committee financial expert does not make Mr. Rochon an “expert” for any purpose, impose any duties, obligations or liability on Mr. Rochon that are greater than those imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the audit committee or board of directors.
CODE OF ETHICS
The Registrant has adopted a code of ethics entitled “Code of Business Conduct and Ethics for Directors, Officers and Employees” that applies to all directors, officers and employees, including the Registrant’s CEO, CFO and principal accounting officer. The Registrant’s code of ethics is available on the Registrant’s Internet website: www.neptunecorp.com.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The disclosure provided under “Report on Audit Committee—External Auditor Fees” in Exhibit 99.1, the Registrant’s Annual Information Form, is incorporated by reference herein.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The disclosure provided under “Charter of the Audit Committee of the Board of Directors—Responsibilities for Engaging External Auditors” in Schedule “A” of the AIF filed as Exhibit 99.1 to this Annual Report on Form 40-F is incorporated by reference herein. None of the services described above under “External Auditor Fees” were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
OFF-BALANCE SHEET ARRANGEMENTS
The disclosure provided under “Consolidated Off Balance Sheet Arrangements and Contractual Obligations” in the 2021 MD&A filed as Exhibit 99.3 to this Annual Report on Form 40-F is incorporated by reference herein.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The disclosure provided under “Consolidated Off Balance Sheet Arrangements and Contractual Obligations” in the 2021 MD&A filed as Exhibit 99.3 to this Annual Report on Form 40-F is incorporated by reference herein.
IDENTIFICATION OF THE AUDIT COMMITTEE
The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Registrant’s audit committee is composed of the following directors: Mr. Frank P. Rochon, Mr. John M. Moretz, and Ms. Jane Pemberton.
DIFFERENCES IN NASDAQ AND QUÉBEC CORPORATE GOVERNANCE REQUIREMENTS
NASDAQ Marketplace Rule 5615(a)(3) permits a foreign private issuer to follow its home country practice in lieu of certain of the requirements of the Rule 5600 Series. A foreign private issuer that follows a home country practice in lieu of one or more provisions of the Rule 5600 Series is required to disclose in its annual report filed with the Commission, or on its website, each requirement of the Rule 5600 Series that it does not follow and describe the home country practice followed by the issuer in lieu of such NASDAQ corporate governance requirements. The Registrant does not follow NASDAQ Marketplace Rule 5620(c), but instead follows its home country practice. The NASDAQ minimum quorum requirement under Rule 5620(c) for a meeting of shareholders is 33.33% of the outstanding shares of common voting stock. The Registrant’s quorum requirement, as set forth in the Registrant’s by-laws, is that a quorum for a meeting of the Registrant’s holders of common shares is the attendance, in person or by proxy, of the shareholders representing 10% of the Registrant’s common shares. The foregoing is consistent with the laws, customs and practices in Québec and the rules and policies of the Toronto Stock Exchange.
FORWARD-LOOKING STATEMENTS
The information provided under the heading “Cautionary Note Regarding Forward-Looking Statements” in the AIF filed as Exhibit 99.1 to this Annual Report on Form 40-F is incorporated by reference herein.
NOTICES PURSUANT TO REGULATION BTR
There were no notices required by Rule 104 of Regulation BTR that the Company sent during the year ended March 31, 2021 concerning any equity security subject to a blackout period under Rule 101 of Regulation BTR.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. Undertaking
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities in relation to which the obligation to file this annual report on Form 40-F arises; or transactions in said securities.
B. Consent to Service of Process
The Registrant has previously filed with the Commission a Form F-X in connection with the class of securities in relation to which the obligation to file this report arises.
Any change to the name or address of the agent for service of process of the Registrant shall be communicated promptly to the Commission by an amendment to the Form F-X referencing the file number of the relevant registration statement.
EXHIBIT INDEX
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Exhibits
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Description
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99.1 |
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Annual Information Form for the fiscal year ended March 31, 2021 |
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99.2 |
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99.3 |
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99.4 |
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99.5 |
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99.6 |
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Rule 13a-14(a)/15d-14(a) Certifications:
Certification of the Registrant’s Principal Executive Officer
Certification of the Registrant’s Principal Financial Officer |
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99.7 |
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Certification of the Registrant’s Principal Executive Officer
Certification of the Registrant’s Principal Financial Officer |
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101 |
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Interactive Data File |
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.
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NEPTUNE WELLNESS SOLUTIONS INC. |
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July 15, 2021 |
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By: |
/s/ Michael Cammarata |
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Name: Michael Cammarata |
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Title: Principal Executive Officer |
ANNUAL INFORMATION FORM
Fiscal Year Ended March 31, 2021
July 15, 2021
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements2
General Development of the Company4
Description of Our Share Capital39
Cease Trade Orders, Bankruptcies, Penalties or Sanctions45
Legal Proceedings and Regulatory Actions46
Interest of Management and Others in Material Transactions47
Transfer Agents and Registrars47
Schedule “A” Charter of the Audit Committee of the Board of DirectorsA-1
2
As used in this annual information form (“AIF”), unless the context otherwise requires, references to “Neptune”, the “Corporation”, “we”, “us”, “our” or similar expressions refer to Neptune Wellness Solutions Inc. (previously Neptune Technologies & Bioressources Inc.) and its subsidiaries, collectivelly or individually.
Unless otherwise noted, in this AIF, all information is presented as of March 31, 2021. All references in this AIF to “dollars”, “CDN$” and “$” refer to Canadian dollars and references to “US$” refer to United States dollars, unless otherwise expressly stated.
References in this AIF to our fiscal year refer to the fiscal year ended March 31. For example, references to “Fiscal 21” refer to our fiscal year ended March 31, 2021.
We have proprietary and usage rights to a number of company names, product names, trade names and trademarks used in this AIF that are important to our business, such as, Mood Ring™, PanHash™, Sprout®, NurturMe®, Nosh!®, Neptune Wellness, Forest Remedies®, and Ocean Remedies®. We may omit the registered trademark (®) and trademark (™) symbols and any other related symbols for such trademarks and all related trademarks, including those related to specific products or services, when used in this AIF.
Market data and certain industry data and forecasts included in this AIF were obtained or derived from internal company surveys, market research, publicly available information, reports of governmental agencies and industry publications and surveys. We have relied upon industry publications as our primary sources for third-party industry data and forecasts. Industry surveys, publications and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable based upon management’s knowledge of the industry, have not been independently verified. By their nature, forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not know what assumptions regarding general economic growth were used in preparing the forecasts cited in this AIF. While we are not aware of any misstatements regarding Neptune’s industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors” and elsewhere in this AIF. While we believe our internal business research is reliable and market definitions are appropriate, neither such research nor definitions have been verified by any independent source. This AIF may only be used for the purpose for which it has been published.
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Cautionary Note Regarding Forward-Looking Statements
This AIF contains certain information that may constitute forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of U.S. federal securities laws, both of which we refer to as forward-looking statements, including, without limitation, statements relating to certain expectations, projections, new or improved product introductions, market expansion efforts, and other information related to our business strategy and future plans. Forward-looking statements can, but may not always, be identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “would”, “should”, “believe”, “objective”, “ongoing”, “assumes”, “goal”, “likely” and similar references to future periods or the negatives of these words and expressions and by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements are based on management’s current expectations and are subject to a number of risks, uncertainties, and assumptions, including market and economic conditions, business prospects or opportunities, future plans and strategies, projections, technological developments, anticipated events and trends and regulatory changes that affect us, our customers and our industries. Although the Corporation and management believe that the expectations reflected in such forward-looking statements are reasonable and based on reasonable assumptions and estimates, there can be no assurance that these assumptions or estimates are accurate or that any of these expectations will prove accurate. Forward-looking statements are inherently subject to significant business, economic and competitive risks, uncertainties and contingencies that could cause actual events to differ materially from those expressed or implied in such statements.
Undue reliance should not be placed on forward-looking statements. Actual results and developments are likely to differ, and may differ materially, from those anticipated by us and expressed or implied by the forward-looking statements contained in this AIF. Such statements are based on a number of assumptions and risks which may prove to be incorrect, including, without limitation, assumptions about: the performance of our production facility; our ability to maintain customer relationships and demand for our products; the overall business and economic conditions; the potential financial opportunity of our addressable markets; the competitive environment; the protection of our current and future intellectual property rights; our ability to recruit and retain the services of our key personnel; our ability to develop commercially viable products; our ability to pursue new business opportunities such as legal cannabis oil production; our ability to obtain additional financing on reasonable terms or at all; our ability to complete and, as applicable, integrate our acquisitions and generate synergies; and the impact of new laws and regulations in Canada, the United States or any other jurisdiction where we are currently doing business or intend to do business.
Many factors could cause our actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressed or implied by forward-looking statements, including, without limitation, the factors discussed under “Risk Factors”. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those expressly or impliedly expected or estimated in such statements. Shareholders and investors should not place undue reliance on forward-looking statements as the plans, intentions or expectations upon which they are based might not occur. Although the Corporation cautions that the foregoing list of risk factors, as well as those risk factors presented under the heading “Risk Factors” and elsewhere in this AIF, are not exhaustive, shareholders and investors should carefully consider them and the uncertainties they represent and the risks they entail. The forward-looking statements contained in this AIF are expressly qualified by this cautionary statement. Unless otherwise indicated, forward-looking statements in this AIF describe our expectations as of the date of this AIF and, accordingly, are subject to change after such date. We do not undertake to update or revise any forward-looking statements for any reason, except as required by applicable securities laws.
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Name, Address and Incorporation
Neptune was incorporated under Part IA of the Companies Act (Québec) on October 9, 1998 and is now governed by the Business Corporations Act (Québec). Neptune’s head office and registered office is located at 545 Promenade du Centropolis, Suite 100, Laval, Québec, Canada, H7T 0A3 and its website address is www.neptunecorp.com. The common shares of Neptune (“Common Shares”) are listed and posted for trading on the Toronto Stock Exchange (“TSX”) and on the NASDAQ Stock Market (“NASDAQ”) under the symbol “NEPT”.
Since its incorporation, Neptune has amended its articles on numerous occasions. The Corporation first amended its articles on May 30, 2000 to convert its then issued and outstanding shares into newly-created classes of shares. The Corporation’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000, the Corporation converted all its issued and outstanding Class A shares into Class B subordinate shares. On September 25, 2000, the Corporation further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. On November 1, 2013, the Corporation amended its articles of incorporation to reflect certain changes to items relating to board matters. On August 22, 2018, the Corporation amended its articles of incorporation to change its name to Neptune Wellness Solutions Inc.
The activities of Neptune are conducted either directly or through its subsidiaries. The table below lists the principal subsidiaries of Neptune as at March 31, 2021, as well as their jurisdiction of organization and the percentage held by Neptune in each of them.
Name |
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Jurisdiction of Organization |
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Percentage Held by Neptune |
9354-7537 Québec Inc. |
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Québec |
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100% |
Biodroga Nutraceuticals Inc. |
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Québec |
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100% |
Neptune Forest, Inc. |
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Delaware |
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100% |
Neptune Growth Ventures, Inc. |
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Delaware |
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100% |
Neptune Health & Wellness Innovation, Inc. |
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Delaware |
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100% |
Neptune Holding USA, Inc. |
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Delaware |
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100% |
Neptune Wellness Brands Canada, Inc. |
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Québec |
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100% |
Sprout Foods, Inc. |
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Delaware |
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50.1% |
Sugarleaf Labs, Inc. |
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Delaware |
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100% |
Biodroga Inc. was acquired by Neptune on January 7, 2016, and on March 1, 2016, it was amalgamated with an inactive subsidiary of Neptune, NeuroBioPharm Inc., and became Biodroga Nutraceutical Inc. (“Biodroga”).
9354-7537 Québec Inc. was incorporated on February 6, 2017. It is a wholly-owned subsidiary of Neptune that was created with the intent of submitting an application to become a Licensed Producer under the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) and to obtain a Control Substance Licence (also referred to as a Dealer’s Licence) under the Controlled Drugs and Substances Act (“CDSA”), which was transitioned to an application for a license for standard processing under the Cannabis Act and the Cannabis Regulations with the coming into force of the new legislation and regulations on October 17, 2018. See “Description of the Business – Business Overview & Mission”.
On May 3, 2019, Neptune incorporated Neptune Holdings USA, Inc., a Delaware corporation wholly-owned by Neptune, which was created in connection with the proposed acquisition of the business of SugarLeaf Labs, LLC and Forest Remedies LLC (collectively, “SugarLeaf”). See “General Development of the Corporation – Fiscal Year Ended March 31, 2020 – Acquisition of the Assets of Hemp Processor SugarLeaf”.
On May 3, 2019, Neptune incorporated Neptune Acquisition USA, Inc., a Delaware corporation wholly-owned by Neptune Holding USA, Inc., which was created in connection with the proposed acquisition of the business of SugarLeaf. On May 13, 2019, Neptune filed a Certificate of Amendment of Certificate of Incorporation to change its name to Sugarleaf Labs, Inc. See “General Development of the Corporation – Fiscal Year Ended March 31, 2020 – Acquisition of the Assets of Hemp Processor SugarLeaf”.
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On April 16, 2020, Neptune incorporated Neptune Health & Wellness Innovation, Inc., a Delaware corporation wholly-owned by Neptune Holding USA, Inc.
On May 21, 2020, Neptune incorporated Neptune Forest, Inc., and Neptune Growth Ventures, Inc., each a Delaware corporation wholly-owned by Neptune Holding USA, Inc. The Corporation intends to commercialize the Forest Remedies™ and Ocean Remedies™ brands through Neptune Forest, Inc.
On May 22, 2020, Neptune incorporated Neptune Wellness Brands Canada, Inc., each a Quebec corporation wholly-owned by Neptune. The Corporation intends to commercialize branded products in Canada through Neptune Wellness Brands Canada, Inc.
On February 10, 2021, Neptune acquired a 50.1% interest in Sprout Foods, Inc. (“Sprout”), a portfolio investment of Morgan Stanley Expansion Capital. Sprout is held by Neptune Growth Ventures, Inc. See “General Development of the Corporation – Fiscal Year Ended March 31, 2021 – Neptune Acquires Controlling Interest in Sprout Foods, Inc.”
General Development of the Corporation
Fiscal Year Ended March 31, 2019
Transaction Concluded with Canopy Growth Corporation
On June 19, 2018, the Corporation announced that it had entered into a multi-year processing agreement with Canopy Growth Corporation (“Canopy Growth”). Under the terms of the agreement, the Corporation will supplement Canopy Growth’s extraction, refinement, and extract product formulation capacity to provide extracted cannabis products.
Two Patent Applications for Innovative Cannabis Extraction Processes
On August 9, 2018, the Corporation announced that it had filed two applications with the United States Patent and Trademark Office (USPTO) for patents related to the extraction of cannabis material. See “Patent Applications” under the heading “Description of the Business”, below.
License from Health Canada
On September 17, 2018, Neptune announced that it received a Confirmation of Readiness letter from Health Canada in regard to its application to become a Licensed Producer under the ACMPR (Access to Cannabis for Medical Purposes Regulations). Health Canada’s positive response marked another important regulatory step forward to obtaining Neptune’s licence to produce cannabis oil supporting its timeline to commence commercialization during Fiscal 2019.
On January 7, 2019, Neptune announced that it received a License for Standard Processing from Health Canada under the Cannabis Act. The Standard Processing License, issued on January 4, 2019, enables Neptune to possess cannabis, to produce cannabis (other than obtain it by cultivating, propagating or harvesting it) and to sell its products or its services to other license holders.
Phase II – 5 Million Investment in Cannabis Extraction Expansion
On June 5, 2018, Neptune announced an investment of $4.8 million to expand the capacity of its extraction facility to 200,000 kg of input material annually. This expansion was completed on time and on budget in April 2019.
Transaction concluded with Lonza
On December 21, 2018, the Corporation announced that it had entered into a multi-year intellectual property (IP) licencing and capsule sale agreement with Lonza (SWX: LONN). With an initial annual capacity of up to 200 million
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capsules, this licensing agreement will allow Neptune to seek to become a large-scale Licaps® manufacturer in the Canadian cannabis sector.
Commercial Production and Shipping of Cannabis Extracts
On March 26, 2019, the Corporation completed initial commercial cannabis extracts production lots and was shipping same from its licensed, GMP (Good Manufacturing Practices, mandated by the Natural Health Products Directorate of Health Canada) facility, in Sherbrooke, Quebec.
Fiscal Year Ended March 31, 2020
Acquisition of the Assets of Hemp Processor SugarLeaf
On July 24, 2019, Neptune completed the acquisition of substantially all of the assets of Sugarleaf Labs, LLC and Forest Remedies LLC (collectively, “SugarLeaf”), a North Carolina-based commercial hemp company (the “SugarLeaf Acquisition”). Neptune paid an initial consideration for SugarLeaf of $23.7 million (US$18.1 million), through a combination of $15.8 million (US$12.0 million) in cash and $8.0 million (US$6.1 million) in Common Shares (1,587,301 Common Shares). Additionally, by achieving certain annual adjusted EBITDA and other performance targets, earnouts could reach $173.5 million (US$132.0 million). A portion of the earnout is to be paid by the issuance of a fixed number of Common Shares upon the achievement of certain performance targets. The three additional earnout payments, if earned, are to be paid over three years following the acquisition with a combination of cash or Common Shares, with at least 50% in cash. The initial cash consideration of the transaction was funded with the proceeds of a private placement financing by the Corporation completed in July 2019 (the “July 2019 Private Placement”). We filed a business acquisition report on Form 51-102F4 with respect to the SugarLeaf Acquisition on October 4, 2019 which is available under the Corporation’s profile on SEDAR at www.sedar.com.
During the year ended March 31, 2020, Neptune determined there was an impairment indicator due to a decline in hemp-derived CBD refined oil pricing as well as a decrease in forecasted sales volumes for the SugarLeaf business. This resulted in a goodwill impairment loss of $82.1 million and a gain of $97.2 million related to a reduction in the fair value of the contingent consideration payable to the former owners of the SugarLeaf business.
Turn-Key Hemp Product Solutions
On April 15, 2019, Neptune announced that its Solutions Business has begun offering turnkey product development solutions with hemp-derived ingredients to business customers in the United States. A U.S.-based supply chain of licensed hemp extract producers has been established, and initial purchase orders are being processed. SugarLeaf will be the main supplier for the turnkey product development solutions with hemp-derived ingredients to our business customers in the United States.
Settlement on Claims
On May 10, 2019, the Corporation announced that it had settled certain claims made by the Corporation’s former chief executive officer against the Corporation in respect of the termination of his employment with the Corporation. Neptune agreed to issue 600,000 Common Shares from treasury and transfer 2,100,000 shares of Acasti held by Neptune to the former chief executive officer, in exchange for a full and final release on all procedures in connection with this case.
Transaction Concluded with Tilray
On June 7, 2019, Neptune entered into a definitive agreement to provide extraction, and purification services to Tilray Inc. (“Tilray”), a global leader in cannabis research, cultivation, production, and distribution. Neptune will receive, at its facility in Sherbooke, Quebec, cannabis and hemp biomass from Tilray. Neptune will provide extraction services to produce various extract formats which include crude resin, winterized oil and distillate extracts. \
Transaction Concluded with TGOD
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On June 12, 2019, Neptune announced the signature of a three-year contract with The Green Organic Dutchman (“TGOD”). Neptune will provide extraction services as well as turnkey packaging solutions to TGOD covering a range of product forms such as capsules, vape pens, sprays, topicals, sachets, tinctures, and others.
Strategic Partnership with American Media LLC
On October 4, 2019, Neptune announced a new strategic partnership with American Media LLC (“American Media”) to help support the growth of Neptune’s brands in the United States, including Forest Remedies™, and Ocean Remedies™. American Media owns and operates leading celebrity and health and fitness media brands such as Men’s Journal®, Us Weekly®, OK!, Life & Style and enthusiast brands including Powder, Surfer and Bike. As reported by American Media, its portfolio of brands has a combined total circulation of over 2.3 million and reaches over 47 million readers each month. American Media’s wide reach in mobile and online media has over 60 million unique visitors and over 762 million page views monthly.
Under the terms of the partnership agreement, American Media will provide advertising and creative services to Neptune to support the marketing and commercialization of Neptune’s consumer-facing brands in the U.S. American Media will also have the opportunity to become a shareholder in Neptune. On October 3, 2019, Neptune issued to American Media 3,000,000 warrants, each warrant allowing the holder to purchase one Common Share at an exercise price of US$8.00 per share and expiring on the fifth anniversary of such issuance. The warrants will vest proportionally to the services rendered by American Media. Upon exercise of the warrants, American Media will be required to hold the Common Shares acquired for a minimum of 6 months.
In addition, on February 5, 2020, Neptune announced the expansion of its strategic partnership with American Media to help support the launch of Neptune’s Ocean Remedies™ brand and product line. Under the terms of this expanded partnership agreement, American Media will provide advertising and creative services to Neptune to support the marketing and commercialization of Neptune’s Ocean Remedies™ brand in the U.S. American Media will provide Neptune with marketing and creative services valued at US$4.7 million in exchange for 1,175,000 warrants that Neptune will issue to American Media. Each warrant gives the holder the right to purchase one Common Share at an exercise price of US$8.00 per share and expires on the fifth anniversary of such issuance. Upon exercise of the warrants, American Media will be required to hold the Common Shares acquired for a minimum of six months.
Definitive Agreement with International Flavors & Fragrances
On November 11, 2019, Neptune announced that it 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.
Under this strategic product development partnership, IFF will leverage its intellectual property for taste, scent and nutrition to provide essential oils and product development resources. Neptune will leverage its proprietary cold ethanol extraction processes and formulation intellectual property to deliver high quality, full- and broad-spectrum extracts for the development, manufacture and commercialization of hemp-derived products, infused with essential oils, for the cosmetics, personal care and household cleaning products markets.
As further detailed below, the first products have been launched under Neptune’s Forest Remedies™ brand. The initial launch will include a variety of topical products across the aromatherapy category. Additional category launches should follow and the total stock-keeping unit (“SKU”) count could ultimately exceed 50 SKUs. Neptune will be responsible for the marketing and sale of the products. Neptune will receive amounts from product sales and in turn will pay a royalty to each of IFF and App Connect associated with the sales of co-developed products. The payment of royalties to App Connect, subject to certain conditions, has been approved by the TSX.
In conjunction with the co-development partnership, Neptune issued to IFF 2,000,000 warrants, each warrant allowing the holder to purchase one Common Share at an exercise price of US$12.00 per share and expiring on the fifth anniversary of such issuance.
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Amended and Restated Processing Agreement with Canopy Growth Corporation
On November 12, 2019, Neptune entered into an amended and restated processing agreement with Canopy Growth Corporation (“Canopy”) to amend their multi-year agreement whereby Neptune supplements Canopy’s extraction, refinement and extract product formulation capacity. Under this amended and restated agreement, Neptune and Canopy agreed to amend the schedule of processing volumes committed to Neptune by Canopy as well as remove certain preferential rights previously granted to Canopy with respect to Neptune’s capacity and pricing. Neptune and Canopy also agreed to negotiate volume and pricing based on market conditions for all orders following June 30, 2020.
Updates on Non-Core Investments
On January 13, 2020, Neptune announced the sale of 1,964,694 shares of Acasti for net proceeds of $5,318 as part of a monetizing process for the Corporation’s non-core investments.
Launch of Forest Remedies and Ocean Remedies
On February 13, 2020, Neptune announced the official launch of its Forest Remedies™ and Ocean Remedies™ brands by launching 11 SKUs of hemp extracts, including six ingestible oils, two soothing balms, one soft gel bottle, a massage oil, and a pet soother. Such Forest Remedies™ products were crafted using Neptune’s hemp extracts, which are produced with its proprietary cold ethanol extraction process and tested for purity at third-party laboratories. Furthermore, in collaboration with IFF, as of March 31, 2021 Neptune launched eighteen essential oils SKUs, which are commercialized under the Forest Remedies™ brand. Neptune also launched Ocean Remedies™ directly on a second website (www.oceanremedies.com). Neptune’s krill oil products, and any other future omega 3 products, will be commercialized under this brand.
Establishment of At-the-Market Program
On March 11, 2020, Neptune entered into an Open Market Sale Agreement with Jefferies LLC (“Jefferies”) pursuant to which Neptune may from time to time sell, through at-the-market (“ATM”) offerings with Jefferies acting as sales agent, such Common Shares as would have an aggregate offer price of up to US$50,000,000.
Hand Sanitizer Products
In March 2020, Neptune commenced its expansion into the production and sale of hand sanitizer products.
Fiscal Year Ended March 31, 2021
Neptune Obtains Sale License from Health Canada
On June 29, 2020, Neptune announced that Health Canada has approved an amendment to the processing license held by Neptune authorizing the sale of certain cannabis products to provincially and territorially authorized retailers and to holders of a license for sale for medical purposes. This amendment includes the authorization of the activity of the sale of cannabis edible products, cannabis extracts, and cannabis topicals. Neptune also added cold storage and operating space at the time the processing license was amended.
On March 22, 2021, Neptune also announced that Health Canada has provided the Corporation with a license amendment to allow it to sell dried cannabis flower and pre-rolled cannabis in the Canadian recreational market. Neptune currently supplies the market with premium cannabis extracts, under its Mood Ring™ and PanHash™ brands, and will expand its offering to include all regulated product categories. This empowers the Corporation to provide a comprehensive portfolio, enhance its total addressable market and target the lucrative flower segment, which is a dominant force in the industry both in sales and revenue. All cannabis products are manufactured and packaged at the Corporation's purpose-built facility in Sherbrooke, Quebec.
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Changes to the Board of Directors and New Auditors
On August 12, 2020, two new directors were elected to the Board of Directors of Neptune during the Annual General Meeting (“AGM”): Jane Pemberton and Frank Rochon.
Ms. Pemberton is an experienced growth driven executive, who has spent her career focused on driving accelerated revenue growth, earnings and brand equity, without compromising core values, culture, authenticity or purpose. She is currently the CEO of Vital Nutrients Holdings and an Operating Advisor at North Castle Partners, a leading private equity firm focused exclusively in the Health, Wellness & Active Living Sector. Mr. Rochon has built a distinguished career over the past 30 years, serving in numerous key leadership positions with the past 20 years at Deloitte Canada. He most recently served as Vice Chairman and Managing Partner of Clients and Industries leading Deloitte Canada’s client and market portfolio, overseeing the firm’s most significant client relationships and opportunities.
Effective with the election of the two new Board members, Hélène Fortin ceased to be a director of Neptune.
Ernst & Young, LLP were also appointed as the Corporation's auditors during the AGM, replacing KPMG LLP.
Finally, on May 17, 2021, Neptune announced that Richard Schottenfeld has resigned as a director of the Corporation for personal considerations.
Neptune Introduces Mood Ring™ and PanHash™ Cannabis Brands for Canadian Market
Mood Ring™
On August 18, 2020, Neptune introduced its proprietary Mood Ring™ cannabis brand for the Canadian market. The Mood Ring™ brand and product line will officially launch in select Canadian markets this fall to meet consumer demand for high-quality, affordable and environmentally friendly cannabis products. Mood Ring™ leverages Neptune’s decades of experience in the wellness, extraction and consumer packaged goods (“CPG”) industries to bring product offerings to market that are designed to meet the specific demands of Canadian consumers. Mood Ring CBD products primarily target wellness focused consumers looking for natural products, whereas Mood Ring THC concentrates focus on the recreational market. Mood Ring™ will use Neptune’s proprietary cold ethanol extraction process technology to create full spectrum extracts for the Corporation’s tincture and capsule products and newly implemented solventless extraction for THC concentrates. These processes allow Mood Ring™ to provide consumers with all of the cannabinoid and terpene benefits of the plant with a significantly lower environmental impact, requiring significantly less energy use when compared to CO2 extraction.
British Columbia
The Corporation entered into an agreement on September 24, 2020 with the British Columbia Liquor Distribution Branch (“BCLDB”), the wholesaler and public retailer of nonmedical cannabis throughout the province, for the sale and distribution of Neptune’s new proprietary Mood Ring™ product line. The agreement marks the launch of Neptune’s Mood Ring™ product line for sale into the Canadian non-medical cannabis market. Products became available for purchase in December 2020 through the BC Cannabis Store online, in addition to its government-run retail locations across British Columbia and to private licensed retailers in British Columbia.
Ontario
The Corporation entered into a supply agreement on October 27, 2020 with the Ontario Cannabis Store (“OCS”), the wholesaler and sole online retailer for recreational cannabis, for the sale and distribution of Neptune's new proprietary recreational product line, Mood Ring™. Ontario is Canada's largest market for adult-use cannabis products. The agreement authorizes Neptune to supply Mood Ring™ products to the OCS for sale and wholesale distribution. The products became available for purchase in February 22, 2021 through the OCS online store. Additionally, the Mood Ring™ product line is available to licensed private retailers in Ontario.
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Quebec (PanHash™)
On March 22, 2021, Neptune announced that it entered into a letter of intent with Société québécoise du cannabis (“SQDC”), the province’s sole legal retailer for recreational cannabis, for the sale of Neptune’s new cannabis brand, PanHash™, exclusively for the Province of Quebec. The initial PanHash™ launch will include two products with a high concentration of CBD: cannabis oil and capsules. These products benefit from Neptune’s proprietary cold ethanol extraction technology, which produces full-spectrum extracts, preserving all of the plant’s terpenes. The agreement authorizes Neptune to supply PanHash™ products to the SQDC for sale in Quebec. PanHash™ products became available for purchase as of May 27, 2021.
Alberta
Neptune announced on April 28, 2021 that it entered into a supply agreement with Alberta Gaming, Liquor and Cannabis (“AGLC”), the wholesaler and sole online retailer for recreational cannabis in Alberta, for the sale and distribution of Neptune's proprietary recreational cannabis brand, Mood Ring™. This is the fourth supply agreement the Corporation has secured with a provincial cannabis wholesaler, and enables Neptune to sell recreational cannabis products, through its Mood Ring™ and PanHash™ brands, to over 1,600 retailers across British Columbia, Alberta, Ontario and Quebec; these four provinces accounted for over 80% of the Canadian cannabis retail sales in 2020.
Launch of Legendary Wildlife Conservationist Jane Goodall’s First Product with the Corporation
On September 17, 2020, Neptune announced the first of its product lines made in collaboration with legendary animal behavior expert and conservationist, Dr. Jane Goodall, under its Forest Remedies™ brand. Inspired by her love of Africa and passion for protecting wildlife and built with the world-recognized leader International Flavors and Fragrances, this exclusive line of natural, plant-based wellness products directly supports the legendary conservationist’s efforts to create a better world for all living things. With every purchase, 5% of the sale price is donated directly to the Jane Goodall Institute to support continued research, conservation, and education efforts.
Neptune to Open a Florida-based Office
On November 25, 2020, Neptune announced that it intends to open a Florida-based office, which is expected to open by approximately mid-August 2021. The office will focus on U.S. legislation matters in Cannabis and global growth opportunities. This office will lead the Corporation’s international institutional advocacy program to drive the conversion of cannabis from an illicit to regulated market.
Neptune Completes its Strategic Transition from Extraction to Cannabis Consumer Packaged Goods
In April 2021, Neptune completed its transition from revenue derived from hemp and cannabis extraction to revenue from consumer packaged goods and branded products, such as Mood Ring™ — an end-to-end developed and manufactured cannabinoid-based product portfolio targeting both wellness-focused CBD consumers looking for natural products, and the recreational market with THC concentrate product. Neptune is beginning its first commercial production of hashish (or hash) — comprised of extracted cannabis trichomes utilizing its own proprietary technologies at the Corporation’s purpose-built facility in Sherbrooke, Quebec. The hashish products are focused on the recreational market for high THC products.
Neptune Acquires Controlling Interest in Sprout Foods, Inc.
On February 10, 2021, Neptune announced the acquisition of a 50.1% interest in Sprout Foods, Inc. ("Sprout"), a portfolio investment of Morgan Stanley Expansion Capital ("MSEC"). As part of the transaction, investment funds managed by MSEC became a major shareholder in Neptune. Sprout is an organic plant-based baby food and toddler snack company with USD$28 million in annual net revenues. The transaction consideration includes a cash payment of USD$6.0 million and the issuance of 6,741,573 Neptune common shares having a value of USD$17.6 million. Additionally, Neptune is guaranteeing a USD$10.0 million note issued by Sprout in favor of MSEC.
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Arbitrator Rules for Neptune in Dispute with Azpa Pharmaceuticals Pty. Ltd.
An independent arbitrator engaged to resolve a commercial dispute between Neptune and Azpa Pharmaceuticals Pty. Ltd. ("Azpa") rendered a decision in favor of Neptune on February 15, 2021, awarding Neptune its full claimed damages, legal fees, and interest of roughly CAD$8 million. The Corporation is seeking recovery of damages, legal fees and interest, however there can be no assurance of the amount, if any, that may be recovered. In 2007 and again in 2011, Azpa entered into a distribution agreement with Neptune for exclusive distribution rights for specific Neptune products in Australia and New Zealand. In 2013, Azpa failed to pay Neptune for shipments of products, giving rise to the arbitration. The arbitrator's award entirely upheld Neptune's interpretation of the distributorship agreement and fully rejected Azpa's CAD$137 million counter claim.
Neptune Announces Exclusive Licensing Agreement Between Sprout Foods and CoComelon®
On June 9, 2021, the Corporation announced a multi-year licensing agreement between Sprout® and CoComelon®, the world's leading children's entertainment brand, owned and operated by Moonbug Entertainment Ltd (“Moonbug”). With more than 110 million subscribers worldwide, CoComelon is the #1 children's entertainment and educational show in the world claiming a #1 ranking on YouTube with its top three episodes generating nearly nine billion views around the world. Additionally, the show was #1 on Netflix and maintains a Top 10 ranking across all genres with the recent launch of Season 3. Sprout products bearing the licensed property are expected to launch in the summer of 2021 in North America.
Business Overview & Mission
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 Corporation 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 legal cannabis and hemp, nutraceuticals and white label consumer packaged goods. The Corporation has a strong position in cannabis and hemp with research, development and commercialization focused on the use of cannabinoids in household products to make them safer, healthier and more effective. 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: Cannabis, Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages.
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 at both the business-to-business (“B2B”) and business-to-consumer (“B2C”) segments in the consumer-packaged goods (“CPG”) market. Over the past year, Neptune has undergone a significant transformation from a B2B cannabis and hemp extraction company to a fully integrated consumer products company. The Corporation's long-term strategy is focused on the health and wellness sector with an emphasis on select CPG verticals, including Cannabis, Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages. Neptune's current brand portfolio across these verticals include Mood Ring™, PanHash™, Sprout®, NurturMe®, Nosh!®, Neptune Wellness, Forest Remedies®, and Ocean Remedies®.
Neptune has a dual go-to market B2B and B2C strategy focused on dramatically expanding its global distribution reach. The strategy sets Neptune apart from its competition and has started to yield a consistent, long-term revenue opportunity for the Corporation. Accordingly, Neptune has transitioned the focus of its Sherbrooke facility from B2B
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to B2C in the second and third quarters of FY2021. Also, the operations of SugarLeaf at the Conover facility were paused; at the moment, no date has been set for resumption of operations.
Neptune’s flagship innovative consumer-facing brands, Forest Remedies™ and Ocean Remedies™, that were launched in 2020, continue to get international recognition as Neptune’s collaboration with Jane Goodall on the Wonders of Africa Essential Oil Kit and Jane Goodall by Forest Remedies Hand Sanitizer spray won a 2020 OK! Wellness Award.
Neptune plans to expand its line of cannabis consumer product goods readying itself for expansion into the United States when permitted by United States Federal law, based on the results of a comprehensive and independent survey commissioned by the Corporation. In preparation for potential U.S. cannabis legalization under Federal law, Neptune is proactively primed for larger distribution. Neptune’s Mood Ring™ line—which was launched in select Canadian markets during the third quarter of FY2021, providing consumer demand for high-quality, affordable, and environmentally friendly cannabis products—positions the Corporation to scale its owned and operated brands to introduce additional cannabis products to complement our hemp and essential oil lines. Furthermore, the PanHashTM line will be launched in Quebec during spring 2021.
On February 10, 2021, Neptune announced the acquisition of a 50.1% interest in Sprout Foods, Inc. (“Sprout”), a portfolio investment of Morgan Stanley Expansion Capital ("MSEC"). As part of the transaction, investment funds managed by MSEC became a shareholder in Neptune. Sprout’s focus on wholesome organic baby food products resonates strongly with Neptune’s core values. By combining high-quality plant-based ingredients and cruelty-free ingredients, Sprout has created a trusted brand with a comprehensive range of products.
Sprout represents an opportunity for Neptune to:
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Capitalize on a shared mission to redefine health and wellness for children; |
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Focus on building a portfolio of high quality, organic and affordable consumer products; |
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Capitalize on the market demand for natural, plant-based, sustainable, and purpose-driven brands. |
Neptune's future will be focused on brand creation, accelerated organic growth complemented by new acquisitions with operational excellence as our foundation. The first step toward this new strategy is a lineup of CBD-infused beverages starting with teas and lemonades, that is expected to launch into the U.S. market later this year. Additionally, we will introduce a disruptive plant-based Omega 3-6-9 product in the U.S. market as well as plant-based tableware and utensils.
Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical. This includes expanding the supply and manufacturing base, which is expected to significantly lower production costs and improve gross margins and returns on invested capital. The MaxSimil® product lineup will be expanded with the launch of two new consumer products: MaxSimil® with CoQ10 and MaxSimil® with Curcumin. Additionally, the Corporation plans to launch 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.
Neptune also made significant progress expanding its product distribution in the Canadian cannabis market over the last several months. The Corporation received authorization to sell its Mood Ring™ and PanHash™products in four provinces. Products are currently sold in British Columbia and Ontario, with plans to begin sales in Alberta and Quebec soon. Additionally, Neptune recently received a license amendment from Health Canada to allow the sale of dried cannabis flower and pre-rolled cannabis joints throughout the Canadian market.
The Corporation intends to continue organically building out its existing brand portfolio through innovation and contributions from its product development and research and development teams. No matter the market or brand unit, Neptune intends to grow its business in an efficient and sustainable manner. Neptune intends to grow its revenues
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organically, by developing new products and by selling to new markets, and also through the acquisition and integration of businesses.
B2C Brand Portfolio Strategy
We are currently working on accelerating brand equity for our brand portfolio:
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Biodroga Neutraceuticals™. Neptune, through its Biodroga Nutraceuticals Inc. 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 core products are Maxsimil, various Omega-3 flavored 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 published the results of a clinical study that position Maxsimil as a superior Omega-3 supplement. 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 intend to commercialize a full line of health and wellness products with and without CBD. The initial launch of the Forest Remedies™ brand was focused in the United States. |
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Ocean Remedies™. Neptune also rebranded OCEANO³ to Ocean Remedies™. The Corporation’s omega-3 products are now commercialized under the Ocean Remedies™ brand. Among the several initiatives underway is a clinical study to determine if MaxSimil® fish oil, when used as a carrier oil, can increase the absorption of cannabinoids in humans. We have increased our clinical activity because of the benefits we anticipate in combining our omega-3 formulations with cannabinoids and have increased the size of our R&D team accordingly. |
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Neptune Wellness. Neptune, through its Neptune Health & Wellness Innovation, Inc. subsidiary, began selling its branded hand sanitizer line in the first quarter of fiscal year 2021, and launched an expanded line of hand sanitizer product lines in the club store channel in July 2020. These hand sanitizer products are plant-based hand sanitizers made with specialized blends of essential oils, aloe vera and fruit extracts and were developed with International Flavors & Fragrances, Inc. |
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Mood Ring™. In Canada, we have received our license amendment from Health Canada to sell cannabis products, and we now commercialize, under the Mood Ring™ brand, derived product forms of cannabis such as tinctures, capsules, concentrates and other refined products destined to frequent cannabis consumers. Since March 2021, Health Canada also allows Neptune to sell dried cannabis flower and pre-rolled cannabis in the Canadian recreational market. |
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PanHash™. The newest addition to Neptune’s line of cannabis products, the PanHash™ brand was specifically designed for the Quebec market to sell cannabis products in the province of Quebec. The initial PanHash™ launch occurred in May 2021 and included two products with a high concentration of CBD: cannabis oil and capsules.
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Sprout®. Neptune entered a new market with the acquisition of a controlling interest in Sprout. 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 completing the Sprout acquisition, the Corporation has begun expansion efforts in Sprouts' distribution, including to in substantially all of Target's U.S. retail stores. The Corporation also expects to launch Sprout products in Canada and the UK during the second fiscal quarter of fiscal year 2022. |
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NurturMe®. Prior to the Neptune/Sprout transaction in early 2021, Sprout acquired the assets of NuturMe, an organic baby food brand. Their product line ranges from Stage 1 (4 to 6 months) quinoa cereal to probiotic and prebiotic fortified Toddler pouches. The brand has had distribution via Sam’s Club, HEB and online via Thrive Market and direct to consumer. |
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Nosh!®. Prior to the Neptune transaction in early 2021, Sprout acquired the assets of organic baby food brand Nosh!. Nosh! products range from Stage 1 teethers to Toddler and up-aged snacks. This includes an allergen introduction line “Peanut Butter Puffs”. The brand has had distribution in the largest organic baby food retailers including Target and Wal Mart, as well as ecommerce platform Amazon and direct to consumer. |
Cannabis
Neptune obtained its sale license from Health Canada on June 29, 2020; the amendment to the processing license held by Neptune authorizing the sale of certain cannabis products to provincially and territorially authorized retailers, and to holders of a license for sale for medical purposes was authorized. This amendment includes the authorization of the activity of the sale of cannabis edible products, cannabis extracts, and cannabis topicals. Neptune also added cold storage and operating space at the time the processing license was amended. Consequently, Neptune introduced its proprietary Mood Ring™ cannabis brand for the Canadian market on August 18, 2020 and received its first orders on November 25, 2020. A further amendment to its sale license was announced on March 22, 2021, allowing Neptune to sell dried cannabis flower and pre-rolled cannabis in the Canadian recreational market. A letter of intent was also signed with SQDC, for the sale of Neptune’s new cannabis brand, PanHash™, in Quebec.
As mentioned above, Neptune sells or will sell cannabis products in four Canadian provinces (British Columbia, Ontario, Quebec and Alberta), representing 87% of the Canadian population, through its brands, Mood Ring™ and PanHash™. Mood Ring™ is a non-GMO and environmentally friendly packaged product with several lines integrating high CBD oil, legacy hashish and high CBD capsules. Mood Ring™ is produced using Neptune’s patented cold ethanol extraction process, which creates a full spectrum concentrate that preserves terpenes to retain its earthy aroma and flavor. PanHash™ includes two product lines with a high concentration of CBD in cannabis oil and capsules, leveraging the Corporation’s cold ethanol extraction technology, which produces full-spectrum extracts, preserving all the plant’s terpenes.
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 Corporation 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 Corporation plans to launch 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 Neutraceuticals.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Corporation continues to expand its delivery system capabilities with 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. With more than 50 years of combined experience in the nutrition industry, Neptune, through its nutraceuticals products business, also formulates, develops and provides customers with turnkey nutrition solutions.
Beauty & Personal Care
Neptune is leveraging the power of cannabinoids and other plant-based ingredients to help consumers generally feel better than they did before. The Corporation sells wellness brands to the Beauty & Personal Care market through its leading brand, Forest Remedies. Forest Remedies offers several lines of CBD-based oils and extracts, and is expanding into plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free.
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Organic Foods and Beverages
In February 2021, Neptune acquired a controlling interest in Sprout, 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 Corporation has begun expansion efforts in Sprouts' distribution across substantially all of Target's U.S. retail stores. The Corporation also expects to launch Sprout products in Canada and the UK during the second fiscal quarter of 2022. The Corporation expects the Neptune/Sprout combination to result in significant incremental revenue growth for both companies, with several near and long-term revenue synergy opportunities identified within Neptune’s existing relationships and current sales channels, as well as an exciting new product pipeline to be launched under the Sprout brand. Sprout’s three main brands are Sprout®, Nosh!® and NurturMe®.
Competition
The cannabis, 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”, below.
Manufacturing and Supply
Canadian Cannabis Products – Extracts and Formulations
We retrofited 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 licence 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 Corporation’s existing Sherbrooke facility. For additional information regarding the regulatory context of the cannabis industry, see “Risks Related to the Cannabis Industry” under the heading “Risk Factors”, below.
Based on our expected growth rate, we believe that our manufacturing capacity will be sufficient to meet our requirements for the near future. Our intention is to maximize the return on investment in our manufacturing unit.
Nutraceutical Products
Our other nutraceutial products are manufactured by third party manufacturers located in North America. In order to meet demand for our nutraceutical products, we have developed relationships with selected contract manufacturers. We believe that we are not dependent on any such contract manufacturer and that, if necessary, our current selected contract manufacturers could be replaced with minimal disruption to our operations, if need be.
We subcontract the encapsulation process and the packaging of our products to third parties in Canada and the United States.
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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.
We are constantly looking at ways to improve the logistics of our operations and optimize processes in place.
Hand Sanitizer Products
Our hand sanitizer products are currently manufactured by third party manufacturers located in North America. Neptune has also completed the submission to the FDA for registration of its Conover, North Carolina facility for the production of hand sanitizers.
Cannabis Activities
The Corporation manufactures, sells and distributes its cannabis products primarily to provincal distributors, such as the Ontario Cannabis Store and the Société québécoise du cannabis, and other private distributors authorized to conduct business legally in Canada and globally. As cannabis becomes legalized for medicinal purposes in other countries, the Corporation intends to also benefit from those business opportunities.
Nutraceutical Activities
The Corporation 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 Corporation may have orders in place with approximately 100 different distributors and customers at any one time, the majority of the Corporation’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.
Consumer Sales in the United States
In the United States, we intend to sell our products to mass retailers, grocery stores, warehouse clubs and other retail outlets primarily through a network of brokers. Certain products, including Forest Remedies™ and Ocean Remedies™, are currently sold through e-commerce, including on our websites www.forestremedies.com and www.oceanremedies.com.
Online orders of Forest Remedies™ and Ocean Remedies™ are handled by our distribution personnel and a third party contractor retained by us. Once an internet order is completed, our computer system forwards the order to the distribution center, where all necessary distribution and shipping documents are printed to facilitate processing. Then, the orders are prepared, picked, packed and shipped continually throughout the business day. Completed orders are bar-coded and scanned and the merchandise and ship date are verified and entered automatically into the customer order file for access by sales associates before shipment. All orders are distributed through common carriers.
We currently distribute all our products to our customers through contract and common carriers.
Neptune’s consolidated revenues for Fiscal 2021 amounted to $46.8 million, a $17.2 million increase from $29.6 million for Fiscal 2020. Our sales are not cyclical or seasonal.
Employees
As of March 31, 2021, we had 127 employees working at our business offices in Laval and at our facilities in Sherbrooke and Conover, North Carolina. Our employees possess specialized skills and knowledge in the following fields, which we believe are valuable assets of the Corporation: (i) oil extraction processes, (iii) scientific knowledge, (iv) commercialization and business development, (v) regulatory affairs, (vi) corporate and legal matters, (vii) clinical
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validation of biological therapeutic properties, and (viii) quality assurance/quality control. We consider our relations with our employees to be good and our operations have never been interrupted as the result of a labor dispute.
Facilities
Our headquarters is located in leased offices in Laval, Province of Québec, where our general and administrative departments primarily operate. We also own a production facility in Sherbrooke, Québec, where we also conduct laboratory activities, and lease a production facility in Conover, North Carolina. We also have leased offices in Vaudreuil, Province of Québec, Canada, which was previously used for the Corporation’s Biodroga business, and leased offices in Montvale, New Jersey, which is the headquarters for Sprout. The Corporation intends to sub-lease the Vaudreuil and Montvale offices. In addition, Neptune has leased office space in Jupiter, Florida, which is expected to open in late calendar 2021.
We consistently 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.
Mood Ring™, PanHash™, Sprout®, NurturMe®, Nosh!®, Neptune Wellness™, Forest Remedies®, and Ocean Remedies® are trademarks of the Corporation. MaxSimil®, NKOTM, NKO BeatTM, NKO FlexTM and NKO FocusTM are trademarks authorized for use by the Corporation.
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 Corporation’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.
Licensing Agreements
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 Corporation believes the MaxSimil® technology has the ability to enhance absorption of lipid-based 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.
In connection with the Aker Transaction, Aker BioMarine (as licensor) and Neptune (as licensee) entered into a trademark licence agreement effective as of August 7, 2017 (the “Aker Trademark Licence Agreement”), pursuant to which Neptune has the limited, exclusive, terminable (as permitted under such agreement), royalty-free, fully paid up, worldwide, non-transferable, non-sublicensable (except as provided in such agreement) right and licence to use the NKO Beat™, NKO Flex™ and NKO Focus™ trademarks, solely in furtherance of the manufacturing of products containing krill oil where all krill oil contained in such products is sourced or received by Neptune exclusively from Aker BioMarine, the whole under the terms of a patent licence agreement between Aker BioMarine and Neptune
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effective as of the same date (the “Aker Patent Licence Agreement”). Pursuant to the Aker Trademark Licence Agreement, Neptune also has a limited, non-exclusive, terminable (as permitted under such agreement), royalty-free, fully paid up, worldwide, non-transferable, non-sublicensable (except as provided in such agreement) right and licence to use the NKO and NKO & Design trademarks, the whole under the terms of the Aker Patent Licence Agreement.
Pursuant to the Aker Patent Licence Agreement, Aker BioMarine (as licensor) has granted to Neptune (as licensee) a limited, terminable (as permitted under such agreement), royalty-free, fully paid-up, non-exclusive, worldwide, non-transferable, nonsublicensable (except as provided under such agreement) right and license to use krill oil purchased only and exclusively Aker BioMarine, under a supply agreement entered into between Aker BioMarine and Neptune effective as of August 7, 2017 (the “Aker Supply Agreement”), to make, have made, use, offer to sell, sell and import licensed products solely in furtherance of Neptune’s business as described further therein. In the event that Aker BioMarine fails to supply the krill oil under the terms of the Aker Supply Agreement, or terminates the Aker Supply Agreement, the Aker Patent Licence Agreement provides that Aker BioMarine will grant to Neptune a licence to use certain patents and/or trade secrets to enable Neptune to extract krill oil from any raw material containing krill biomass.
On January 30, 2020, Neptune entered into an exclusive, worldwide, and royalty-bearing licensing agreement for the use of the MaxSimil® technology, a patented omega-3 fatty acid delivery technology, and strong growth driver of Neptune’s nutraceutical business, replacing a previous license for MaxSimil entered into in 2016. The agreement allows Neptune to manufacture, distribute, and sell MaxSimil in the nutraceutical field worldwide. The terms also cover potential collaboration between Neptune and its contracting partner on clinical trials. In order to keep its exclusivity, Neptune has to sell a minimum volume per year or pay the minimal amount.
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.
Canadian Regulatory Framework
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 Act provides a licensing and permitting scheme for the cultivation, processing, importation, exportation, testing, packaging, labelling, sending, delivery, transportation, sale, possession and disposal of cannabis for adult recreational use, implemented by the Cannabis Regulations. The Cannabis Act and the Cannabis Regulations maintain separate access to cannabis for medical purposes. Under the Cannabis Act and the Cannabis Regulations, import and export permits will only be issued in respect of cannabis for medical or scientific purposes or in respect of industrial hemp and in accordance with the Industrial Hemp Regulations. Import and export permits will not be issued in respect of cannabis for adult recreational use.
The Cannabis Regulations, among other things, set out regulations relating to the following matters: (1) licences, 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.
Licences, Permits and Authorizations
The Cannabis Regulations establish six classes of licences: cultivation licences; processing licences; analytical testing licences; sales for medical purposes licences; research licences; and cannabis drug licences. The Cannabis Regulations also create subclasses for cultivation licences (standard cultivation, micro-cultivation and nursery) and processing licences (standard processing and micro-processing). Different licences and each subclass therein carry differing rules and requirements that are intended to be proportional to the public health and safety risks posed by each
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licence category and subclass. The Cannabis Regulations provide that all licences issued under the Cannabis Act must include both the effective date and expiry date of the licence and may be renewed on or before the expiry date.
The Industrial Hemp Regulations under the Cannabis Act came into force on October 17, 2018. The Industrial Hemp Regulations remained largely the same as they were under the CDSA but now they permit the sale of hemp plants to cannabis licence holders and the use of additional parts of the hemp plant (i.e., flowers and leaves), and licensing requirements were introduced in accordance with the low risk posed by industrial hemp. The Industrial Hemp Regulations define “industrial hemp” as cannabis plants – or any part of the plant – in which the concentration of delta-9-tetrahydrocannabinol (THC) is 0.3% or less in the flowering heads and leaves.
Security Clearances
Certain people associated with cannabis licensees, including individuals occupying a “key position” such as directors, officers, large shareholders and individuals identified by the Minister of Health (the “Minister”), must hold a valid security clearance issued by the Minister. Under the Cannabis Regulations, the Minister may refuse to grant security clearances to individuals with associations to organized crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. This was largely the approach in place under the ACMPR and other related regulations governing the licensed production of cannabis for medical purposes. Individuals who have histories of non-violent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants) are not precluded from participating in the legal cannabis industry, and the grant of security clearance to such individuals is at the discretion of the Minister and such applications will be reviewed on a case-by-case basis.
Security clearances issued under the ACMPR are considered to be security clearances for the purposes of the Cannabis Act and Cannabis Regulations.
Cannabis Tracking System
Under the Cannabis Act, the Minister is authorized to establish and maintain a national cannabis tracking system. The Cannabis Regulations provide the Minister with the authority to make a ministerial order that would require specified persons to report specific information about their authorized activities with cannabis, in the form and manner specified by the Minister.
The ministerial order regarding the Cannabis Tracking System (together with the licensing portal, collectively known as the “Cannabis Tracking and Licensing System”) was published in the Canada Gazette, Part II, on September 5, 2018 and came into effect on October 17, 2018 (the “2018 Ministerial Order”). The 2018 Ministerial Order was repealed and replaced by the new ministerial order, the Cannabis Tracking System Order, published in the Canada Gazette, Part II on June 26, 2019 and in force on October 17, 2019 in order to address the unique public health and public safety risks associated with the three new classes of cannabis, being edible cannabis, cannabis extracts and cannabis topicals (collectively, the “New Classes of Cannabis”) authorized by the Regulations Amending the Cannabis Regulations (New Classes of Cannabis) (the “Amending Regulations”) on October 17, 2019.
The purpose of this system is to enable the submission of licence applications, amendments and renewals through an online portal and track the flow of cannabis throughout the supply chain as a means of preventing the illegal inversion and diversion of cannabis into and out of the regulated system. Under the Cannabis Tracking and Licensing System, a holder of a licence for cultivation, licence for processing, or a licence for sale for medical purposes is required to submit monthly reports to Health Canada.
Cannabis Products
The Cannabis Regulations set out the requirements for cannabis products and permits the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants, cannabis plant seeds, edible cannabis, cannabis extracts and cannabis topicals. THC content is limited by the Cannabis Regulations.
Prior to the passage of the Amending Regulations, the Cannabis Act only permitted the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants and cannabis plant seeds. The Amending Regulations permit the production and sale of the New Classes of Cannabis. As is the case for the licence requirements for dried or fresh
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cannabis and cannabis oil, a processing licence is required in order to produce edible cannabis, cannabis extracts and cannabis topicals, and to package and label these types of cannabis products for sale to consumers. Holders of processing licences issued prior to October 17, 2019 were required to implement additional production and facility quality controls before they could begin manufacturing products belonging to New Classes of Cannabis. The Cannabis Regulations require the filing of a notice with Health Canada at least 60 days before releasing a new product to the market. As a result, December 16, 2019 was the earliest date that products in the New Classes of Cannabis could be made available for sale.
In addition, if a holder of a processing licence chooses to process edible cannabis and food products on the same site, then the production, packaging, labelling, and storage of cannabis and the production, packaging, and labelling of food products will need to be conducted in separate buildings. All cannabis production is required to occur in a separate building from any food production.
Packaging & Labeling
The Cannabis Regulations set out strict requirements pertaining to the packaging and labelling of cannabis products. These requirements are intended to promote informed consumer choice and allow for the safe handling and transportation of cannabis, while also reducing the appeal of cannabis to youth.
All cannabis products are required to be packaged in a manner that is tamper-proof and child-resistant in accordance with the Cannabis Regulations and in plain packaging. The Cannabis Regulations impose strict limits on the use of colours, graphics, and other special characteristics of packaging. Cannabis package labels must include specific information, such as: (i) product source information, including the class of cannabis and the name, phone number and email of the licence holder; (ii) a mandatory health warning, rotating between Health Canada’s list of standard health warnings; (iii) the Health Canada standardized cannabis symbol; and (iv) information specifying THC and CBD content.
Promotion
The Cannabis Act sets out restrictions regarding the promotion of cannabis products. Subject to a few exceptions, all promotions of cannabis products are prohibited unless authorized by the Cannabis Act. While these restrictions also apply to the New Classes of Cannabis, the Amending Regulations also prohibit certain representations and associations on products, their packages and labels and associated promotional activity, including: certain flavours in cannabis extracts (e.g. confectionary, dessert, soft drink, and energy drink) that are appealing to youth; health or cosmetic benefits unless registered as a health product; energy value and nutrient content representations that go beyond those permitted in the list of ingredients and in the cannabis-specific nutrition facts table; statements reasonably likely to create the impression the edible cannabis or accessory is intended to meet particular dietary requirements; and promotion that could reasonably associate the cannabis, the cannabis accessory or the service related to cannabis with an alcoholic beverage, a tobacco product or a vaping product.
Product Composition
The Amending Regulations introduced restrictions on product composition specific to each New Class of Cannabis including specific THC limits. Examples of other product-specific restrictions include:
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Edible cannabis: must be shelf stable; only food and food additives will be allowed to be used as ingredients in edible cannabis and the use of food additives will need to be in accordance with the limits and purposes that are prescribed for foods; must not have caffeine added, however the use of ingredients containing naturally occurring caffeine will be permitted in edible cannabis products provided that the total amount of caffeine in each immediate container does not exceed 30 milligrams; must not contain alcohol in excess of 0.5% w/w; must not contain anything that would cause the sale of the edible cannabis, if it was a food regulated under the Food and Drugs Act, to be prohibited and must not be fortified with vitamins or mineral nutrients. |
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Cannabis extracts: must not contain ingredients that are sugars, sweeteners or sweetening agents, nor any ingredient listed on Column 1 of Schedule 2 to the Tobacco and Vaping Products Act (which is a list of |
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ingredients that are prohibited in vaping products) except if those ingredients and their levels are naturally occurring in an ingredient used to produce the extract. |
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Cannabis topicals: must not contain anything that may cause injury to the health of the consumer when the product is used as intended or in a reasonably foreseeable way. |
Health Products Containing Cannabis
Under the current regulatory framework, cannabis is not permitted for use in a natural health product or a non-prescription drug product, as phytocannabinoids are included as prescription drugs on the Human and Veterinary Prescription Drug List (“PDL”). Although Health Canada has previously authorized prescription drug products containing cannabis, the agency maintains that there remains significant scientific uncertainty regarding the pharmacological actions, therapeutic effectiveness and safety of the majority of phytocannabinoids. The cannabis-based prescription drug products that have been authorized by Health Canada have been studied, authorized and used in specific conditions. While these authorized products have contributed to the global body of knowledge concerning the safety and efficacy of cannabis-based therapies, Health Canada has stated that the presence of scientific uncertainty and limited market experience gives rise to the need for a precautionary approach. Listing all phytocannabinoids on the PDL addresses this uncertainty by allowing healthcare practitioners to monitor and manage any unanticipated effects. All phytocannabinoids will remain listed on the PDL until there is sufficient scientific evidence (e.g., as demonstrated through a submission to Health Canada) to change the prescription status of a particular phytocannabinoid when used in specific conditions.
Cannabis is also expressly prohibited for use in cosmetic products as it is included on Health Canada’s Cosmetic Ingredient Hotlist, List of Ingredients Prohibited for Use in Cosmetic Products.
Provincial and Territorial Regulatory Regimes
While the Cannabis Act provides for the regulation of the commercial production of cannabis for adult recreational purposes and related matters by the federal government, the Cannabis Act includes provisions stipulating that the provinces and territories of Canada have authority to regulate other aspects of adult recreational use cannabis (similar to what is currently the case for liquor and tobacco products), such as retail sale and distribution, minimum age requirements above that in place under the Cannabis Act, places where cannabis can be consumed, and a range of other matters. The governments of every Canadian province and territory have, to varying degrees, regulatory regimes for the distribution and sale of cannabis for adult recreational purposes within those jurisdictions. Each of these Canadian jurisdictions has established a minimum age of 19 years for cannabis use, except for Québec and Alberta, where the minimum age is 21 and 18, respectively.
Québec: In Québec, all recreational cannabis is managed and sold through outlets of the Société québécoise du cannabis, a subsidiary of the Société des alcools du Québec, and its online site.
Ontario: In Ontario, the distribution and online retail sale of recreational cannabis is conducted through the Ontario Cannabis Retail Corporation, under the oversight of the Alcohol and Gaming Commission of Ontario (the “AGCO”). Ontario also permits the sale of recreational cannabis through private brick-and-mortar retailers. Initially, Ontario employed a “phased” approach to retail licensing, setting a maximum cap of 25 licenses available to be issued to allow operators to open for business beginning April 1, 2019. The Ontario government has now moved to open the market for private cannabis retail stores in Ontario. In addition to removing the cap on the number of private retail stores in Ontario, the previously mandated regional distribution limiting the number of retail stores permitted in each region will be maintained only until March 2, 2020 and then eliminated entirely. The AGCO expects to issue up to 20 Retail Store Authorizations per month, beginning in April 2020. Federally licensed producers may now own or control, directly or indirectly, up to 25% of a corporation holding a cannabis Retail Operator License (required to hold a Retail Store Authorization) in Ontario, an increase from the previous threshold of 9.9%. Until August 31, 2020 each retail operator (and its affiliates) may own a maximum of 10 cannabis stores, increasing to 30 cannabis stores in September 2020 and increasing again to 75 cannabis stores in September 2021.
British Columbia: In British Columbia, recreational cannabis is to be sold through both public and privately-operated stores, with the provincial Liquor Distribution Branch handling wholesale distribution.
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Alberta: In Alberta, cannabis products are sold by private retailers that receive their products from a government-regulated distributor (the Alberta Gaming & Liquor Commission), similar to the distribution system currently in place for alcohol in the province. Only licensed retail outlets are to be permitted to sell cannabis with online sales run by the Alberta Gaming and Liquor Commission.
Saskatchewan: In Saskatchewan, recreational cannabis is sold by private retailers. The Saskatchewan Liquor and Gaming Authority (the “SLGA”) has selected operators for the province’s 51 cannabis private retail store permits, with municipalities having the option of opting out of having a cannabis store if they choose. Saskatchewan is the only jurisdiction to allow for private distribution and wholesale (but regulated by the SLGA).
Manitoba: In Manitoba, cannabis distribution and wholesale is government-run by the Manitoba Liquor and Lotteries Corporation (the “MBLL”), with retail sale privately operated. Manitoba has opened the cannabis retail application process to all prospective retailers. This includes the introduction of a new controlled-access licence for retailers. Manitoba will also continue to offer age-restricted licences for retailers wishing to open stand-alone stores. To become a retailer, applicants will be required to successfully complete the required application process, enter into a Cannabis Store Retailer Agreement with MBLL, and be issued an applicable licence from the Liquor, Gaming and Cannabis Authority of Manitoba.
New Brunswick: In New Brunswick, recreational cannabis is sold and online sales are run by Cannabis NB, a subsidiary of a network of tightly-controlled, stand-alone stores through the New Brunswick Liquor Corporation (the “NBLC”). The NBLC also controls the distribution and wholesale of cannabis in the province. The New Brunswick government has issued a request for proposals in order to find a single private operator to take over the Cannabis NB operations which would privatize the government-operated corporation created to handle retail sale of adult use cannabis. This would result in the retail model changing from government-operated to privately-operated in New Brunswick.
Nova Scotia: In Nova Scotia, the Nova Scotia Liquor Corporation (the “NSLC”) is responsible for the regulation of cannabis in the province, and recreational cannabis is only to be sold publicly through government-operated storefronts and online sales. There is no private licensing of retail. The NSLC also controls the distribution and wholesale of cannabis in the province.
Prince Edward Island: In Prince Edward Island, similar to Nova Scotia, sale of cannabis is government-run through government retail sales and online. There is no private licensing of retail. The PEI Cannabis Management Corporation is responsible for the distribution and wholesale of cannabis in the province.
Newfoundland and Labrador: In Newfoundland and Labrador, recreational cannabis is sold through licensed private retail stores, with its crown-owned liquor corporation, the Newfoundland and Labrador Liquor Corp. (the “NLC”), overseeing the wholesale and distribution to the private sellers. The NLC controls the possession, sale and delivery of cannabis, and sets prices. It is also the initial online retailer, although licenses may later be issued to private interests.
Yukon: The Yukon limits the initial distribution and sale of recreational cannabis to government outlets and government-run online stores and allows for the later licensing of private retailers. The Yukon Liquor Corporation is responsible for the distribution and wholesale of cannabis in the territory while the Cannabis Licensing Board is the regulatory body in the Yukon.
Northwest Territories: The Northwest Territories relies on the N.W.T. Liquor and Cannabis Commission to control the importation and distribution of cannabis, whether through retail outlets or by mail order service run by the Liquor Commission. Communities in the Northwest Territories will be able to hold a plebiscite to prohibit cannabis sales in their communities, similar to options currently available to restrict alcohol in the Northwest Territories.
Nunavut: Nunavut permits the sale of cannabis through private retailers, including online. The Nunavut Liquor and Cannabis Commission is responsible for distribution and wholesale in the territory.
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United States Regulatory Matters
Hemp and Cannabis
Neptune does not currently have any direct or indirect cannabis investments in the United States, where cannabis remains federally illegal. We will only participate in federally permissible activities, despite cannabis being legal in certain individual states.
The United States represents the largest cannabis and hemp-derived CBD market globally. As part of any U.S. market strategy, we must consider the Corporation’s stakeholders and how various state and federal regulations will affect the Corporation’s business prospects. The Corporation is committed to only engaging in activities which are permissible under both state and federal laws.
Investing in our securities involves a high degree of risk. Prospective investors should carefully consider the following risks, as well as the other information contained in this AIF and the other information in our publicly filed documents before investing in our securities. The occurrence of any of these risks could have a material adverse effect on our business, financial condition, results of operations and future prospects. These risks are not the only risks we face; risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition and results of operations. This AIF also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors. See the section titled “Cautionary Note Regarding Forward-Looking Statements.”
COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition.
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. The COVID-19 pandemic continues to result in extended government-ordered closures affecting significant portions of the global economy, including in the United States and Canada. The public health crisis caused by COVID-19 and the measures taken and continuing to be taken by governments, businesses and the public have, and we expect will continue to have, certain negative impacts on our business operations, and could have a material adverse effect on our business, results of operations and financial condition.
The full extent to which COVID-19 may impact our business, including our operations and the market for our securities and our financial condition, will depend on future developments, which are highly uncertain and cannot be predicted at this time. These include the duration, severity and scope of the outbreak, and further action taken by the government and other third parties in response to the pandemic. In particular, COVID-19 and government efforts to curtail COVID-19 could impede our production facilities, increase operating expenses, result in loss of sales, affect our supply chains, impact performance of contractual obligations and require additional expenditures to be incurred.
In connection with COVID-19 and to comply with mandates and guidance from governmental authorities, we have and continue to update our operational procedures and safety protocols at our facilities. If such measures are not effective or governmental authorities implement further restrictions, we may be required to take more extreme action, which could include a short or long-term closure of our facilities or reduction in workforce. These measures may impair our production levels or cause us to close or severely limit production at one or more facilities. Further, our operations could be adversely impacted if suppliers, contractors, customers and/or transportation carriers are restricted or prevented from conducting business activities.
Consumer demand for our products may also be impacted by COVID-19 as a result of reductions in consumers’ disposable income associated with layoffs, and work or pay limitations due to mandatory social distancing and lockdown measures implemented by government authorities. As demand for our products decreases, we may be required to record additional asset impairments, including an impairment of the carrying value of our goodwill, along with other accounting charges.
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Given the ongoing and dynamic nature and significance of COVID-19 and its impact globally, we are not able to enumerate all potential risks to our business. Any of the negative impacts of COVID-19, including those described above, alone or in combination with others, may have a material adverse effect on our business, results of operations or financial condition. Further, any of these negative impacts, alone or in combination with others, could exacerbate many of the other risk factors outlined in this AIF.
Catastrophic events outside of our control, including pandemics, may harm our results of operations or damage our facilities.
A catastrophic event where we have our operations, offices or manufacturing facilities, such as an earthquake, tsunami, flood, typhoon, fire, power disruption or other natural or manmade disaster, computer virus, cyber attack, terrorist attack, war, riot, civil unrest or other conflict, or an outbreak of a public health crisis including epidemics, pandemics or outbreaks of new infectious diseases or viruses, as well as related events that can result in volatility and disruption to global supply chains, operations, mobility of people, patterns of consumption and service, and the financial markets. A catastrophic event where Neptune has important operations could disrupt the Corporation’s operations or those of its contractors and impair production or distribution of its products, damage inventory, interrupt critical functions or otherwise negatively affect its business, harming Neptune’s results of operations.
If our risk management methods are not effective, our business, reputation and financial results may be adversely affected.
We have methods to identify, monitor, and manage our risks; however, these methods may not be fully effective. Some of our risk management methods may depend upon evaluation of information regarding markets, customers or other matters that are publicly available or otherwise accessible by us. That information may not in all cases be accurate, complete, up-to-date, or properly evaluated. If our methods are not fully effective or we are not successful in monitoring or evaluating the risks to which we are or may be exposed, our business, reputation, financial condition and operating results could be materially and adversely affected. In addition, our insurance policies may not provide adequate coverage.
We are currently, and may in the future be, subject to substantial litigation, investigations and proceedings that could cause us to incur significant legal expenses and result in harm to our business.
We are subject to federal, state, local, foreign, and provincial laws, rules, and regulations concerning advertising and marketing, including but not limited to those prohibiting unfair, deceptive, and/or abusive trade practices. Violations of advertising and marketing requirements can result in fines, penalties, injunctions, disgorgement of profits, full restitution for injury suffered by consumers, rescission of contracts, enforcement actions, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions.
Accordingly, we are exposed to potential liabilities and reputational risk associated with litigation, regulatory proceedings and government investigations and enforcement actions for the failure of us to comply with applicable health, safety, and labeling requirements and advertising and marketing requirements. Any adverse judgment in or settlement of any pending or any future litigation or investigation could result in payments, fines and penalties that could adversely affect our business, results of operations and financial condition. Regardless of the merits of the claims and the outcome, legal proceedings have resulted in, and may continue to result in, significant legal fees and expenses, diversion of management and employee time and other resources, and adverse publicity. Such proceedings could also adversely affect our business, results of operations and financial condition. For more information on our pending legal proceedings, see “Legal Proceedings and Regulatory Actions.”
Increasing awareness of health and wellness are driving changes in the consumer products industry, and if we are unable to react in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
We must continually anticipate and react, in a timely and cost-effective manner, to changes in consumer preferences and demands, including changes in demand driven by increasing awareness of health and wellness and demands for transparency or cleaner labels with respect to product ingredients by consumers and regulators. Consumers, especially in developed economies such as the U.S. and Canada, are rapidly shifting away from products containing artificial ingredients to all-natural, healthier alternatives. In addition, there has been a growing demand by
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consumers, non-governmental organizations and, to a lesser extent, governmental agencies to provide more transparency in product labeling and our customers have been taking steps to address this demand, including by voluntarily providing product-specific ingredients disclosure. These two trends could affect the types and volumes of our ingredients and compounds that our customers include in their consumer product offerings and, therefore, affect the demand for our products. If we are unable to react to or anticipate these trends in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
Markets for our products and services are highly competitive, and we may be unable to compete effectively.
Our products and services, including our consumer products, are offered in highly competitive markets that may be characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short product life cycles, evolving industry standards, continual improvement in product price/performance characteristics, rapid adoption of technological advancements by competitors and price sensitivity on the part of consumers and businesses.
Additionally, our consumer products may compete on the basis of product performance, brand recognition and price. Advertising, promotion, merchandising and packaging also have significant impacts on consumer purchasing decisions. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it typically requires continued advertising, promotional support and product innovations to maintain its relative market position. If our advertising, marketing and promotional programs are not effective or adequate, our net sales may be negatively impacted.
Some of our competitors are larger than us and have greater financial resources. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly and respond more effectively to changing business and economic conditions than we can. Competitive activity may require the Corporation to increase its spending on advertising and promotions and/or reduce prices, which could lead to reduced sales, margins and net earnings.
Our commercial success depends, in part, on our intellectual property rights and a failure by us to protect our intellectual property may have a material adverse effect on our ability to develop and commercialize our products.
Our success depends in part on our ability to develop products, obtain patents, protect our trade secrets and operate without infringing third-party exclusive rights or without others infringing our exclusive rights or those granted to us under license. The patent position of a corporation is generally uncertain and involves complex legal, factual and scientific issues, several of which remain unresolved. We do not know whether we will be able to develop other patentable proprietary technology and/or products. Furthermore, we cannot be completely certain that our future patents, if any, will provide a definitive and competitive advantage or afford protection against competitors with similar technology. Furthermore, we cannot give any assurance that such patents will not be challenged or circumvented by others using alternative technology or whether existing third-party patents will prevent us from marketing our products. In addition, competitors or potential competitors may independently develop, or have independently developed products as effective as ours or invent or have invented other products based on our patented products.
If third-party licenses are required, we may not be able to obtain them, or if obtainable, they may not be available on reasonable terms. Furthermore, we could develop or obtain alternative technologies related to third-party patents that may inadvertently cover its products. Inability to obtain such licenses or alternative technologies could delay the market launch of certain of our products, or even prevent us from developing, manufacturing or selling certain products. In addition, we could incur significant costs in defending ourselves in patent infringement proceedings initiated against us or in bringing infringement proceedings against others.
We may be unable to manage our growth effectively.
Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to continue to improve our operational and financial systems, managerial controls and procedures and we will need to continue to
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expand, train and manage our technology and workforce. We must also maintain close coordination among our technology, compliance, accounting, finance, marketing and sales functions. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business could be materially harmed.
To support our growth, we may have to further increase our investment in technology, facilities, personnel and financial and management systems and controls. We may also have to further expand our procedures for monitoring and assuring our compliance with applicable regulations, and may need to integrate, train and manage a growing employee base. The expansion of our existing businesses, and expansion into new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes that are more extensive and broader in scope than those we have historically required. We may not be successful in identifying or implementing all of the processes that are necessary. Further, unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our operating margins and profitability will be adversely affected.
We depend on significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly.
For the year ended March 31, 2021, one customer accounted for 14.9% of revenue; no customer accounted for more than 10% of revenue for the year ended March 31, 2020.
We believe that our operating results for the foreseeable future will continue to depend on sales to a small number of customers. These customers have no purchase commitments and may cancel, change or delay purchases with little or no notice or penalty. As a result of this customer concentration, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of these customers or any other significant customer. In the future, these customers may decide to purchase less product from us than they have in the past, may alter purchasing patterns at any time with limited notice, or may decide not to continue to purchase our products at all, any of which could cause our revenue to decline materially and materially harm our financial condition and results of operations. If we are unable to diversify our customer base, we will continue to be susceptible to risks associated with customer concentration.
In addition, the Corporation is subject to credit risk of its customers, and its profitability and cash flow are dependent on receipt of timely payments from clients. Any delay in payment by the Corporation’s customers may have an adverse effect on the Corporation’s profitability, working capital and cash flow. There is no assurance that the Corporation will be able to collect all or any of its trade receivables in a timely matter. If any of the Corporation’s clients face unexpected situations such as financial difficulties, the Corporation may not be able to receive full or any payment of the uncollected sums or enforce any judgment debts against such clients, and the Corporation’s business, results of operations and financial condition could be materially and adversely affected.
We have recorded significant goodwill impairment charges and may be required to record additional charges to future earnings if our goodwill or intangible assets become impaired.
As of March 31, 2021, our goodwill balance was $32.0 million which represented 13.6% of total consolidated assets. We are required to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets and/or goodwill may not be recoverable include a decline in stock price and market capitalization, slower growth rates in our industry or our own operations, and/or other materially adverse events that have implications on the profitability of our business or business segments. We may be required to record additional charges during the period in which any impairment of our goodwill or other intangible assets is determined which could have a material adverse impact on our results of operations. Even though these charges may be non-cash items and may not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities.
In some cases, we cannot determine with any certainty whether we have priority of invention in relation to any new product or new process covered by a patent application or if we were the first to file a patent application for any such new invention. Furthermore, in the event of patent litigation there can be no assurance that our patents would be
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held valid or enforceable by a court of competent jurisdiction or that a court would rule that the competitor’s products or technologies constitute patent infringement.
Moreover, part of our technological know-how constitutes trade secrets. We require that our employees, consultants, advisers and collaborators sign confidentiality agreements. However, these agreements may not provide adequate protection in the event of unauthorized use or disclosure of our trade secrets, know-how or other proprietary information.
Claims that our technology or products infringe on intellectual property rights of others could be costly to defend or settle, could cause reputational injury and would divert the attention of our management and key personnel, which in turn could have a material adverse effect on our business, results of operations, financial condition and cash flows. Any adverse outcome of such litigation or settlement of such a dispute could subject us to significant liabilities, could put one or more of our patents at risk of being invalidated or interpreted narrowly, could put one or more of our pending patent applications at risk of not issuing, or could facilitate the entry of generic products. Any such litigation could also divert our research, technical and management personnel from their normal responsibilities.
Significant interruptions in our access to certain supply chains, for key inputs such as raw materials, electricity, water, and other utilities may impair our operations.
Our business is dependent on a number of key inputs and their related costs (certain of which are sourced in other countries and on different continents), including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. We operate a manufacturing facility and have dispersed suppliers and customers. Governments may regulate or restrict the flow of our labor or our products, and the Corporation's operations, suppliers, customers, and distribution channels could be severely impacted. Any significant future governmental-mandated or market-related interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, rising or volatile energy costs could curtail or preclude our ability to continue production. In addition, our operations would be significantly affected by a prolonged power outage.
No assurances can be given that we will be successful in maintaining our required supply of materials, labor, equipment, parts, and components. See also “COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition”.
Our activities rely on certain third-party suppliers, contract manufacturers and distributors, and such reliance may adversely affect us if the third parties are unable or unwilling to fulfill their obligations.
We purchase certain important ingredients and raw materials from third-party suppliers and, in certain cases, we engage contract manufacturers to supply us with finished products. For certain of our products, we enter into arrangements with third parties related to the development, testing, production, packaging, and commercialization of our products to our customers which are then responsible for the marketing and distribution of the products. Our revenues are therefore dependent on the successful efforts of these third parties.
Real or perceived quality control problems with raw materials or finished products manufactured by contract manufacturers could negatively impact consumer confidence in our products or expose us to liability. In addition, disruption in the operations of any such supplier or manufacturer or material increases in the price of raw materials, for any reason, such as changes in economic and political conditions, tariffs, trade disputes, regulatory requirements, import restrictions, loss of certifications, power interruptions, fires, hurricanes, drought or other climate-related events, war, or other events, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The Corporation’s third-party manufacturers are subject to laws and regulations, including current Good Manufacturing Practices regulations (“cGMP”), which are enforced by the FDA and other regulatory authorities. The Corporation’s third-party manufacturers may be unable to comply with cGMP or other regulatory requirements. A failure to comply with these requirements may result in fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, warning or untitled letters, import or export bans or restrictions and criminal prosecution and penalties. Any of these penalties could delay or prevent the promotion, marketing, or sale of the Corporation’s products. If the safety of any products supplied to the Corporation
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is compromised due to a third-party manufacturer’s failure to adhere to applicable laws or for other reasons, the Corporation may not be able to successfully sell its products and our business, financial condition and operations may be adversely affected.
Some of our current and future partners may decide to compete with us, refuse or be unable to fulfill or honour their contractual obligations to us, or change their plans to reduce their commitment to, or even abandon, their relationships with us. There can be no assurance that our partners will market our products successfully or that any such third-party collaboration will be on favourable terms. We may not be able to control the amount and timing of resources our partners devote to our products. In addition, we may incur liabilities relating to the distribution and commercialization of our products. While the agreements with such customers generally include customary indemnification provisions indemnifying us for liabilities relating to third-party manufacturing or packaging of our products, there can be no assurance that these indemnification rights will be sufficient in amount, scope or duration to fully offset the potential liabilities associated with our products. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations.
Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, adulteration, unintended harmful side effects, or interactions with other substances, packaging safety, and inadequate or inaccurate labeling disclosure. If any of the products produced by or for us are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. As a result of any such recall, our sales may be significantly affected and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention or damage our reputation and goodwill or that of our products or brands.
Additionally, product recalls may lead to increased scrutiny of our operations by regulatory agencies and authorities, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses. Any product recall affecting the cannabis or hemp industry more broadly, whether or not involving us, could also lead consumers to lose confidence in the safety and security of the products sold by us generally.
Product contamination or tampering or issues or concerns with respect to product quality, safety and integrity could adversely affect our business, reputation, financial condition or results of operations.
Product contamination or tampering, or allegations of product contamination or tampering or product quality issues (whether or not valid) with respect to products in our portfolio may reduce demand for such products, and cause production and delivery disruptions or increase costs, which could adversely affect our business, reputation, financial condition or results of operations. Moreover, even if allegations of product contamination or tampering or suggestions that our products were not fit for consumption or use are meritless, the negative publicity surrounding assertions against us or products in our portfolio or processes could adversely affect our reputation or brands. Our business could also be adversely affected if consumers lose confidence in product quality, safety and integrity generally, even if such loss of confidence is unrelated to products in our portfolio.
Any of the foregoing could adversely affect our business, reputation, financial condition or results of operations. In addition, if we do not have adequate insurance, if we do not have enforceable indemnification from suppliers, manufacturers, distributors, joint venture partners or other third parties or if indemnification is not available, the liability relating to such product claims or disruption as a result of recall efforts could materially adversely affect our business, financial condition or results of operations.
We identified material weaknesses in our internal control over financial reporting. This may adversely affect the accuracy and reliability of our financial statements and, if we fail to maintain effective ICFR it could impact
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our reputation, business, and the price of our common shares, as well as lead to a loss of investor confidence in us.
The Corporation has and may continue to fail to maintain the adequacy of its internal controls over financial reporting as such standards are modified, supplemented or amended from time to time, and the Corporation cannot ensure that it will conclude on an ongoing basis that it has effective internal controls over financial reporting. The Corporation’s failure to satisfy the requirements of Canadian and United States legislation on an ongoing, timely basis could result in the loss of investor confidence in the reliability of its financial statements or in a cease trade order, which in turn could harm the Corporation’s business and negatively impact the trading price and market value of its shares or other securities. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Corporation’s operating results or cause it to fail to meet its reporting obligations.
The Corporation has and may continue to fail to maintain the adequacy of its disclosure controls. Disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Corporation in reports filed with securities regulatory agencies is recorded, processed, summarized and reported on a timely basis and is accumulated and communicated to the Corporation’s management, as appropriate, to allow timely decisions regarding required disclosure.
No evaluation can provide complete assurance that the Corporation’s financial and disclosure controls will detect or uncover all failures of persons within the Corporation to disclose material information otherwise required to be reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation. The effectiveness of the Corporation’s controls and procedures could also be limited by simple errors or faulty judgements.
Material weaknesses in the Corporation’s internal control over financial reporting were determined to exist at March 31, 2021 and these material weaknesses has not been remediated to date. The Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was not effective as of March 31, 2021 due to the presence of these material weaknesses. While new and revised controls are being adopted to remediate these weaknesses, if these and other controls fail to adequately remediate these material weaknesses, it could result loss of investor confidence, which could lead to a decline in our stock price. In addition, if we do not maintain adequate financial and management personnel, processes, and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our share price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also jeopardize our continued listing on the TSX or Nasdaq or any other exchange on which our common shares may be listed.
We may be unable to attract or retain key personnel, and we may be unable to attract, develop and retain additional employees required for our development and future success.
Our success is largely dependent on the performance of our management team and certain employees and our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The loss of the services of any key personnel, or an inability to attract other suitably qualified persons when needed, could prevent us from executing on our business plan and strategy, and we may be unable to find adequate replacements on a timely basis, or at all. We do not currently maintain key-person insurance on the lives of any of our key personnel.
Further, officers, directors, and certain key personnel at our facility that is licensed by Health Canada are subject to the requirement to obtain and maintain a security clearance from Health Canada. Moreover, an individual with security clearance must be physically present on site when other individuals are conducting activities with cannabis. A security clearance is valid for a limited time and must be renewed before the expiry of a current security clearance. There is no assurance that any of our existing personnel who presently or may in the future require a security clearance will be able to obtain or renew such clearances or that new personnel who require a security clearance will be able to obtain one. A failure by an individual in a key operational position to maintain or renew his or her security clearance could result in a reduction or complete suspension of our operations. In addition, if an individual in a key operational position leaves us, and we are unable to find a suitable replacement who is able to obtain a security clearance in a timely manner, or at all, we may not be able to conduct our operations at planned production volume levels or at all.
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Insurance coverage, even where available, may not be sufficient to cover losses we may incur.
Our current and expected business activities expose us to the risk of liabilities arising from our operations. For example, we may be liable for claims brought by users of our products or by employees, customers or other third parties for personal injury or property damage occurring in the course of our operations. We seek to minimize these risks through various insurance contracts from third-party insurance carriers. However, our insurance coverage is subject to large individual claim deductibles, individual claim and aggregate policy limits, and other terms and conditions. We retain an insurance risk for the deductible portion of each claim and for any gaps in insurance coverage. We do not view insurance, by itself, as a material mitigant to these business risks.
We cannot assure that our insurance will be sufficient to cover our losses. Any losses that insurance does not substantially cover could have a material adverse effect on our business, results of operations, financial condition and cash flows. The insurance industry has become more selective in offering some types of insurance, such as product liability, product recall, property and directors’ and officers’ liability insurance. Our current insurance program is consistent with both our past level of coverage and our risk management policies. However, we cannot assure that we will be able to obtain comparable insurance coverage on favorable terms, or at all, in the future.
We must successfully maintain and/or upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition or results of operations.
We rely on various information technology systems to manage our operations. Over the last several years, we have implemented, and we continue to implement, modifications and upgrades to such systems, including changes to legacy systems, replacing legacy systems with successor systems with new functionality, and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications, and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have a material adverse effect on our business, financial condition, or results of operations.
Conflicts of interest may arise between the Corporation and its officers and directors, which could adversely affect our operations.
The Corporation may be subject to various potential conflicts of interest because of the fact that some of its officers and directors may potentially be engaged in a range of business activities. In addition, its executive officers and directors may potentially devote time to their outside business interests, so long as such activities do not materially or adversely interfere with their duties to the Corporation. In some cases, the Corporation’s executive officers and directors may have fiduciary obligations associated with these business interests that interfere with their ability to devote time to the Corporation’s business and affairs and that could adversely affect the Corporation’s operations.
In addition, we may also become involved in other transactions which conflict with the interests of its directors and officers who may from time to time deal with persons, firms, institutions or corporations with which the Corporation may be dealing, or which may be seeking investments similar to those the Corporation desires. The interests of these persons could conflict with the Corporation’s interests. In addition, from time to time, these persons may be competing with the Corporation for available investment opportunities. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular, in the event that such a conflict of interest arises at a meeting of the Corporation’s directors, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the Corporation’s directors are required to act honestly, in good faith and in the Corporation’s best interests.
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Cannabis Industry Risks
The adult use cannabis market in Canada and the regulations governing the industry are still developing.
Cannabis for adult use only became legal in Canada in late 2018. As a result, the industry and the regulations governing the industry are rapidly developing. If they develop in ways that differ from the Corporation’s expectations, the business and results of operations may be adversely impacted.
United States Food and Drug Administration’s (“FDA”) regulation relating to hemp-derived CBD products remain subject to FDA’s enforcement discretion, albeit, FDA’s official position regarding ingestible CBD products precluded under the Federal Food, Drug, and Cosmetic Act (“FDCA”). Thus, the regulatory status of these products remain unclear and rapidly evolving, and changes may not develop in the timeframe or manner most favorable to our business objectives.
Our participation in the market for hemp-derived CBD products in the United States and elsewhere may require us to employ novel approaches to existing regulatory pathways. The passage of the Farm Bill in December 2018 legalized the cultivation of hemp in the United States to produce products containing CBD and other non-THC cannabinoids. On May 31, 2019, the FDA held a public hearing to obtain scientific data and information about the safety, manufacturing, product quality, marketing, labeling, and sale of products containing cannabis or cannabis-derived compounds, including CBD. The FDA has also formed an internal working group to evaluate the potential pathways to market for CBD products. FDA’s present position is that dietary supplement and food products containing CBD are precluded from addition to food and dietary supplements. The FDA further takes the position that CBD is not permitted for use in food as the ingredient is not Generally Recognized as Safe (“GRAS”). FDA’s position on preclusion and safety is disputed by industry that CBD is precluded from addition to dietary supplements and foods. In regard to other cannabinoids, FDA has not taken a regulatory position other than to reiterate that addition of other cannabinoids may be considered new dietary ingredients and subject to notification and that other cannabinoids cannot be added to food if they are not GRAS. It is important to note that company’s may take a self-determined GRAS position regarding its products and there is no requirement to submit GRAS ingredients to FDA for its review and concurrence, albeit, FDA does have a mechanism to do so. With that said, FDA is exercising enforcement discretion over ingestible CBD products absent express disease claims until such time it has concluded its review of available regulatory pathways.
In addition, such products may be subject to regulation at the state or local levels. While the Farm Bill created a pathway under which hemp and its derivatives are exempted from the definition of marijuana and protected from state’s interfering with the transportation of hemp and its derivatives in interstate commerce, state and local authorities are permitted under the Farm Bill to issue their own restrictions on the cultivation or sale of hemp or hemp-derived products, including laws that ban the cultivation or possession of hemp or any other plant of the cannabis genus and derivatives thereof, such as CBD. State regulators may take enforcement action against food and dietary supplement products that contain CBD, or enact new laws or regulations that prohibit or limit the sale of such products. Unforeseen regulatory obstacles or compliance costs may hinder our ability to successfully compete in the market for such products.
Unfavorable publicity or consumer perception regarding the cannabis industry could decrease demand for our products and adversely impact our operating results.
We believe the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of cannabis and related products distributed to such consumers. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favourable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for our products and the business, results of operations, financial condition and cash flows of the Corporation. Our dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have
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a material adverse effect on the Corporation, the demand for our products, and the business, results of operations, financial condition and cash flows of the Corporation.
Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis and related products in general, or our products specifically, or associating the consumption of cannabis or related products with illness or other negative effects or events, could have such a material adverse effect. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views in regard to the Corporation and our activities, whether true or not. Although we believe that we operate in a manner that is respectful to all stakeholders and that we take care in protecting our image and reputation, we do not ultimately have direct control over how it is perceived by others. Reputational loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to our overall ability to advance our projects, thereby having a material adverse impact on our financial performance, financial condition, cash flows and growth prospects.
We must comply with requirements for licenses and permits in Canada and the failure to maintain these could adversely affect our operations.
As a holder of a license for standard processing, we will be subject to ongoing inspections by Health Canada to monitor our compliance with its licensing requirements. Our license(s) that we obtained, or may in the future obtain, in Canada may be revoked or restricted at any time in the event that we are found not to be in compliance. Should we fail to comply with the applicable regulatory requirements or with conditions set out under our license(s), should our license(s) not be renewed when required, or be renewed on different terms, or should our license(s) be revoked, we may not be able to produce, process or distribute cannabis products.
We operate in Canada out of our existing facility located in Sherbrooke, Québec, which is required to comply with Health Canada requirements. Our facility is therefore subject to the adherence of ongoing standards and thresholds in order to maintain the appropriate certificate. Although the Corporation believes it will continue to meet such ongoing requirements, there is no guarantee that the required certification will be maintained. Any loss in certification would have a material adverse effect on the business, financial condition, and results of the operations of the Corporation.
Our current license with Health Canada expires on January 4, 2022. Prior to the expiration, we must submit to Health Canada an application for renewal of such license. There can be no assurance that we will be able to renew our existing license and any failure to renew such license would have a material adverse impact on our business, financial condition, and operating results.
In addition, we and other licensed producers in Canada may produce more cannabis than is needed to satisfy the collective demand of the Canadian adult-use markets, and we may be unable to export that oversupply into other legal markets. As a result, the available supply of cannabis could exceed demand, resulting in a significant decline in the market price for cannabis. If this were to occur, there is no assurance that we would be able to generate sufficient revenue from the sale of adult-use cannabis to result in profitability and sufficient liquidity. Regulatory restrictions or over supply conditions could result in inventory adjustments.
The tax burden related to our expected cannabis and hemp-related activities is still uncertain.
Tax regimes, including excise taxes and sales taxes, can disproportionately affect the price of our products, or disproportionately affect the relative price of our products versus other cannabis and hemp-based products. Because our expected products are targeted at the premium cannabis market, tax regimes based on sales price can place us at a competitive disadvantage in certain price-sensitive markets. As a result, our volume and profitability may be adversely affected in these markets.
Additionally, the Corporation may incur significant tax liabilities if the U.S. Internal Revenue Service (“IRS”) continues to determine that certain expenses of businesses working with the cannabis plant are not permitted tax deductions under section 280E of the U.S. Internal Revenue Code of 1986, as amended (“Code”). Section 280E of
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the Code prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked section 280E of the Code in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly, and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of section 280E of the Code favorable to cannabis businesses.
Laws in the United States may make it difficult for us to open bank accounts for our business.
Since the production and possession of cannabis is currently illegal under U.S. federal law, it is possible that banks may refuse to open bank accounts for the deposit of funds from businesses involved with the cannabis industry. Similarly, because the 2018 Farm Bill has not yet been fully implemented; the Corporation relies on exemptions promulgated pursuant to the 2014 Farm Bill; and the FDA continues to assert that CBD cannot be added to food or dietary supplements, it is possible that banks may refuse to open bank accounts for the deposit of funds related to the Corporation’s hemp operations. The inability to open bank accounts with certain institutions could materially and adversely affect the business of the Corporation.
The development of the adult-use cannabis industry and regulations governing this industry may impact our ability to successfully compete.
The Cannabis Act and the accompanying regulations (“CR”), became effective in October 2018 and allow individuals over the age of 18 to legally purchase, process and cultivate limited amounts of cannabis for adult use recreational purposes in Canada. Further, each province and territory of Canada has the ability to separately regulate the distribution of cannabis within such province or territory, and the rules (including associated regulations) adopted by these provinces or territories vary significantly. There is no assurance that the adult-use cannabis industry, and the regulations governing this industry, will continue to develop as anticipated.
There are and will be significant restrictions on the marketing, branding, product formats, product composition, packaging, and distribution channels allowed under the CR, which may reduce the value of certain of our products and brands or negatively impact our ability to compete with other companies in the adult-use cannabis market in Canada. For instance, the CR includes a requirement for health warnings on product packaging, the limited ability to use logos and branding (only one brand name and one brand element per package), restrictions on packaging itself, and restrictions on types and avenues of marketing. Further, Cannabis 2.0 regulations (which came into force on October 17, 2019, allowing new cannabis form factors) govern the production and sale of new classes or forms of cannabis products (including vapes and edibles), and impose considerable restrictions on product composition, labeling, and packaging in addition to being subject to similar marketing restrictions as existing form factors. Additional marketing and product composition restrictions have been imposed by some provinces and territories. Such federal and provincial restrictions may impair our ability to develop our adult-use brands and additional product or marketing restrictions imposed under future regulations may make it uneconomic or unfeasible for us to introduce brands and products into the Canadian market.
Some provinces and territories also impose significant restrictions on our ability to merchandise products; for example, some provinces impose restrictions on investment in retailers or distributors and their employees as well as in our ability to negotiate for preferential retail space or in-store marketing. Such variance may make participation in the adult-use cannabis market uneconomic or of limited economic benefit for us in those provinces or territories and could result in significant additional compliance or other costs and limitations on our ability to compete successfully in each such market.
Market consolidation in the cannabis industry may reduce our ability to compete, due to scale, cost and pricing disadvantages.
The Canadian cannabis industry has and may continue to experience consolidation, and some of the resulting companies that will be our competitors will have market presence, growth operations, technical and marketing capabilities, personnel, financial and other resources substantially greater than our own. In addition, some of these competitors will be able to raise capital at a lower cost than we will be able to. Consequently, some of these competitors
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may be able to develop and expand their growth, distribution and retail infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily and devote greater resources to the marketing and sale of their products and services than we will be able to. Additionally, the greater brand name recognition of some of our current and future competitors or competitive price pressure may require us to lower prices in order to retain or acquire customers. Finally, the cost advantages of some of these competitors may give them the ability to reduce their prices for an extended period of time or achieve a greater return.
In addition to competition from licensed producers, we face competition from illegal dispensaries and black market suppliers.
In addition to competition from licensed producers and those able to produce cannabis legally without a license, the Corporation also faces competition from unlicensed and unregulated market participants, including illegal dispensaries and black-market suppliers selling cannabis and cannabis-based products in Canada.
Despite the legalization of medical and adult recreational-use cannabis in Canada, black market operations remain and are a substantial competitor to our business. In addition, illegal dispensaries and black market participants may be able to (i) offer products with higher concentrations of active ingredients that are either expressly prohibited or impracticable to produce under current Canadian regulations, and (ii) use delivery methods that the Corporation is currently prohibited from offering to individuals in Canada, (iii) use marketing and branding strategies that are restricted under the Cannabis Act and Cannabis Regulations, and (iv) make claims not permissible under the Cannabis Act and other regulatory regimes. As these illicit market participants do not comply with the regulations governing the medical and adult-use cannabis industry in Canada, their operations may also have significantly lower costs.
As a result of the competition presented by the black market for cannabis, any unwillingness by consumers currently utilizing these unlicensed distribution channels to begin purchasing from licensed producers for any reason or any inability or unwillingness of law enforcement authorities to enforce laws prohibiting the unlicensed cultivation and sale of cannabis and cannabis-based products could (i) result in the perpetuation of the black market for cannabis, (ii) adversely affect our market share and (iii) adversely impact the public perception of cannabis use and licensed cannabis producers and dealers, all of which would have a materially adverse effect on our business, operations and financial condition.
We are subject to risks inherent to suppliers in an agricultural business, including the risk of crop failure.
Cannabis is an agricultural product. As such, its supply is subject to the risks inherent in the agricultural business, including risks of crop failure presented by weather, insects, plant diseases, and similar agricultural risks. There can be no assurance that natural elements, such as insects and plant diseases, will not interrupt production activities with our suppliers and partners and have an adverse effect on our business.
We rely on third parties for our supply of cannabis.
We do not cultivate cannabis to supply ourselves with cannabis leaves, flowers and trim to operate our extraction business. We currently obtain cannabis from third parties in amounts sufficient to operate our extraction business. However, there can be no assurance that there will continue to be a supply of cannabis available for us to process or purchase a sufficient amount of cannabis to operate our business. Additionally, the price of cannabis may rise which would increase our cost of goods. If we are unable to acquire the cannabis required to operate our extraction business or if the price of cannabis increases, it could have a material adverse impact on our business, our financial condition and results from operations.
If any of our key suppliers fails to provide inputs meeting our quality standards, we may need to source cannabis, equipment or other inputs from other suppliers, which may result in additional costs and delay in the delivery of our products and services to our clients. There is no assurance that our suppliers will be able to supply and deliver the required materials to us in a timely manner or that the materials they will not be defective or substandard. Any delay in the delivery of materials, or any defect in the materials, supplied to the Corporation may materially and adversely affect or delay its production schedule and affect its product quality. If we cannot secure materials of similar quality and at reasonable prices from alternative suppliers in a timely manner, or at all, we may not be able to deliver its products to our clients on time with required quality. The Corporation’s suppliers, service providers and distributors
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may elect, at any time, to breach or otherwise cease to participate in supply, service or distribution agreements, or other relationships, upon which our operations rely. Loss of its suppliers, service providers or distributors would have a material adverse effect on the Corporation’s business and operational results.
Our activities and resources in the Canadian cannabis industry rely on a single facility.
To date, our activities and resources in the Canadian cannabis industry have been primarily focused on our facility located in Sherbrooke, Québec, and we will continue to focus on such facility for the foreseeable future. Adverse changes or developments affecting this facility could have a material and adverse effect on our business and financial condition.
We may not be able to transport our cannabis products to customers in a safe and efficient manner.
We will depend on fast and efficient third-party transportation services to distribute our cannabis products. Any prolonged disruption of third-party transportation services could have a material adverse effect on our sales volumes or our end users’ satisfaction with our services. Rising costs associated with third-party transportation services used by us to ship our products may also adversely impact our profitability, and more generally our business, financial condition and results of operations.
The security of products during transportation will be of the utmost concern. A breach of security during transport or delivery could result in the loss of high-value product. A failure to take steps necessary to ensure the safekeeping of cannabis could also have an impact on our ability to operate under our license(s), to renew or receive amendments to such licenses, or to receive required new licenses.
Access to certain markets in Canada is dependent on compliance with supplier standards established by provincial or territorial distributors.
Government-run provincial and territorial distributors in Canada require suppliers to meet certain service and business standards, and routinely assess for compliance with such standards. Any failure by us to comply with such standards could result in our being downgraded or disqualified as a supplier and would severely impede or eliminate our ability to access certain markets within Canada.
Regulatory Compliance Risks
Our Status as a Foreign Private Issuer
As a foreign private issuer, we are subject to different reporting and disclosure requirement under U.S. securities laws and regulations than a domestic U.S. issuer, which may limit the information publicly available to our U.S. shareholders.
We are a foreign private issuer under applicable U.S. federal securities laws. As a result, we do not file the same reports that a U.S. domestic issuer would file with the SEC, although we are required to file with or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws. In addition, our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions of Section 16 of the U.S. Exchange Act. Therefore, our shareholders may not know on as timely a basis when our officers, directors and principal shareholders purchase or sell Common Shares as the reporting periods under the corresponding Canadian insider reporting requirements are longer. In addition, as a foreign private issuer, we are exempt from the proxy rules under the U.S. Exchange Act.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses to us.
We may in the future lose our foreign private issuer status if a majority of our Common Shares are held in the United States and we fail to meet the additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under U.S. federal securities laws as a U.S. domestic issuer may be significantly more than the costs we incur as a Canadian foreign private issuer.
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U.S. investors may be unable to enforce certain judgments against us in Canada.
Neptune is a corporation existing under the Business Corporations Act (Québec). A number of our directors and officers are residents of Canada or other jurisdictions outside of the United States, and substantially all of our assets are located outside the United States. As a result, it may be difficult to effect service within the United States upon the Corporation or upon its directors and officers. Execution by United States courts of any judgment obtained against the Corporation or any of the Corporation’s directors or officers in United States courts may be limited to the assets of such companies or such persons, as the case may be, located in the United States. It may also be difficult for holders of securities who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon civil liability and the civil liability of the Corporation’s directors and executive officers under the United States federal securities laws. The Corporation has been advised that a judgment of a U.S. court predicated solely upon civil liability under U.S. federal securities laws or the securities or “blue sky” laws of any state within the United States, would likely be enforceable in Canada if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that would be recognized by a Canadian court for the same purposes. However, there may be doubt as to the enforceability in Canada against these non-U.S. entities or their controlling persons, directors and officers who are not residents of the United States, in original actions or in actions for enforcement of judgments of courts of the United States, of liabilities predicated solely upon U.S. federal or state securities laws.
Ownership of our Securities
The market price of Neptune’s Common Shares may be highly volatile.
The stock market, from time-to-time, experiences significant price and volume fluctuations unrelated to the operating performance of particular companies. Future announcements concerning Neptune, its competitors, including those pertaining to financing arrangements, government regulations, developments concerning regulatory actions affecting Neptune, litigation, additions or departures of key personnel, cash flow, and economic conditions and political factors in Canada and the United States may have a significant impact on the market price of Neptune’s Common Shares. In addition, there can be no assurance that the Neptune’s Common Shares will continue to be listed on the TSX or Nasdaq.
The market price of the Neptune’s Common Shares could fluctuate significantly for many other reasons, including for reasons unrelated to Neptune’s specific performance, such as reports by industry analysts, investor perceptions, or negative announcements by its subscribers, competitors or suppliers regarding their own performance, as well as general economic and industry conditions.
For example, to the extent that other large companies within its industry experience declines in their stock price, the share price of the Neptune’s Common Shares may decline as well. In addition, when the market price of a company’s shares drops significantly, shareholders often institute securities class action lawsuits against the company.
Litigation resulting from these claims could be costly and time-consuming and could divert the attention of management and other key personnel from the Corporation’s business and operations. The complexity of any such claims and the inherent uncertainty of commercial or class action, litigation increases these risks. In recognition of these considerations, the Corporation could suffer significant litigation expenses in defending any of these claims and enter into settlement agreements. If the Corporation is unsuccessful in its defense of material litigation claims or is unable to settle the claims, the Corporation may be faced with significant monetary damage awards or other remedies against it including injunctive relief that could have a material adverse effect on the Corporation’s business, financial condition and results of operations. Administrative or regulatory actions against the Corporation or its employees could also have a material adverse effect on the Corporation’s business, financial condition and results of operations.
We do not currently intend to pay any cash dividends on our Common Shares in the foreseeable future.
We have never paid any cash dividends on our Common Shares. We do not anticipate paying any cash dividends on our Common Shares in the foreseeable future because, among other reasons, we currently intend to retain any future earnings to finance our business. The future payment of cash dividends will be dependent on factors such as cash on hand and achieving profitability, the financial requirements to fund growth, our general financial condition and other factors our board of directors may consider appropriate in the circumstances. Until we pay cash dividends,
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which we may never do, our shareholders will not be able to receive a return on their Common Shares unless they sell them.
If there is insufficient liquidity in our Common Shares, it could adversely affect your ability to sell your shares.
Shareholders of the Corporation may be unable to sell significant quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common Shares, or at all. There can be no assurance that there will be sufficient liquidity of the Common Shares on the trading market, and that the Corporation will continue to meet the listing requirements of the TSX and NASDAQ or achieve listing on any other public stock exchange. There can be no assurance that an active and liquid market for the Common Shares will be maintained and an investor may find it difficult to resell Common Shares.
Certain Canadian laws could delay or deter a change of control.
The Investment Canada Act (Canada) subjects an acquisition of control of a corporation by a non-Canadian to government review if the value of the assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be a net benefit to Canada.
Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities for our shareholders to sell their shares.
Our stockholders may be subject to dilution resulting from future offerings of common stock by us.
We may raise additional funds in the future by issuing common shares or equity-linked securities. Holders of our securities have no pre-emptive rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of our capital stock is warranted, the price at which such issuance is to be affected and the other terms of any future issuance of capital stock. In addition, additional common stock will be issued by us in connection with the exercise of options or grant of other equity awards granted by us. Such additional equity issuances could, depending on the price at which such securities are issued, substantially dilute the interests of the holders of our existing securities.
Other regulatory compliance risks
We are subject to laws and regulations and guidelines, changes in which could increase our costs and individually or in the aggregate adversely affect our business.
We are subject to laws and regulations affecting our operations in a number of areas. These laws and regulations affect the Corporation’s activities in areas including, but not limited to, the cannabis industry in Canada, the hemp business in the United States, food, beverage and nutritional products, consumer protection, labor, intellectual property ownership and infringement, import and export requirements, and environmental, health and safety.
The successful execution of our business objectives is contingent upon compliance with all applicable laws and regulatory requirements and obtaining all other required regulatory approvals, which may be onerous and expensive. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation and the expansion of the Corporation’s business, could individually or in the aggregate make the Corporation’s products and services less attractive to our customers, delay the introduction of new products, or cause the Corporation to implement policies and procedures designed to ensure compliance with applicable laws and regulations. There can be no assurance that the Corporation’s employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.
We are subject to risks inherent to the nutraceutical industry.
We are heavily dependent on the export of products to the United States. The U.S. FDA is able to block the import entry of any product that “appears” to violate U.S. law, which represents a low evidentiary standard for the U.S. FDA. Future changes in U.S. requirements and interpretations of those requirements, coupled with the “appears” to violate the law standard for refusing entry of imported products, increases the possibility that our products may not have full access to the U.S. market and poses additional risks to our business.
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We are subject to taxation in multiple jurisdictions, and changes in taxation may impact our earnings.
The Corporation will operate and will be subject to income tax and other forms of taxation (which are not based upon income) in multiple tax jurisdictions. Taxation laws and rates which determine taxation expenses may vary significantly in different jurisdictions, and legislation governing taxation laws and rates is also subject to change. Therefore, the Corporation’s earnings may be impacted by changes in the proportion of earnings taxed in different jurisdictions, changes in taxation rates, changes in estimates of liabilities and changes in the amount of other forms of taxation. The Corporation may have exposure to greater than anticipated tax liabilities or expenses. The Corporation will be subject to income taxes and non- income taxes in a variety of jurisdictions and its tax structure is subject to review by both domestic and foreign taxation authorities and the determination of the Corporation’s provision for income taxes and other tax liabilities will require significant judgment.
We are subject to anti-money laundering laws and regulations in multiple jurisdictions.
The Corporation will be subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), the Criminal Code (Canada), as amended and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
If any of the Corporation’s investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States or Canada were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Corporation to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Corporation has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, the Corporation may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
Our inability to maintain our regulatory approvals and permits could adversely affect our business and financial results.
The Corporation is required to obtain and maintain certain federal and state permits, licenses and approvals in the jurisdictions where its products are manufactured and/or sold. There can be no assurance that the Corporation will be able to obtain or maintain necessary licenses, permits or approvals. Any material delay or inability to receive these items is likely to delay and/or inhibit the Corporation’s ability to conduct its business, and would have an adverse effect on its business, financial condition and results of operations.
Any acquisitions, strategic investments, divestures, mergers, or joint ventures we make may require the issuance of a significant amount of equity or debt securities and may not be successful.
As part of our business strategy, we expect to selectively pursue strategic acquisitions, as well as additional strategic and other investments such as joint ventures or partnerships, to obtain additional businesses, products and/or technologies, capabilities, and personnel. Acquisitions and other investments present challenges, including geographical coordination, personnel integration and retention of key management personnel, systems integration, the potential disruption of each company’s respective ongoing businesses, possible inconsistencies in standards, controls, procedures, and policies, unanticipated costs of terminating or relocating facilities and operations, unanticipated expenses relating to such integration, contingent obligations, and the reconciliation of corporate cultures. Those operations could divert management’s attention from the business, cause a temporary interruption of or loss of momentum in the business, and adversely affect our results of operations and financial condition. The inability to consummate and integrate new acquisitions on advantageous terms, or the failure to achieve a favorable return on our strategic and other investments, could adversely affect our ability to grow and compete effectively. Additionally, if we make one or more acquisitions in which the consideration includes the Corporation’s securities, we may be required
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to issue a substantial amount of equity, debt, warrants, convertible instruments, or other similar securities. Such an issuance could result in dilution to shareholders or increase our interest expense and other expenses.
We have reported negative cash flows from operating activities and may do so in future periods.
The Corporation reported negative cash flow from operating activities of $72.6 million and $31.4 million for the fiscal years 2021 and 2020. The Corporation has historically and may also continue to have negative cash flow from operating activities until sufficient levels of sales are achieved. The Corporation cannot guarantee that future positive cash flow from operating activities will be obtained. In addition, negative cash flows may continue longer than the Corporation has planned for which could cause liquidity issues.
The Corporation may also be unable to obtain borrowings in an amount sufficient to enable them to pay debt or to fund other liquidity needs. If sufficient liquidity is not obtained, the Corporation may need to refinance or restructure all or a portion of its debt on or before maturity, sell assets or borrow money or issue equity, which may not be possible on terms satisfactory to the Corporation, or at all. If the Corporation continues to report negative cash flows from operating activities, or any failure to obtain any required additional financing on favourable terms, or at all, such events could have a material adverse effect on the business, financial condition, and results of operation of the Corporation.
We are subject to foreign currency fluctuations, which could adversely affect our financial results.
We are exposed to the financial risk related to the fluctuation of foreign exchange rates and the degrees of volatility of those rates. Currency risk relates to the portion of our business transactions denominated in currencies other than the Canadian dollar.
For the twelve-month period ended March 31, 2021, approximately 61% of our revenues were in U.S. dollars, and a significant portion of our expenses, including the purchase of raw materials, were in U.S. dollars. If the value of the United States dollar fluctuates significantly more than expected in the foreign exchange markets, our operating results and financial condition may be adversely affected.
We may be exposed to risks and costs associated with security breaches, data loss, credit card fraud and identity theft that could cause us to incur unexpected expenses and loss of revenue as well as other risks.
Neptune’s operations are increasingly dependent on IT systems and the management of information; thus, the protection of customers, employees, suppliers and other business data is critical. A portion of our sales require the collection of certain customer data, such as credit card information. In order for our sales channel to function, we and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information, securely over public networks. The use of credit payment systems makes us more susceptible to a risk of loss, particularly with respect to an external security breach of customer information controlled by us, or by third parties under arrangements with us (including those with whom we have strategic alliances).
Despite of all efforts, Neptune experienced a cyber attack in July of the current fiscal year as consequence of increased digital interactions with customers, suppliers and consumers, and changes in ways of working of our employees and these external stakeholders due to the Covid-19 outbreak. Also, we are particularly reliant on service providers and thus the impact of Covid-19 on their operations also imposed a risk for us. Cyber-attacks will continue to impose threats to our operations.
In addition, federal, state, provincial and international laws and regulations govern the collection, retention, sharing, and security of data that we manage. The regulatory environment surrounding information security and privacy has been increasingly demanding in recent years and may see the imposition of new and additional requirements by provincial, state, and federal governments as well as foreign jurisdictions in which we do business. Compliance with these requirements may result in cost increases due to necessary systems changes and the development of new processes to meet these requirements by us.
In the event of a security breach, theft, leakage, accidental release or other illegal activity with respect to employees, customers, suppliers or other company data, we could become subject to various claims, including those arising out of thefts and fraudulent transactions, and may also result in the suspension of credit card services. This
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could cause consumers to lose confidence in our security measures, harm our reputation as well as divert management attention, and expose us to potentially unreserved claims and litigation. Any loss in connection with these types of claims could be substantial. If our electronic payment systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, we are reliant on these systems, not only to protect the security of the information stored, but also to appropriately track and record data. Any failures or inadequacies in these systems could expose us to significant unreserved losses, which could materially and adversely affect our earnings and the market price of securities. Our brand reputation would likely be damaged as well.
We do not anticipate paying any dividend on our Common Shares in the foreseeable future. We presently intend to retain future earnings to finance the expansion and growth of our business. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements and other factors the Board of Directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends.
Description of Our Share Capital
The authorized share capital of the Corporation is comprised of an unlimited number of Common Shares and an unlimited number of preferred shares (“Preferred Shares”), issuable in one or more series. In accordance with our articles of incorporation, we created the “Series A Preferred Shares”, which are non-voting shares.
As at March 31, 2021, there were a total of (i) 165,622,944 Common Shares and no Preferred Shares issued and outstanding, (ii) options to purchase 13,242,213 Common Shares issued and outstanding, (iii) deferred share units which settle in 41,960 Common Shares issued and outstanding, (iv) restricted share units which settle in 3,354,631 Common Shares issued and outstanding and (v) warrants to purchase 23,582,401 Common Shares issued and outstanding.
Each Common Share entitles its holder to receive notice of, and to attend and vote at, all annual or special meetings of the shareholders of the Corporation. Each Common Share entitles its holder to one vote at any meeting of the shareholders, other than meetings at which only the holders of a particular class or series of shares are entitled to vote due to statutory provisions or the specific attributes of this class or series.
Subject to the prior rights of the holders of Preferred Shares ranking before the Common Shares as to dividends, the holders of Common Shares are entitled to receive dividends as declared by the board of directors of the Corporation from the Corporation’s funds that are duly available for the payment of dividends.
Winding-Up and Dissolution
In the event of the Corporation’s voluntary or involuntary winding-up or dissolution, or any other distribution of the Corporation’s assets among its shareholders for the purposes of winding up its affairs, the holders of Common Shares shall be entitled to receive, after payment by the Corporation to the holders of Preferred Shares ranking prior to Common Shares regarding the distribution of the Corporation’s assets in the case of winding-up or dissolution, share for share, the remainder of the property of the Corporation, with neither preference nor distinction.
The foregoing description of the terms of the Common Shares does not purport to be complete and is subject to and qualified in its entirety by reference to the Articles and general by-laws of the Corporation, each of which is available on SEDAR at www.sedar.com and EDGAR at www.sec.gov.
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The Preferred Shares carry no voting rights. Preferred Shares may be issued at any time, in one or more series. The Corporation’s board of directors has the power to set the number of Preferred Shares and the consideration per share, as well as to determine the provisions attaching to each series of Preferred Shares (including dividends, redemption rights and conversion rights, where applicable). The shares in each series of Preferred Shares rank prior to the Common Shares of the Corporation with regard to payment of dividends, reimbursement of capital and division of assets in the event of the Corporation’s winding-up or dissolution. The holders of Preferred Shares shall not be entitled to receive notice of, or to attend or vote at the meetings of the shareholders, except: (i) in the event of a separate meeting or vote by class or by series as specified by law, (ii) where entitled to vote by class or series on amendments to the attributes attaching to the class or series, or (iii) where applicable, in the event of the Corporation’s omission to pay the number of periodical dividends, whether consecutive or not, as applicable to any series.
The board of directors of the Corporation has passed a by-law creating the Series A Preferred Shares. Series A Preferred Shares may be issued only as part of an acquisition by the Corporation of other companies or material assets. Series A Preferred Shares are non-voting, and entitle holders thereof to a fixed, preferential and non-cumulative annual dividend of 5% of the amount paid for the said shares.
The Common Shares are listed and posted for trading on the TSX under the symbol “NEPT” and NASDAQ under the symbol “NEPT”.
Trading Prices and Volumes
The following table sets out the high and low prices and total trading volume of the Common Shares as reported by the TSX and NASDAQ for each month of our Fiscal 2021.
Period |
TSX (CDN$) |
NASDAQ (US$) |
||||||
|
High |
Low |
Average Daily Volume |
Total Monthly Volume |
High |
Low |
Average Daily Volume |
Total Monthly Volume |
March 2021 |
$2.13 |
$1.62 |
549,722 |
12,643,600 |
$1.70 |
$1.29 |
4,213,383 |
96,907,800 |
February 2021 |
$4.04 |
$1.96 |
1,328,011 |
25,232,200 |
$3.15 |
$1.56 |
13,456,405 |
255,671,700 |
January 2021 |
$2.71 |
$1.98 |
378,875 |
7,577,500 |
$2.03 |
$1.63 |
2,187,689 |
41,566,100 |
December 2020 |
$2.39 |
$1.81 |
220,471 |
4,629,900 |
$1.75 |
$1.49 |
1,560,305 |
34,326,700 |
November 2020 |
$2.93 |
$1.95 |
312,510 |
6,562,700 |
$2.01 |
$1.53 |
1,661,480 |
33,229,600 |
October 2020 |
$3.27 |
$2.32 |
223,195 |
4,687,100 |
$2.48 |
$1.80 |
987,409 |
21,723,000 |
September 2020 |
$3.58 |
$2.75 |
241,586 |
5,073,300 |
$2.65 |
$2.11 |
529,224 |
11,113,700 |
August 2020 |
$4.13 |
$3.31 |
198,180 |
3,963,600 |
$3.07 |
$2.54 |
722,681 |
15,176,300 |
July 2020 |
$4.80 |
$3.25 |
157,882 |
3,473,400 |
$3.23 |
$2.79 |
759,177 |
16,701,900 |
June 2020 |
$4.36 |
$3.23 |
229,427 |
5,047,400 |
$3.15 |
$2.55 |
739,686 |
16,273,100 |
May 2020 |
$4.80 |
$3.25 |
307,905 |
6,158,100 |
$3.09 |
$1.98 |
1,331,655 |
26,633,100 |
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Period |
TSX (CDN$) |
NASDAQ (US$) |
||||||
|
High |
Low |
Average Daily Volume |
Total Monthly Volume |
High |
Low |
Average Daily Volume |
Total Monthly Volume |
April 2020 |
$3.62 |
$1.43 |
459,048 |
9,640,000 |
$2.35 |
$1.02 |
2,032,286 |
42,678,000 |
Issuance of Securities
For information in respect of options and warrants to purchase Common Shares and Common Shares issued or issuable upon the exercise of options and warrants, see the notes to our Fiscal 2021 financial statements. We did not otherwise issue any class of securities of Neptune that is not listed or quoted on a marketplace during Fiscal 2021.
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Directors
The table below sets out the name, place of residence, principal occupation and security holding in the Corporation and the period during which each such director has so served as well as the member of each committee of the Board of Directors as of the date hereof. Directors are elected at each annual shareholders meeting for a term that expires on the date of the Corporation’s next annual shareholders meeting or until his or her successor is duly elected, unless prior thereto the director resigns or otherwise vacates office.
Name and Place of Residence |
Principal Occupation |
Position Within the Corporation |
Year of Nomination as Director of the Corporation |
Common Shares, Directly or Indirectly, Beneficially Owned as of March 31, 2021 |
John Moretz (1)(2)(3)(4)(5)(6)
|
Chief Executive Officer and President, Moretz Marketing LLC |
Director, Chairman of the Board, Chair of the Special Transaction Committee and Interim Chair of the Compensation and Human Resources Committee, Nominating Committee |
2014 |
3,265,226 |
Joseph Buaron (4)(6)
|
Co-Founder and CTO – goPeer Corporation
|
Director and Chair of the Operations and IT Committee |
2020 |
14,619 |
Michael Cammarata (5)(6)
|
President and Chief Executive Officer of the Corporation |
Director, President and Chief Executive Officer |
2019 |
4,416,897 |
Ronald Denis (2)(3)(4)
|
Chief of Surgery at Hôpital du Sacré-Coeur, Montréal |
Director |
2000 |
75,000 |
Michael A. De Geus (6)
|
Founder and Chief Executive Officer of Leatherback Gear, LLC |
Director |
2020 |
14,619 |
Jane Pemberton (1)(2)(5)(6) New York, United States of America |
Operating Advisor North Castle Partners, LLC |
Director |
2020 |
9,672 |
Frank Rochon (1)(2) Ontario, Canada |
Chief Executive Officer Supply Ontario |
Director, Chair of the Audit Committee and Governance Committee |
2020 |
4,771 |
(1)Member of the Audit Committee (2)Member of the Governance Committee (3) Member of the Nominating Committee (4)Member of the Compensation and Human Resources Committee (5)Member of the Special Transaction Committee (6) Member of the Operations and IT Committee |
The information as to outstanding Common Shares beneficially owned or over which the above-named individuals exercise control or direction and the foregoing information is not within the knowledge of the Corporation and has been furnished by the respective persons.
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Officers
The following table sets out the name, place of residence and position held with us for each of our executive officers as of March 31, 2021.
Name and Place of Residence |
Position Held |
With the Corporation Since |
Common Shares, Directly or Indirectly, Beneficially Owned as of March 31, 2021 |
Michael Cammarata Florida, USA |
President and Chief Executive Officer |
2019 |
4,416,897 |
Toni Rinow Quebec, Canada |
Chief Financial Officer and Global Operating Officer |
2020 |
30,000 |
As of March 31, 2021, the directors and executive officers and key members of our management, as a group, beneficially owned or exercised control or direction over approximately 7,830,804 (4.7%) of the outstanding Common Shares of Neptune.
The following are brief biographies of Neptune’s directors and executive officers and key members of our management as of the date hereof:
Board of Directors
Mr. John Moretz – Director
Mr. Moretz currently serves as Chief Executive Officer and President of Moretz Marketing, LLC and is Managing Director of Kathy Ireland, LLC. In addition, he is the Managing Director of various real estate entities, including LaMoe, LLC and Moretz Mills, LLC. Mr. Moretz spent 39 years in the textile industry building and marketing numerous consumer brands. He served as the Chairman and Chief Executive Officer of Gold Toe Moretz Holdings Corp. and its subsidiaries prior to its acquisition by Gildan Activewear Inc. in 2012. Mr. Moretz founded Moretz Marketing in 1987 to create and manage lifestyle brands licensing opportunities. He serves on the following boards: Neptune Wellness Solutions-Chairman, LED Technologies, Blowing Rock Brewery, and McCubbin Hosiery, LLC.
Joseph Buaron - Director
Mr. Buaron is co-founder and CTO of goPeer, Canada’s first regulated consumer peer-to-peer lender, he additionally serves as Chief Strategy Officer to Loti Wellness Inc., a Canadian self-care consumer brand. Prior, Mr. Buaron served as CTO of Schmidt’s Naturals, where he led the technology, AI, digital marketing and consumer support divisions through transition from start-up to enterprise, and subsequently through the acquisition by Unilever, and the integration that followed. Mr. Buaron is a seasoned CTO with over two-decades related experience as an entrepreneur, investor, programmer, solutions architect, and DevOps engineer. His passion for technology reflects his recognition for the tremendous impact it has on our lives and its potential for creating a better tomorrow. Immersed in technology, Mr. Buaron strives to provide vision, leadership, form relationships, and eliminate barriers to allow the brightest minds to flourish.
Michael Cammarata – Director, Chief Executive Officer
Mr. Cammarata became CEO of Neptune Wellness Solutions July 8, 2019. Mr. Cammarata is the founder of Random Occurrence, a venture capital and private equity firm. He invested in and cofounded Schmidt’s Naturals, one of the world’s fastest growing wellness brands, leading it from fledgling start-up to acquisition in 2017 by Unilever and onto record breaking growth in 2018. He remained CEO of Schmidt’s Naturals until June 2019, leading its rapid expansion into new and innovative products, retailers and global markets. Mr. Cammarata is a new breed of unconventional CEO with a personal mission to invest and scale companies globally that will make sustainable
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innovation and modern wellness solutions accessible to the world. He believes that natural products are the future and that every person deserves natural products that work and minimize their harm to people, the planet and animals. Through all his investments, Mr. Cammarata is looking toward future technologies, including AI and machine learning to create stronger connections and personalized products for customers. He is a passionate advocate for ending animal testing in cosmetics. Raised in New York, Mr. Cammarata’s dyslexia made school challenging, but that perspective allowed him to identify opportunities others missed. He became a technology and marketing wunderkind by his mid-teens.
Michael A. de Geus – Director
Mr. de Geus is a highly accomplished security executive with domestic and international cyber investigative and physical security experience. He is the founder and Chief Executive Officer of Leatherback Gear, LLC., a producer of bullet proof backpacks. He also served as a Special Agent in federal law enforcement with the Department of Homeland Security and has served on various assignments both physically and with cyber security since 2008. Previously, he served as the Director of Sales at Koro Sun Report in the Fiji Islands and as a consultant for MD Consulting, working on various projects from developing branding and new store layouts to helping with various start-up companies. Mr. de Geus is a Ph.D. Candidate in Public Policy specializing in Homeland Security at Walden University, holds a Master of Science in International Relations from the Troy State University and holds a Bachelor of Science in Criminal Justice from California State University Fullerton.
Dr. Ronald Denis – Director
Dr. Denis has been Chief of Surgery and director of the Trauma Program at Hôpital du Sacré-Coeur in Montréal since 1997. Also, since 1987, Dr. Denis has occupied the position of medical co-director of the Canadian Formula 1 Grand Prix. Dr. Denis sits on several scientific boards and management committees.
Jane Pemberton – Director
Ms. Pemberton is a growth driven, brand loving, digital first executive with over 25 years of experience building and investing in highly profitable business with a focus on “good for you” businesses around the world. Ms. Pemberton is currently the Operating Advisor at North Castle Partners, a leading private equity firm focused exclusively in the Health, Wellness & Active Living Sector. Prior to North Castle Partners, she served in multiple leadership roles at Gaiam, The Mommy & Me Company, Fox Filmed Entertainment and The Walt Disney Company. Ms. Pemberton currently serves on the Board of Directors for ProSupps USA and The Escape Game.
Frank Rochon – Director
Mr. Rochon was Vice Chairman and Managing Partner with Deloitte until July 2020. In addition, Mr. Rochon was Mr. Rochon has built a distinguished career over the past 30 years, serving in numerous key leadership positions with the past 20 years at Deloitte Canada. He most recently served as Vice Chairman and Managing Partner of Clients and Industries leading Deloitte Canada’s client and market portfolio, overseeing the firm’s most significant client relationships and opportunities. Mr. Rochon is widely sought after for his business insights and hands-on experience in all aspects of professional services within the Canadian business landscape. At Deloitte, he served in many roles such as Regional Managing Partner roles and also as Deloitte Canada M&A Executive Leader. In addition, Mr. Rochon served on the Deloitte Global executive leadership and the Canadian Board of Directors. Mr. Rochon holds a degree in Business from the University of Ottawa.
Executive Officers
Dr. Toni Rinow –Chief Financial Officer & Global Operating Officer
Dr. Toni Rinow is a catalyst for growth and expansion and is well known for accelerating revenue streams through acquisitions, corporate development, sales and marketing, and financings. With a proven track record of success in international corporate development and the sales and financing of companies in the healthcare market, Toni has successfully facilitated the negotiation of international corporate alliances valued over $100M and overseen a life
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science investment portfolio with $400M under management. She was appointed General Manager of Jubilant DraxImage in 2018, a global leader in nuclear medicine with $200M in sales in 22 countries. Her professional career has included leadership roles in both public and private pharmaceutical and healthcare organizations, where she spearheaded acquisitions across Canada, Latin America, and India and supported the transition of two biotechnology companies to an initial public offering at the Toronto Stock Exchange. With a focus on strategic growth, Toni is that rare C-level business manager with blended business expertise in finance, science and engineering. In addition to a double Masters of Business Administration and Accounting from McGill University, she holds a doctorate in physical chemistry from the Université de Montréal (Ph.D), and a chemical engineering degree from the European Higher Institute of Chemistry in Strasbourg, France. As a forward thinker, she is trained in Artificial Intelligence from MIT. Toni believes in giving back to the community and sits on Board of Directors for non-for-profit organizations.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Except as set forth below, to the knowledge of Neptune, none of the directors or executive officers of the Corporation:
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(a) |
is, or has been, within the last ten years, a director, chief executive officer or chief financial officer of any corporation that: |
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(i) |
was subject to a cease trade order, an order similar to a cease trade order, or an order that denied the relevant corporation access to any exemption under applicable securities legislation, that was in effect for a period of more than 30 consecutive days (an “Order”), which Order was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or |
|
(ii) |
was subject to an Order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer; |
Except as set forth below, to the knowledge of Neptune, no director or executive officer of the corporation, or shareholder holding a sufficient number of securities of the Corporation to affect materially the control of the Corporation:
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(a) |
is, or has been, within the last ten years, a director or executive officer of any corporation that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver manager or trustee appointed to hold its assets, with the exception of Ms. Jane Pemberton, who was a director of Mynd Spa & Salon, Inc. (formerly Elizabeth Arden Red Door Salon & Spa) (“Mynd”), which was a portfolio company of North Castle Partners, LLC, from 2018 until she resigned from the Board of Directors on March 16, 2020. On March 19, 2020, Mynd filed for bankruptcy relief under of the United States Chapter 7 Bankruptcy Code; or |
|
(b) |
has, within the last ten years, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold his or its assets of the proposed director. |
To the knowledge of Neptune, no director, executive officer or shareholder holding a sufficient number of securities of the Corporation to affect materially the control of the Corporation has been subject to:
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(a) |
any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or |
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Legal Proceedings and Regulatory Actions
The Corporation is engaged from time-to-time in various legal proceedings and claims that have arisen in the ordinary course of business. The outcome of such proceedings and claims against the Corporation is subject to future resolution, including the uncertainties of litigation. Based on information currently known to the Corporation, the most significant outstanding proceedings and claims are as follows:
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(a) |
In September 2020, Neptune submitted a claim and demand for arbitration against Peter M. Galloway and PMGSL Holdings, LLC (collectively “PMGSL”) in accordance with the Asset Purchase Agreement (“APA”) dated May 9, 2019 between, among others, Neptune and PMGSL. Separately, PMGSL submitted a claim and demand for arbitration against Neptune. The Neptune claims and PMGSL claims have been consolidated into a single arbitration and each are related to the purchase by Neptune of substantially all of the assets of the predecessor entities of PMGSL Holdings, LLC. Neptune is claiming, among other things, breach of contract and negligent misrepresentation by PMGSL in connection with the APA and is seeking, among other things, equitable restitution and any and all damages recoverable under law. PMGSL is claiming, among other things, breach of contract by Neptune and is seeking, among other things, payment of certain compensation contemplated by the APA. While Neptune believes there is no merit to the claims brought by PMGSL, a judgment in favor of PMGSL may have a material adverse effect on our business and Neptune intends to continue vigorously defending itself. Based on currently available information, a provision of $754,440 has been recognized for this case as at March 31, 2021. |
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(b) |
On February 4, 2021, the United States House of Representatives Subcommittee on Economic and Consumer Policy, Committee on Oversight and Reform (the “Subcommittee”), published a report, “Baby Foods Are Tainted with Dangerous Levels of Arsenic, Lead, Cadmium, and Mercury” (the “Report”), which stated that, with respect to Sprout, “Independent testing of Sprout Organic Foods” has confirmed that their baby foods contain concerning levels of toxic heavy metals.” The Report further stated that after receiving reports alleging high levels of toxic metals in baby foods, the Subcommittee requested information from Sprout but did not receive a response. 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 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 and is producing documents to the NMAG on March 10, 2021 as requested by the NMAG. The pending inquiries and potential findings could result in material litigation and may have a material adverse effect on our business, financial condition, or results of operations. |
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(c) |
On March 16, 2021, a purported shareholder class action was filed in US District Court for the Eastern District of New York against the Corporation and certain of its current and former officers alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The Corporation believes these claims are without merit and intends to vigorously defend itself. |
Although the outcome of these and various other claims and legal proceedings against the Corporation as at March 31, 2021 cannot be determined with certainty, based on currently available information, management believes that the ultimate outcome of these matters, individually and in aggregate, would not have a material adverse effect on the Corporation’s financial position or overall trends in results of operations.
Interest of Management and Others in Material Transactions
To the Corporation’s knowledge and other than as set forth herein, there are no material interests, direct or indirect, of directors, executive officers, any shareholder who beneficially owns, directly or indirectly, more than 10% of any class or series of voting securities of the Corporation, or any associate or affiliate of such persons, in any transaction within the last three most recently completed fiscal years or in any proposed transaction which has materially affected or would reasonably be expected to materially affect the Corporation.
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On November 11, 2019, the Corporation entered into a collaboration agreement with International Flavors & Fragrances Inc. to co-develop hemp-derived CBD products for the mass retail and health and wellness markets. App Connect Service, Inc. (“App Connect”) is also a party to the agreement to provide related branding strategies and promotional activities and will be paid royalties in connection with these activities. App Connect is indirectly controlled by Mr. Michael Cammarata.
To the knowledge of the Corporation, as of the date hereof, no securities of any class of securities of the Corporation are held in escrow or subject to contractual restrictions on transfer or are anticipated to be held in escrow or subject to contractual restrictions on transfer.
Transfer Agents and Registrars
Computershare Trust Company of Canada, at its offices in Montreal, is the transfer agent and registrar for our Common Shares.
The following is a list of the Corporation’s material contracts required to be listed under applicable Canadian securities laws that the Corporation has entered into since April 1, 2019 or prior thereto but which are still in effect:
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(a) |
the License for Standard Processing from Health Canada issued on January 4, 2019 to a subsidiary of the Corporation, 9354-7537 Québec Inc.; |
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(b) |
the asset purchase agreement dated May 9, 2019 with SugarLeaf in respect of the SugarLeaf Acquisition, as described under “General Development of the Corporation – Fiscal Year Ended March 31, 2020 – Acquisition of the Assets of Hemp Processor SugarLeaf”; |
Ernst & Young LLP are the auditors of the Company and have reported on the consolidated financial statements of the Company as of and for the year ended March 31, 2021. Ernst & Young LLP confirmed that they are independent with respect to the Company within the meaning of the Code of Ethics of Chartered Professional Accountants of the Ordre des comptables professionnels agréés du Québec and within the meaning of the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB (United States).
KPMG LLP were the prior auditors of the Corporation. As at the date of their audit report on the Company’s annual consolidated financial statements as at and for the fiscal year ended March 31, 2020, they confirmed with respect to the Corporation that they were independent within the meaning of the relevant rules and related interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation or regulations, and also that they were independent accountants with respect to the Corporation under all relevant US professional and regulatory standards.
Audit Committee’s Charter
The Charter of the Audit Committee is annexed to this circular as Schedule A. The Charter was adopted by the Board of Directors, and lastly amended on November 14, 2017.
Composition of the Audit Committee
The Audit Committee is currently composed of three (3) members of Board of Directors: Mr. Frank P. Rochon, acting as Chairperson of the Committee, Mr. John M. Moretz and Ms. Jane Pemberton. From the experience set forth
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below, the Corporation believes that these persons have sufficient knowledge and background to actively participate on the Audit Committee. Under National Instrument 52-110 - Audit Committees, a member of an Audit Committee is “independent” if he or she has no direct or indirect material relationship with the issuer, that is, a relationship which could, in the view of the Board of Directors, reasonably interfere with the exercise of the member’s independent judgment.
All members of the Audit Committee are considered to be “financially literate” within the meaning of applicable Canadian securities regulations in that they each have the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Corporation financial statements.
Relevant Education and Experience
The following describes the relevant education and experience of each member of the Audit Committee that shows their (a) understanding of the accounting principles used by the Corporation to prepare its financial statements, (b) ability to assess the general application of such accounting principles, (c) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to those that can reasonably be expected to be raised by the Corporation’s financial statements or experience actively supervising one or more persons engaged in such activities, and (d) understanding of internal controls and procedures for financial reporting.
Mr. Frank Rochon –Mr. Rochon was Mr. Rochon has built a distinguished career over the past 30 years, serving in numerous key leadership positions with the past 20 years at Deloitte Canada. He most recently served as Vice Chairman and Managing Partner of Clients and Industries leading Deloitte Canada’s client and market portfolio, overseeing the firm’s most significant client relationships and opportunities. Mr. Rochon is widely sought after for his business insights and hands-on experience in all aspects of professional services within the Canadian business landscape. At Deloitte, he served in many roles such as Regional Managing Partner roles and also as Deloitte Canada M&A Executive Leader. In addition, Mr. Rochon served on the Deloitte Global executive leadership and the Canadian Board of Directors. Mr. Rochon holds a degree in Business from the University of Ottawa.
Mr. John Moretz – Mr. Moretz currently serves as Chief Executive Officer and President of Moretz Marketing, LLC and is Managing Director of Kathy Ireland, LLC. In addition, he is the Managing Director of various real estate entities, including LaMoe, LLC and Moretz Mills, LLC. Mr. Moretz spent 39 years in the textile industry building and marketing numerous consumer brands. He served as the Chairman and Chief Executive Officer of Gold Toe Moretz Holdings Corp. and its subsidiaries prior to its acquisition by Gildan Activewear Inc. in 2012. Mr. Moretz founded Moretz Marketing in 1987 to create and manage lifestyle brands licensing opportunities.
Ms. Jane Pemberton – Ms. Pemberton is a Private Equity Advisor and investor at North Castle Partners, a leading consumer middle market private-equity company focused on investing in and growing healthy living businesses. Ms. Pemberton has a long track record of driving accelerated revenue growth, earnings and brand equity, without compromising core values, culture, authenticity or purpose.
External Auditor Fees
Ernst & Young LLP served as the Corporation’s auditors for the financial year ended March 31, 2021, and KPMG LLP served as the Corporation’s auditors for the financial year ended March 31, 2020.
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|
|
|
|
Financial Year Ended March 31, 2021 |
|
Financial Year Ended March 31, 2020 |
Audit Fees (1) ………………..……… |
$1,215,105 |
|
$561,400 |
Audit-Related Fees (2) …...…………. |
- |
|
$553,000 |
Tax Fees (3) ……………………..…. |
$15,790 |
|
$87,100 |
Other Fees (4) ……………………..… |
- |
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$9,200 |
Total Fees ……………………. |
$1,230,895 |
|
$1,210,700 |
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1. |
“Audit fees” consist of fees for professional services for the audit of the Corporation’s annual financial statements, interim reviews, securities filings, Sarbanes–Oxley Act Section 404 opinion on internal control over financial reporting and consultations on accounting or disclosure issues. |
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2. |
“Audit-related fees” consist of fees for professional services that are reasonably related to the performance of the audit or review of the Corporation’s financial statements and which are not reported under “Audit Fees” above. |
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3. |
“Tax fees” consist of fees for professional services for tax compliance, tax advice and tax planning. Tax fees include, but are not limited to, preparation of tax returns and R&D tax credit claims. |
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4. |
“Other fees” consist of fees for other professional advisory services. |
Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of the Corporation’s securities, options to purchase securities and interests of informed persons in material transactions, if applicable, is contained in Neptune’s management proxy circular for its 2020 annual and special meeting of shareholders held on August 12, 2020 and will be contained in Neptune’s management proxy circular for its annual and special meeting of shareholders to be held on August 12, 2021. Additional financial information is also provided in the Corporation’s financial statements and MD&A for the most recently completed fiscal year. These documents and additional information related to Neptune are available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov/edgar.html.
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Schedule “A”
Charter of the Audit Committee of the Board of Directors
The Audit Committee of the Board of Directors assists the Board in fulfilling its oversight responsibilities relating to the quality and integrity of the accounting, auditing and reporting practices of the Corporation and such other duties as directed by the Board of Directors or imposed by legislative authorities or stock exchanges.
Structure and Organization
1. |
The membership of the Committee will consist of at least three independent members of the Board of Directors, the majority of whom will not be employees, controlling shareholders or executives of the Corporation or of any associates or affiliates of the Corporation. Committee members and the Committee Chairman shall be designated by and serve at the pleasure of the Board of Directors. All members must be financially literate and at least one member must have accounting or related financial management expertise, in each case in the judgment of the Board of Directors. |
2. |
The Committee shall meet at least four times per year or more frequently as circumstances require. The Committee may ask members of management or others to attend meetings and provide pertinent information as necessary. The required quorum for the Committee will be the majority of the members forming the Committee. |
3. |
The Committee is expected to maintain free and open communication with management and the external auditors. |
4. |
The Committee has the authority to investigate any matter brought to its attention and to retain outside counsel for this purpose if, in its judgment, that is appropriate. |
General Responsibilities
The Committee shall:
1. |
Meet periodically with representatives of the external auditors, the internal audit manager (if any) and management in separate sessions, if considered necessary, to discuss any matters that the Committee or these groups believe should be discussed privately with the Committee. Provide sufficient opportunity for the external auditors to meet with the Audit Commitee as appropriate without members of management being present. |
2. |
Prepare the minutes of all Committee meetings and report of such meetings to the Board of Directors. |
3. |
Review and reassess the adequacy of this Charter annually. |
Responsibilities for Engaging External Auditors
The Committee shall:
1. |
Recommend for approval by the Board of Directors and ratification by the shareholders the selection and retention of an independent firm of chartered professional accountants as external auditors, approve compensation of the external auditors, and review and approve in advance the discharge of the external auditors. |
2. |
Review the independence of the external auditors. In considering the independence of the external auditors, the Committee will review the nature of the services provided by the external auditors and the fees charged, and such other matters as the Committee deems appropriate. |
3. |
Ensure that the external auditors are in good standing with the Canadian Public Accountability Board (CPAB) and that the CPAB has not imposed any sanction on them. The Audit Committee is also responsible for ensuring that the external auditors comply with the rotation requirements with respect to partners involved in the audit of the Corporation. |
4. |
Arrange for the external auditors to be available to the Board of Directors at least annually to help provide a basis for the Board’s approval of the external auditors’ appointment. |
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5. |
Approve all allowable non-audit related services to be provided to the Corporation or one of its subsidiaries by the Corporation’s external auditors if applicable. |
6. |
Non-audit services of minimal amount satisfy the pre-approval requirements on the following conditions: |
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(a) |
that the aggregate amount of all non-audit services that were not pre-approved is reasonably expected to constitute no more than five per cent of the total amount of fees paid by the Corporation and its subsidiaries to the Corporation’s external auditors during the fiscal year in which the services are provided; |
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(b) |
that the Corporation or its subsidiaries, as the case may be, did not recognize the services as non-audit services at the time of the engagement; and |
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(c) |
that the services are promptly brought to the attention of the Audit Committee and approved, prior to the completion of the audit, by the Audit Committee or by one or more of its members to whom authority to grant such approvals had been delegated by the Audit Committee. |
Responsibilities for Oversight of the Quality and Integrity of Accounting, Auditing and Reporting Practices of the Corporation
The Committee shall:
1. |
Directly review the work of the external auditors engaged for the purpose of preparing or issuing an auditor’s report or performing other audit, review or attestation services for the Corporation. The Committee shall be directly responsible of the resolution of disagreements between management and the external auditors regarding financial reporting. |
2. |
Review the Corporation’s financial statements, management’s discussion and analysis (MD&A) and annual and interim earnings press releases together with management and the external auditors, if applicable, before the Corporation publicly discloses this information. This review should cover the quality of the financial reporting and such other matters as the Committee deems appropriate. |
3. |
Review with the external auditors and management the audit plan of the external auditors for the current year. |
4. |
Review with financial and accounting personnel, the adequacy and effectiveness of the accounting, financial, and computerized information systems controls of the Corporation, and the results of any external audit procedures, if applicable. |
5. |
Establish procedures for the receipt, retention and treatment of complaints received regarding accounting, internal accounting controls or auditing matters. Such complaints are to be treated confidentially and anonymously. On a quarterly basis, the Committee shall monitor and report in the minutes of meeting any such complaint. |
6. |
Review and approve all related party transactions undertaken by the Corporation. |
Periodic Responsibilities
The Committee shall:
1. |
Review periodically with management any legal and regulatory matters that may have a material impact on the Corporation’s financial statements, compliance policies and compliance programs. |
2. |
Review with management and approve transactions involving management and/or members of the Board of Directors, which would require disclosure under Toronto Stock Exchange rules. |
3. |
Supervise the corporate compliance program and periodically review whether any improvements should be made thereto and make appropriate recommendations to management. |
4. |
Perform such other functions assigned by law, the Corporation’s Articles or bylaws, or by the Board of Directors. |
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5. |
Review services and related fees for work done by the external auditors as well as an updated projection of the total costs for the fiscal year. |
6. |
Review and approve the engagement policy of the Corporation with respect to partners, employees, former partners and employees of the current and previous external auditors of the Corporation. |
7. |
Implement a process for the identification of the principal business risks and monitor the implementation of appropriate methods of risk management. This process will require consultation with management in order to determine how risks are handled and to solicit the opinion of the internal audit department with respect to the effectiveness of the risk limitation strategies. |
Authority of the Audit Committee
The Committee shall have the authority to:
1. |
Engage independent counsel and other advisors as it determines necessary to carry out its duties. |
2. |
Pay the compensation for any advisors employed by the Committee. The Committee shall notify the Board of Directors on the extent of the financing required to pay for the compensation of the independent expert advisors retained to advise the Committee. |
3. |
Communicate directly with the internal and external auditors. |
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Exhibit 99.2
Consolidated Financial Statements of
neptune WELLNESS SOLUTIONS inc.
For the years ended March 31, 2021 and 2020
Report of independent registered public accounting firm
To the Shareholders and the Board of Directors of
Neptune Wellness Solutions Inc.
Opinion on the financial statements
We have audited the accompanying consolidated statement of financial position of Neptune Wellness Solutions Inc. [the “Corporation”] as of March 31, 2021, the related consolidated statements of loss and comprehensive loss, changes in equity and cash flows for the year ended March 31, 2021 and the related notes [collectively referred to as the “consolidated financial statements”]. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation at March 31, 2021 and its financial performance and its cash flows for the year ended March 31, 2021, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited the effects of the revision to segments to be one single segment for the year ended March 31, 2021, as described in Note 24, and the Corporation’s conclusion that such revision did not have an impact on the comparative figures of the consolidated financial statements. We were not engaged to audit, review or apply any procedures to the consolidated financial statements for the year ended March 31, 2020, other than with respect to the assessment of the removal of segment disclosure for the comparative period as described in Note 24 and, accordingly, we do not express an opinion or any other form of assurance on the March 31, 2020 consolidated financial statements taken as a whole.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) [“PCAOB”], the Corporation’s internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission [2013 framework] and our report dated July 15, 2021 expressed an adverse opinion thereon.
Basis for opinion
These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
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Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: [1] relate to accounts or disclosures that are material to the financial statements and [2] involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
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Acquisition of a controlling interest in Sprout Foods and valuation of trade name intangible assets |
Description of the matter |
As disclosed in notes 2(d) and 4 to the consolidated financial statements, the Corporation acquired a 50.1% interest in Sprout Foods, Inc. [“Sprout”] on February 10, 2021, and the acquisition has been accounted for using the acquisition method. The Corporation applied significant judgment and determined that it has control over Sprout considering its voting interest, participation on the Board of Directors and ability to direct the relevant daily activities. The consideration transferred for the acquisition amounted to $29.9 million, which was allocated to the identifiable net assets acquired, including an amount of $28.4 million related to trade names. Auditing the Corporation’s accounting for its acquisition of Sprout was complex due to the significant judgment exercised by management in determining whether control was obtained, and the significant estimation required by management in determining the fair value of the trade names. The Corporation used the average derived from two valuation methods, the relief from royalty approach and the excess earnings method to estimate the fair value of the trade names. The significant assumptions used to estimate the value of the intangible assets included discount rates, royalty rates, and inputs in determining forecasted results such as revenue growth rates and profit margins. These significant assumptions are forward-looking and could be affected by future economic and market conditions. |
– 7 –
How we addressed the matter in our audit |
To test management’s assessment of control, we reviewed the purchase agreements, and evaluated management’s assessment of the relevant activities of Sprout and the Corporation’s power to direct those relevant activities based on the contractual arrangements, and performed a search for new or contrary evidence that would affect the assessment, including consideration of events after the balance sheet date. To test the fair value of the Corporation’s trade name intangible assets, our audit procedures included, among others, evaluating the Corporation’s valuation models, the methods and significant assumptions used and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We compared the revenue growth rates and profit margins to historical results of Sprout’s business and current industry and market trends for those in which Sprout operates. We involved a valuation specialist to assist with our evaluation of the valuation methods used by the Corporation and the discount rates and royalty rates. We understood and validated the source information underlying the determination of the discount rates and royalty rates and tested the mathematical accuracy of the calculations. Our procedures also included a comparison of the selected discount rates to the acquired business’s weighted average cost of capital, and an evaluation of the relationship of the weighted average cost of capital, internal rate of return and weighted-average return on assets. We also performed a search for new or contrary evidence that would affect the estimate, including consideration of events after the balance sheet date. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2020.
Montréal, Canada
July 15, 2021
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Report of independent registered public accounting firm
To the Shareholders and the Board of Directors of
Neptune Wellness Solutions Inc.
Opinion on internal control over financial reporting
We have audited Neptune Wellness Solution Inc.’s internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission [2013 framework], [the COSO criteria]. In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Neptune Wellness Solution Inc. [the “Corporation”] has not maintained effective internal control over financial reporting as of March 31, 2021, based on the COSO criteria.
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 the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management identified material weaknesses related to the Corporation’s design, implementation and operating effectiveness of process-level control activities related to various processes, account level assertions and disclosures including entity level controls and information technology general controls [“ITGCs”].
As indicated in Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Sprout Foods, which is included in the 2021 consolidated financial statements of the Corporation and constituted 34% and 32% of total and net assets, respectively, as of March 31, 2021 and 7% and 2% of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Sprout Foods.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) [“PCAOB”], the consolidated statement of financial position of the Corporation as of March 31, 2021, the related consolidated statements of loss and comprehensive loss, changes in equity and cash flows for the year ended March 31, 2021, and the related notes. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report dated July 15, 2021, which expressed an unqualified opinion thereon.
Basis for opinion
The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that [1] pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; [2] provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the corporation; and [3] provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Montréal, Canada
July 15, 2021
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KPMG LLPTelephone (514) 840-2100
600 de Maisonneuve Blvd. WestFax(514) 840-2187
Suite 1500, Tour KPMGInternetwww.kpmg.ca
Montréal (Québec) H3A 0A3
Canada
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Neptune Wellness Solutions Inc.
Opinion on the Consolidated Financial Statements
We have audited, before the effects of retrospectively applying the revision to segments described in Note 24, the accompanying consolidated statement of financial position of Neptune Wellness Solutions Inc. (the "Company") as of March 31, 2020, the related consolidated statements of loss and comprehensive loss, changes in equity, and cash flows for the year then ended, and the related notes (collectively, the "consolidated financial statements"). The fiscal 2020 consolidated financial statements before the effects of the revision described in Note 24 are not presented herein. In our opinion, the consolidated financial statements, before the effects of retrospectively applying the revision to segments described in Note 24, present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2020, and its consolidated financial performance and its consolidated cash flows for the year then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We were not engaged to audit, review, or apply any procedures to the effects of retrospectively applying the revision to segments described in Note 24 and, accordingly, we do not express an opinion or any other form of assurance about whether such effects are appropriate and have been properly applied. Those effects were audited by other auditors.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. KPMG
Canada provides services to KPMG LLP.
Page 2
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
We served as the Company’s auditor from fiscal 2007 to 2020.
Montréal, Canada
June 10, 2020
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KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
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neptune WELLNESS SOLUTIONS inc.
Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Financial Statements
neptune wellness solutions inc.
Consolidated Statements of Financial Position
As at March 31, 2021 and 2020
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March 31, |
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March 31, |
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2021 |
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2020 |
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Assets |
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Current assets: |
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Cash and cash equivalents (note 23) |
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$ |
75,167,100 |
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$ |
16,577,076 |
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Short-term investment (note 23) |
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24,050 |
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36,000 |
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Trade and other receivables (note 5) |
|
|
10,887,748 |
|
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|
10,793,571 |
|
Prepaid expenses |
|
|
4,631,422 |
|
|
|
2,296,003 |
|
Inventories (note 6) |
|
|
21,754,147 |
|
|
|
9,092,538 |
|
|
|
|
112,464,467 |
|
|
|
38,795,188 |
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|
|
|
|
|
|
|
|
|
Property, plant and equipment (note 7) |
|
|
46,913,688 |
|
|
|
60,028,574 |
|
Right-of-use assets (note 8) |
|
|
3,541,147 |
|
|
|
1,386,254 |
|
Intangible assets (note 9) |
|
|
32,606,969 |
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|
25,518,287 |
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Goodwill (note 9) |
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31,974,526 |
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42,333,174 |
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Tax credits recoverable (note 19) |
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— |
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184,470 |
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Other assets (notes 4 (b) and 21 (a)) |
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|
7,243,774 |
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|
530,000 |
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Total assets |
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$ |
234,744,571 |
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$ |
168,775,947 |
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Liabilities and Equity |
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Current liabilities: |
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Trade and other payables (note 10) |
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$ |
24,975,764 |
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$ |
12,451,669 |
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Lease liabilities (note 8) |
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288,947 |
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450,125 |
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Loans and borrowings (note 11) |
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— |
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3,180,927 |
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Deferred revenues |
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|
2,499,376 |
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|
17,601 |
|
Provisions (note 12) |
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|
2,820,995 |
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|
1,115,703 |
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|
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|
30,585,082 |
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17,216,025 |
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|
Lease liabilities (note 8) |
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3,626,574 |
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|
|
1,141,314 |
|
Long-term payables (note 13) |
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|
— |
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|
555,440 |
|
Deferred tax liabilities (note 19) |
|
|
— |
|
|
|
5,015,106 |
|
Liability related to warrants (note 14) |
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|
9,879,980 |
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|
|
— |
|
Loans and borrowings (note 11) |
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|
14,211,339 |
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|
|
— |
|
Other liability (note 25) |
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|
2,258,449 |
|
|
|
1,217,769 |
|
Total liabilities |
|
|
60,561,424 |
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|
|
25,145,654 |
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|
|
|
|
|
|
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Equity: |
|
|
|
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|
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|
Share capital (note 15) |
|
|
379,643,670 |
|
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|
213,876,454 |
|
Warrants (note 15 (f)) |
|
|
23,947,111 |
|
|
|
18,597,776 |
|
Contributed surplus |
|
|
71,991,328 |
|
|
|
69,173,313 |
|
Accumulated other comprehensive income |
|
|
1,202,409 |
|
|
|
5,517,376 |
|
Deficit |
|
|
(330,681,375 |
) |
|
|
(163,534,626 |
) |
Total equity attributable to equity holders of the Corporation |
|
|
146,103,143 |
|
|
|
143,630,293 |
|
|
|
|
|
|
|
|
|
|
Non-controlling interest |
|
|
28,080,004 |
|
|
|
— |
|
Total equity attributable to non-controlling interest |
|
|
28,080,004 |
|
|
|
— |
|
Total equity |
|
|
174,183,147 |
|
|
|
143,630,293 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 22) |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
234,744,571 |
|
|
$ |
168,775,947 |
|
See accompanying notes to consolidated financial statements.
On behalf of the Board: |
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|
/s/ John Moretz |
|
/s/ Michael Cammarata |
John Moretz |
|
Michael Cammarata |
Chairman of the Board |
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President and CEO |
1
NEPTUNE wellness solutions INC.
Consolidated Statements of Loss and Comprehensive Loss
For the years ended March 31, 2021 and 2020
|
|
|
March 31, 2021 |
|
|
March 31, 2020 |
|
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Revenue from sales and services |
|
$ |
45,304,176 |
|
|
$ |
27,722,571 |
|
|
Royalty revenues |
|
|
1,467,327 |
|
|
|
1,630,717 |
|
|
Other revenues |
|
|
38,339 |
|
|
|
224,516 |
|
|
Total revenues (note 24) |
|
|
46,809,842 |
|
|
|
29,577,804 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (note 6) |
|
|
(83,005,929 |
) |
|
|
(31,416,251 |
) |
|
Gross profit |
|
|
(36,196,087 |
) |
|
|
(1,838,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses, net of tax credits and grants of $16,227 (2020 - $73,930) |
|
|
(2,155,332 |
) |
|
|
(2,870,497 |
) |
|
Selling, general and administrative expenses (note 5) |
|
|
(88,196,457 |
) |
|
|
(64,664,389 |
) |
|
Impairment loss related to property, plant and equipment (notes 7 and 9) |
|
|
(14,211,673 |
) |
|
|
— |
|
|
Impairment loss related to right-of-use assets (notes 8 and 9) |
|
|
(142,345 |
) |
|
|
— |
|
|
Impairment loss related to goodwill (note 9) |
|
|
(35,567,246 |
) |
|
|
(85,548,266 |
) |
|
Loss from operating activities |
|
|
(176,469,140 |
) |
|
|
(154,921,599 |
) |
|
|
|
|
|
|
|
|
|
|
|
Finance income (note 17) |
|
|
1,091,882 |
|
|
|
151,219 |
|
|
Finance costs (note 17) |
|
|
(2,471,281 |
) |
|
|
(583,707 |
) |
|
Foreign exchange gain (loss) |
|
|
(5,344,763 |
) |
|
|
1,883,999 |
|
|
Revaluation of derivatives (note 4 and 14) |
|
|
10,001,102 |
|
|
|
— |
|
|
Change in fair value of contingent consideration (note 4 (a)) |
|
|
— |
|
|
|
97,208,166 |
|
|
|
|
|
|
3,276,940 |
|
|
|
98,659,677 |
|
Loss before income taxes |
|
|
(173,192,200 |
) |
|
|
(56,261,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income tax recovery (expense) (note 19) |
|
|
4,598,577 |
|
|
|
(4,601,340 |
) |
|
Net loss |
|
|
(168,593,623 |
) |
|
|
(60,863,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
Unrealized gains on investments (note 21 (a)) |
|
|
192,279 |
|
|
|
1,320,431 |
|
|
Net change in unrealized foreign currency losses on translation of net investments in foreign operations |
|
|
(4,805,991 |
) |
|
|
3,438,879 |
|
|
Total other comprehensive income (loss) |
|
|
(4,613,712 |
) |
|
|
4,759,310 |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(173,207,335 |
) |
|
$ |
(56,103,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to: |
|
|
|
|
|
|
|
|
|
Equity holders of the Corporation |
|
$ |
(167,146,749 |
) |
|
$ |
(60,863,262 |
) |
|
Non-controlling interest |
|
|
(1,446,874 |
) |
|
|
— |
|
|
Net loss |
|
$ |
(168,593,623 |
) |
|
$ |
(60,863,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss attributable to: |
|
|
|
|
|
|
|
|
|
Equity holders of the Corporation |
|
$ |
(171,461,716 |
) |
|
$ |
(56,103,952 |
) |
|
Non-controlling interest |
|
|
(1,745,619 |
) |
|
|
— |
|
|
Total comprehensive loss |
|
$ |
(173,207,335 |
) |
|
$ |
(56,103,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share attributable to the equity holders of the Corporation |
|
$ |
(1.38 |
) |
|
$ |
(0.68 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares |
|
|
121,277,033 |
|
|
|
89,972,395 |
|
See accompanying notes to consolidated financial statements.
2
NEPTUNE wellness solutions INC.
Consolidated Statements of Changes in Equity
For the years ended March 31, 2021 and 2020
|
|
Attributable to equity holders of the Corporation |
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Share Capital |
|
|
|
|
|
|
|
|
|
|
other comprehensive |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income |
|
|
|
|
|
|
|
|
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|
|
|
|||||
|
|
Number |
|
|
Dollars |
|
|
Warrants |
|
|
Contributed surplus |
|
|
Investment in equity instruments |
|
|
Cumulative translation account |
|
|
Deficit |
|
|
Equity attributable to non-controlling interest |
|
Total |
|
|||||||||
Balance as at March 31, 2020 |
|
|
99,338,135 |
|
|
$ |
213,876,454 |
|
|
$ |
18,597,776 |
|
|
$ |
69,173,313 |
|
|
$ |
2,078,497 |
|
|
$ |
3,438,879 |
|
|
$ |
(163,534,626 |
) |
|
$ |
— |
|
$ |
143,630,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(167,146,749 |
) |
|
|
(1,446,874 |
) |
|
(168,593,623 |
) |
Other comprehensive income (loss) for the period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
192,279 |
|
|
|
(4,507,246 |
) |
|
|
|
|
|
|
(298,745 |
) |
|
(4,613,712 |
) |
Total comprehensive income (loss) for the period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
192,279 |
|
|
|
(4,507,246 |
) |
|
|
(167,146,749 |
) |
|
|
(1,745,619 |
) |
|
(173,207,335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction with equity holders recorded directly in equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions by and distribution to equity holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment transactions (note 18) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,069,174 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
13,069,174 |
|
Warrants in exchange of services rendered by non-employees (note 15 (f)) |
|
|
— |
|
|
|
— |
|
|
|
5,349,335 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
5,349,335 |
|
Share options exercised (notes 15 (b) and 18 (a)) |
|
|
5,001,793 |
|
|
|
14,354,754 |
|
|
|
— |
|
|
|
(4,584,803 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
9,769,951 |
|
DSUs released (notes 15 (c) and 18 (b)(i)) |
|
|
48,313 |
|
|
|
127,000 |
|
|
|
— |
|
|
|
(127,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
— |
|
RSUs released, net of tax (notes 15 (d) and 18 (b)(ii)) |
|
|
574,464 |
|
|
|
4,405,118 |
|
|
|
— |
|
|
|
(5,414,775 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
(1,009,657 |
) |
Restricted shares issued (notes 15 (e) and 18 (b)(iii)) |
|
|
29,733 |
|
|
|
124,581 |
|
|
|
— |
|
|
|
(124,581 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
— |
|
At-The-Market Offering, net of issuance costs (note 15 (g)) |
|
|
5,411,649 |
|
|
|
18,210,042 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
18,210,042 |
|
Direct Offering, net of issuance costs (note 15 (h)) |
|
|
4,773,584 |
|
|
|
16,006,155 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
16,006,155 |
|
Private Placement, net of issuance costs (note 15 (i)) |
|
|
16,203,700 |
|
|
|
32,341,719 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
32,341,719 |
|
Business combinations (notes 4 (b) and 15 (j)) |
|
|
6,741,573 |
|
|
|
22,333,976 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,825,623 |
|
|
52,159,599 |
|
Registered Direct Offering Priced At-The-Market and Concurrent Private Placement, net of issuance costs (note 15 (k)) |
|
|
27,500,000 |
|
|
|
57,863,871 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
57,863,871 |
|
Total contributions by and distribution to equity holders |
|
|
66,284,809 |
|
|
|
165,767,216 |
|
|
|
5,349,335 |
|
|
|
2,818,015 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,825,623 |
|
|
203,760,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at March 31, 2021 |
|
|
165,622,944 |
|
|
$ |
379,643,670 |
|
|
$ |
23,947,111 |
|
|
$ |
71,991,328 |
|
|
$ |
2,270,776 |
|
|
$ |
(1,068,367 |
) |
|
$ |
(330,681,375 |
) |
|
$ |
28,080,004 |
|
$ |
174,183,147 |
|
See accompanying notes to consolidated financial statements.
3
NEPTUNE wellness solutions INC.
Consolidated Statements of Changes in Equity, Continued
For the years ended March 31, 2020 and 2019
|
|
Attributable to equity holders of the Corporation |
|
|||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other comprehensive |
|
|
|
|
|
|
|
|
|
|||||
|
|
Share Capital |
|
|
|
|
|
|
|
|
|
|
income |
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Number |
|
|
Dollars |
|
|
Warrants |
|
|
Contributed surplus |
|
|
Investment in equity instruments |
|
|
Cumulative translation account |
|
|
Deficit |
|
|
Total |
|
||||||||
Balance as at March 31, 2019 (1) |
|
|
79,987,292 |
|
|
$ |
131,083,698 |
|
|
$ |
648,820 |
|
|
$ |
39,165,706 |
|
|
$ |
758,066 |
|
|
$ |
— |
|
|
$ |
(102,671,364 |
) |
|
$ |
68,984,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(60,863,262 |
) |
|
|
(60,863,262 |
) |
Other comprehensive income for the period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,320,431 |
|
|
|
3,438,879 |
|
|
|
— |
|
|
|
4,759,310 |
|
Total comprehensive income (loss) for the period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,320,431 |
|
|
|
3,438,879 |
|
|
|
(60,863,262 |
) |
|
|
(56,103,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction with equity holders recorded directly in equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions by and distribution to equity holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment transactions (note 18) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16,594,588 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16,594,588 |
|
Warrants exercised (note 15 (f)(iii)) |
|
|
750,000 |
|
|
|
3,176,320 |
|
|
|
(648,820 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,527,500 |
|
Warrants in exchange of services rendered by non-employees (note 15 (f)) |
|
|
— |
|
|
|
— |
|
|
|
18,597,776 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,597,776 |
|
Share options exercised (notes 15 (b) and 18 (a)) |
|
|
2,067,418 |
|
|
|
6,553,243 |
|
|
|
— |
|
|
|
(2,622,819 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,930,424 |
|
DSUs released (notes 15 (c) and 18 (b)(i)) |
|
|
333,279 |
|
|
|
492,989 |
|
|
|
— |
|
|
|
(492,989 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
RSUs released, net of tax (notes 15 (d) and 18 (b)(ii)) |
|
|
437,849 |
|
|
|
3,099,004 |
|
|
|
— |
|
|
|
(4,061,081 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(962,077 |
) |
Private Placement, net of issuance costs (note 15 (i)) |
|
|
9,415,910 |
|
|
|
51,432,131 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51,432,131 |
|
At-The-Market Offering, net of issuance costs (note 15 (g)) |
|
|
4,159,086 |
|
|
|
6,760,099 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,760,099 |
|
Business combinations (notes 4 (a) and 15 (m)) |
|
|
1,587,301 |
|
|
|
7,966,970 |
|
|
|
— |
|
|
|
20,589,908 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28,556,878 |
|
Provisions settled in shares (note 15 (l)) |
|
|
600,000 |
|
|
|
3,312,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,312,000 |
|
Total contributions by and distribution to equity holders |
|
|
19,350,843 |
|
|
|
82,792,756 |
|
|
|
17,948,956 |
|
|
|
30,007,607 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
130,749,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at March 31, 2020 |
|
|
99,338,135 |
|
|
$ |
213,876,454 |
|
|
$ |
18,597,776 |
|
|
$ |
69,173,313 |
|
|
$ |
2,078,497 |
|
|
$ |
3,438,879 |
|
|
$ |
(163,534,626 |
) |
|
$ |
143,630,293 |
|
(1) |
The Corporation has initially applied IFRS 16 as at April 1, 2019. Under the transition method chosen, comparative information is not restated. Refer to note 3 (p). |
See accompanying notes to consolidated financial statements.
4
neptune wellness solutions inc.
Consolidated Statements of Cash Flows
For the years ended March 31, 2021 and 2020
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
Cash flows used in operating activities: |
|
|
|
|
|
|
|
|
Net loss for the period |
|
$ |
(168,593,623 |
) |
|
$ |
(60,863,262 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment (note 7) |
|
|
5,238,049 |
|
|
|
3,005,017 |
|
Amortization of right-of-use assets (note 8) |
|
|
473,009 |
|
|
|
378,309 |
|
Amortization of intangible assets |
|
|
19,967,678 |
|
|
|
5,000,910 |
|
Impairment loss on goodwill (note 9) |
|
|
35,567,246 |
|
|
|
85,548,266 |
|
Stock-based compensation |
|
|
13,069,174 |
|
|
|
16,594,588 |
|
Impairment loss on inventories (note 6) |
|
|
25,073,789 |
|
|
|
2,081,943 |
|
Bad debt expenses |
|
|
9,832,794 |
|
|
|
97,881 |
|
Non-employees compensation related to warrants (note 15 (f)) |
|
|
5,349,335 |
|
|
|
18,597,776 |
|
Recognition of deferred revenues |
|
|
— |
|
|
|
(25,070 |
) |
Net finance (income) expense |
|
|
1,379,399 |
|
|
|
(1,451,511 |
) |
Unrealized foreign exchange (gain) loss |
|
|
(2,373,181 |
) |
|
|
979,505 |
|
Revaluation of derivatives |
|
|
(10,001,102 |
) |
|
|
— |
|
Impairment loss on property, plant and equipment (note 7) |
|
|
14,211,673 |
|
|
|
— |
|
Impairment loss on right-of-use assets (note 8) |
|
|
142,345 |
|
|
|
— |
|
Change in fair value of contingent consideration (note 4) |
|
|
— |
|
|
|
(97,208,166 |
) |
Income taxes expense (recovery) (note 19) |
|
|
(4,600,426 |
) |
|
|
4,601,340 |
|
Net loss from sale of property, plant and equipment |
|
|
(3,484 |
) |
|
|
14,165 |
|
|
|
|
(55,267,325 |
) |
|
|
(22,648,309 |
) |
Changes in operating assets and liabilities (note 20) |
|
|
(18,292,867 |
) |
|
|
(8,782,678 |
) |
|
|
|
(73,560,192 |
) |
|
|
(31,430,987 |
) |
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
Maturity of previously restricted short-term investments |
|
|
11,950 |
|
|
|
12,000 |
|
Interest received |
|
|
50,130 |
|
|
|
151,219 |
|
Acquisition of a subsidiary, net of cash acquired (note 4) |
|
|
(3,982,101 |
) |
|
|
(15,770,400 |
) |
Acquisition of property, plant and equipment |
|
|
(8,751,003 |
) |
|
|
(13,785,701 |
) |
Acquisition of intangible assets |
|
|
(515,412 |
) |
|
|
(487,184 |
) |
Proceeds from sale of property, plant and equipment |
|
|
19,177 |
|
|
|
7,103 |
|
Sales of Acasti shares (note 21 (a)) |
|
|
— |
|
|
|
5,317,770 |
|
|
|
|
(13,167,259 |
) |
|
|
(24,555,193 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Variation of the bank line of credit (note 20 (c)) |
|
|
— |
|
|
|
(620,000 |
) |
Repayment of loans and borrowings (note 20 (c)) |
|
|
(3,250,000 |
) |
|
|
(3,807,132 |
) |
Increase in loans and borrowings, net of financing fees (note 20 (c)) |
|
|
— |
|
|
|
3,996,392 |
|
Payment of lease liabilities (note 8) |
|
|
(453,634 |
) |
|
|
(384,494 |
) |
Interest paid |
|
|
(911,824 |
) |
|
|
(359,825 |
) |
Withholding taxes paid pursuant to the settlement of non-treasury RSUs |
|
|
(1,009,657 |
) |
|
|
(962,077 |
) |
Proceeds from the issuance of shares through an At-The-Market Offering (note 15 (g)) |
|
|
19,045,446 |
|
|
|
7,069,220 |
|
Proceeds from the issuance of shares through a Direct Offering (note 15 (h)) |
|
|
17,089,372 |
|
|
|
— |
|
Proceeds from the issuance of shares and warrants through a Private Placement (note 15 (i)) |
|
|
45,997,000 |
|
|
|
53,970,867 |
|
Proceeds from the issuance of shares and warrants through a Registered Direct Offering Priced At-The-Market and Concurrent Private Placement (note 15 (k)) |
|
|
69,916,000 |
|
|
|
— |
|
Issuance of shares costs (note 15 (g), (h), (i) and (k)) |
|
|
(7,403,533 |
) |
|
|
(2,847,857 |
) |
Proceeds from exercise of warrants (note 15 (f)(iii)) |
|
|
— |
|
|
|
2,527,500 |
|
Proceeds from exercise of options (note 15 (b)) |
|
|
9,769,951 |
|
|
|
3,930,424 |
|
|
|
|
148,789,121 |
|
|
|
62,513,018 |
|
Foreign exchange gain (loss) on cash and cash equivalents held in foreign currencies |
|
|
(3,471,646 |
) |
|
|
230,887 |
|
Net increase in cash and cash equivalents |
|
|
58,590,024 |
|
|
|
6,757,725 |
|
Cash and cash equivalents as at April 1, 2020 and 2019 |
|
|
16,577,076 |
|
|
|
9,819,351 |
|
Cash and cash equivalents as at March 31, 2021 and 2020 |
|
$ |
75,167,100 |
|
|
$ |
16,577,076 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents is comprised of: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
75,167,100 |
|
|
$ |
16,577,076 |
|
Cash equivalents |
|
|
— |
|
|
|
— |
|
See accompanying notes to consolidated financial statements.
5
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
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, H7T 0A3. The consolidated 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™, Ocean Remedies™, 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. Neptune’s corporate headquarters is located in Laval, Quebec, with a 50,000 square-foot production facility located in Sherbrooke, Quebec and a 24,000 square-foot facility located in North Carolina.
2. |
Basis of preparation: |
|
(a) |
Statement of compliance: |
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB").
The consolidated financial statements were approved by the Board of Directors on July 15, 2021.
|
(b) |
Basis of measurement: |
The consolidated financial statements have been prepared on the historical cost basis, except for the following:
|
• |
Share-based compensation transactions which are measured pursuant to IFRS 2, Share-based payment (note 3 (l)(ii)); |
|
• |
Initial measurement of assets and liabilities acquired in a business combination and the related contingent consideration, which are generally measured at fair value (note 4); and |
|
• |
Financial asset and liability which are measured at fair value (note 21 (a)). |
Certain of the Corporation’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. In establishing fair value, the Corporation uses a fair value hierarchy based on levels as defined below:
|
• |
Level 1: defined as observable inputs such as quoted prices in active markets. |
|
• |
Level 2: defined as inputs other than quoted prices in active markets that are either directly or indirectly observable. |
|
• |
Level 3: defined as inputs that are based on little or no little observable market data, therefore requiring entities to develop their own assumptions. |
|
(c) |
Functional and presentation currency: |
These consolidated financial statements are presented in Canadian dollars, which is the functional currency of the parent company.
|
(d) |
Use of estimates and judgments: |
The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
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.
Critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements include the following:
|
• |
Assessing if the Corporation has control of Sprout: upon the acquisition of 50.1% of the outstanding equity of Sprout, Neptune assessed whether it controls Sprout through its exposure and rights to variable returns from its involvement with Sprout and has the |
6
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
ability to affect those returns through its power over Sprout. The former controlling shareholder retained a participation of 39.7% and will be the minority representative through the execution of their voting power as long as it holds more than half of its current investment. Based on the contractual terms of the acquisition agreement, the Corporation assessed that the voting rights in Sprout Foods, in combination with its majority representation on the Board of Directors, are the dominant factors in deciding who controls Sprout. Therefore, Sprout Foods Inc. is consolidated in the Corporation’s consolidated financial statements (note 4 (b)). |
|
• |
Assessing the recognition of contingent liabilities, which requires judgment in evaluating whether there is a probable outflow of economic benefits that will be required to settle matters subject to litigation (notes 12 and 22); |
|
• |
Assessing if performance criteria on options and DSUs will be achieved in recognizing the stock-based compensation expense (note 18); |
|
• |
Assessing the fair value of services rendered in exchange of warrants (note 15 (f)); |
|
• |
Assessing the recognition period to be used in recording stock-based compensation that is based on market and non-market conditions, as well as bonuses that are based on achievement of market capitalization targets (notes 18 and 25); |
|
• |
The Corporation recognizes revenue from the sale of goods in the course of ordinary activities at a point in time when control of the assets is transferred to the customer. The Corporation must assess whether promises made to customers represent distinct performance obligations, the appropriate measure of the transfer of control and when the transfer of control has occurred. In addition, the Corporation may also 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, and in these instances, must determine whether it is a principal in these transactions. The assessment of terms and conditions in contracts which may impact revenue recognition can require significant judgment, particularly when contracts include non-standard terms. |
Assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year include the following:
|
• |
Estimating the recoverable amount of non-financial assets (notes 3 (f)(ii), 8 and 9); |
|
• |
Estimating the lease term of contracts with extension options and termination options (notes 3 (j) and 8); |
|
• |
Estimating the revenue from contracts with customers subject to variable consideration; |
|
• |
Estimating the fair value of bonus and options that are based on market and non-market conditions (notes 18 and 25); |
|
• |
Estimating the fair value of the identifiable assets acquired, liabilities assumed, and consideration transferred of the acquired business, including the related contingent consideration and Call Option (note 4); and |
|
• |
Estimating the litigation provision as it depends upon the outcome of proceedings (note 12). |
3. |
Significant accounting policies: |
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by the Corporation’s subsidiaries.
|
(a) |
Basis of consolidation: |
Subsidiaries
The Corporation’s subsidiaries and their jurisdiction of incorporation are as follows:
Subsidiary |
Ownership % |
|
Jurisdiction of Incorporation |
|
Biodroga Nutraceuticals Inc. |
|
100.0 |
% |
Quebec |
SugarLeaf Labs, Inc. |
|
100.0 |
% |
Delaware (with a Certificate of Authority to operate in North Carolina) |
Neptune Holding USA, Inc. |
|
100.0 |
% |
Delaware |
9354-7537 Québec Inc. |
|
100.0 |
% |
Quebec |
Neptune Health and Wellness Innovation, Inc. |
|
100.0 |
% |
Delaware |
Neptune Forest, Inc. |
|
100.0 |
% |
Delaware |
Neptune Care, Inc. (formerly known as Neptune Ocean, Inc.) |
|
100.0 |
% |
Delaware |
Neptune Growth Ventures, Inc. |
|
100.0 |
% |
Delaware |
9418-1252 Québec Inc. |
|
100.0 |
% |
Quebec |
Neptune Wellness Brands Canada, Inc. |
|
100.0 |
% |
Quebec |
Sprout Foods, Inc. |
|
50.1 |
% |
Delaware |
|
(i) |
Business combinations and related goodwill: |
Business combinations are accounted for using the acquisition method as at the acquisition date, when control is transferred. The consideration transferred for the acquisition of a business is the fair value of the assets transferred, and any liability and equity interests issued by the Corporation on the date control of the acquired company is obtained. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are generally measured initially at their fair values at the acquisition date. The Corporation measures goodwill as the fair value for the consideration transferred including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount of the identifiable assets acquired and liabilities assumed, all measured at the acquisition date. If this consideration is lower than the fair value of the net assets of the business acquired, the difference is recognized immediately in the consolidated statement of loss and comprehensive income or loss as a gain from a bargain purchase.
For each business combination, the Company elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets.
Restructuring, transaction costs other than those associated with the issue of debt or equity securities, and other direct costs of a business combination are not considered part of the business acquisition transaction and are expensed as incurred.
Subsequent recognition of goodwill:
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortized but tested for impairment at least annually and upon occurrence of an indication of impairment. The impairment testing process is described in the appropriate section of these accounting policies.
Subsidiaries:
Subsidiaries are entities controlled by the Corporation. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Control exists when the Corporation is exposed to, or has the right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
Non-controlling interests are measured initially at fair value at the date of acquisition. Changes in the Corporation’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
|
(ii) |
Transactions eliminated on consolidation: |
Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.
|
(b) |
Financial instruments: |
All financial instruments, including derivatives, are recognized in the consolidated statement of financial position initially at fair value when the Corporation becomes a party to the contractual obligations of the instrument. Transaction costs that are directly attributable to the acquisition or issuance of financial instruments that are not subsequently recognized at fair value are added or deducted from the financial asset or liability and are amortized using the effective interest rate method over the expected life of the related asset/liability.
7
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
(i) |
Offsetting of financial instruments |
Financial assets and financial liabilities are offset, and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
|
(ii) |
Financial assets: |
On initial recognition, the Corporation classifies its financial assets as subsequently measured at either amortized cost or fair value, depending on its business model for managing the financial assets and the contractual cash flow characteristics of the financial assets.
Financial asset measured at amortized cost:
A financial asset is subsequently measured at amortized cost using the effective interest method and net of any impairment loss if it meets both of the following conditions and is not designated as at fair value through profit or loss:
|
▪ |
it is held within a business model whose objective is to hold assets to collect contractual cash flows; and |
|
▪ |
its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
The financial assets of the Corporation that are measured at amortized cost consist of cash and cash equivalents, short-term investments, and trade and other receivables. Interest income, foreign exchange gains and losses and impairment are recognized in the consolidated statement of loss and comprehensive loss.
Financial assets measured at fair value:
Certain financial assets including debt investments and equity investments that are not held for trading are accounted for as fair value through other comprehensive income or loss. Subsequent changes in fair value of these financial assets are recorded in other comprehensive income or loss, except for foreign exchange gains or losses and expected credit loss and reversal that are recognized in profit or loss. Amounts recognized in other comprehensive income for equity investments are not reclassified to profit or loss under any circumstances. Dividends on such instruments are recognized in profit or loss unless dividends clearly represent a recovery of a repayment of part of the cost of the investment. The Corporation has an equity instrument measured at fair value through other comprehensive income or loss (refer to note 21 (a)). All financial assets not classified as measured at amortized cost or fair value through other comprehensive income are measured at fair value through profit or loss. In addition, on initial recognition, the Corporation may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at fair value through other comprehensive income or loss as at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Financial assets at fair value through profit or loss are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognized in the consolidated statement of loss and comprehensive loss. The Corporation currently has no such financial instruments.
Derecognition of financial assets:
Financial assets are derecognized when the Corporation’s contractual rights to the cash flows from the respective assets have expired or the Corporation has transferred its rights to the cash flows from the respective assets and either (i) the Corporation has transferred substantially all of the risks and rewards of the assets or (ii) the Corporation has neither exposure to the risks inherent in those assets nor entitlement to rewards from them. Any gain or loss on derecognition is recognized in the consolidated statement of loss and comprehensive loss.
|
(iii) |
Financial liabilities and equity instruments: |
Debt and equity instruments issued by the Corporation are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.
On initial recognition, the Corporation classifies its financial liabilities as subsequently measured at either amortized cost or fair value.
Financial liabilities measured at amortized cost:
A financial liability is subsequently measured at amortized cost, using the effective interest method. The Corporation currently classifies loans and borrowings, trade and other payables and long-term payables as financial liabilities measured at amortized cost.
Financial liabilities measured at fair value:
8
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Financial liabilities at fair value are initially recognized at fair value and are remeasured at each reporting date with any changes therein recognized in net income. The Corporation’s significant financial liabilities measured at fair value are the liabilities related to warrants.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Corporation are recognized at the proceeds received, net of direct issue costs and applicable income taxes.
Derecognition of financial liabilities:
Financial liabilities are derecognized when the obligations under the liabilities are discharged, cancelled, expired or are replaced by a new liability with substantially modified terms. Any gain or loss on derecognition is recognized in the consolidated statement of loss and comprehensive loss.
Effective interest method:
The effective interest method is a method of calculating the amortized cost of a financial asset or financial liability and of allocating interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts/payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial instrument, or (when appropriate) a shorter period, to the net carrying amount on initial recognition.
|
(iv) |
Share capital: |
Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognized as a deduction from equity, net of any tax effects.
|
(v) |
Other equity instruments: |
Warrants, options and rights over the Corporation’s equity issued outside of share-based payment transactions that do not meet the definition of a liability instrument are recognized in equity.
|
(vi) |
Derivative financial instruments and hedge accounting: |
Derivative financial instruments:
The Corporation has issued liability-classified derivatives over its own equity and has a call option on the non-controlling interest of a subsidiary. Embedded derivative is separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss.
Derivatives and separable embedded derivatives are recognized initially at fair value; attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives and separable embedded derivatives are measured at fair value, and all changes in their fair value are recognized immediately in profit or loss.
Cash flow hedges:
For derivative financial instruments designated as cash flow hedges, the effective portion of changes in their fair value is recognized in other comprehensive income in the consolidated statement of comprehensive income and presented in the cash flow hedges reserve in equity. Any ineffectiveness is recognized in net income (loss) immediately as it arises in the same consolidated statement of loss and comprehensive loss account as the hedged item when realized.
Should a cash flow hedging relationship become ineffective or the hedging relationship be terminated, previously unrealized gains and losses remain within the cash flows hedges reserve until the hedged item is settled and any future changes in value of the derivative are recognized in net income (loss) prospectively.
When the hedged item is realized, amounts recognized in the cash flow hedge reserve are reclassified to the same consolidated statement of loss and comprehensive loss account or reclassified to the related non-financial asset in which the hedged item is recorded. If the hedged item ceases to exist before the hedging instrument expires, the unrealized gains or losses within the cash flow hedge reserve are immediately reclassified to net income (loss).
Use of derivative financial instruments:
Derivative financial instruments are utilized, from time to time, by the Corporation in the management of its foreign currency exposures and interest-rate market risks. These derivative financial instruments are used as a method for meeting the risk reduction
9
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
objectives of the Corporation by generating offsetting cash flows related to the underlying position in respect of amount and timing of forecasted foreign currency cash flows and interest payments.
When it utilizes derivatives in hedge accounting relationships, the Corporation formally documents and designates all of its eligible hedging relationships. This process involves associating all derivatives to specific assets and liabilities on the consolidated statement of financial position or with forecasted or probable transactions. The Corporation also formally assesses the effectiveness of hedging relationships at inception and on an on-going basis. The Corporation does not currently have any derivatives in a hedging relationship.
|
(c) |
Inventories: |
Inventories are measured at the lower of cost and net realizable value. The cost of finished goods, raw materials, supplies and spare parts is based on the weighted-average cost method. The cost of finished goods and work in progress includes expenditures incurred in acquiring the inventories, production or conversion costs, sub-contractors costs and other costs incurred in bringing them to their existing location and condition, as well as production overheads based on normal operating capacity.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
|
(d) |
Property, plant and equipment: |
|
(i) |
Recognition and measurement: |
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located and borrowing costs on qualifying assets.
Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.
When parts of an item of property, plant and equipment have significantly different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized in net profit or loss.
|
(ii) |
Subsequent costs: |
The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Corporation, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred.
|
(iii) |
Depreciation: |
Depreciation is calculated over the depreciable amount, which is the cost of an asset less its residual value.
Depreciation is recognized in profit or loss on either a straight-line basis or a declining basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset.
The estimated useful lives for the current and comparative periods are as follows:
Asset |
Method |
|
Period/Rate |
|
|
|
|
Building and building components |
Straight-line |
|
20 to 40 years |
Laboratory, R&D and plant equipment |
Straight-line |
|
10 to 20 years |
Furniture and office equipment |
Declining balance |
|
20% to 30% |
Computer equipment |
Straight-line |
|
2 to 5 years |
Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted prospectively, if appropriate.
10
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
(e) |
Intangible assets: |
|
(i) |
Research and development: |
Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss as incurred.
Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Corporation intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized includes the cost of materials, direct labour, overhead costs that are directly attributable to preparing the asset for its intended use, and borrowing costs on qualifying assets. There are no capitalized development costs during the years ended March 31, 2021 and 2020. Other development expenditure is recognized in profit or loss as incurred.
Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses.
|
(ii) |
Other intangible assets: |
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses.
The useful lives of intangible assets are assessed as either finite or indefinite. The Corporation has no indefinite life intangible assets.
Intangible assets with finite useful lives are amortized over their useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The residual value, amortization period and amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end and adjusted prospectively, if applicable. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates which are accounted for prospectively.
Intangible assets with finite useful lives are amortized as follows:
Asset |
Method |
|
Period/Rate |
|
|
|
|
Non compete agreements |
Straight-line |
|
3 years |
Customer relationships (1) |
Straight-line |
|
10 years |
Farmer relationships (1) |
Straight-line |
|
3 years |
License agreements |
Straight-line |
|
31 months to 12 years |
Website and trademarks |
Straight-line |
|
4 years |
Tradenames |
Straight-line |
|
15 years |
Computer software |
Straight-line |
|
3 to 5 years |
|
(1) |
During the third quarter of the year ended March 31, 2021, the amortization of customer relationships and farmer relationships, both related to SugarLeaf, was accelerated and those assets were then fully amortized. |
Amortization is calculated over the cost of the asset less its residual value.
Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives for the current and comparative periods are described above.
|
(iii) |
Subsequent expenditure: |
Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditure on internally generated goodwill and brands, are recognized in profit or loss as incurred.
|
(f) |
Impairment: |
|
|
(i) |
Financial assets: |
Loss allowances for “expected credit losses” (“ECLs”) are measured on either of the following bases:
11
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
▪ |
12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and |
|
▪ |
Lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument. |
The Corporation has elected to measure loss allowances for trade accounts receivable at an amount equal to lifetime ECLs.
The Corporation measures loss allowances for other receivables by determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs. The Corporation considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Corporation’s historical experience and informed credit assessment, including forward-looking information.
The Corporation considers a financial asset to be in default when the borrower is unlikely to pay its credit obligations to the Corporation in full, without recourse by the Corporation to actions such as recovering inventory or the Corporation’s credit insurance.
The maximum period considered when estimating ECLs is the maximum contractual period over which the Corporation is exposed to credit risk.
Measurement of ECLs:
ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Corporation expects to receive). The Corporation establishes an impairment loss allowance on a collective and individual assessment basis, by considering past events, current conditions and forecasts of future economic conditions. Collective assessment is carried out by grouping together trade accounts receivable with similar characteristics. ECLs are discounted at the effective interest rate of the financial asset.
Credit-impaired financial assets:
At each reporting date, the Corporation assesses whether financial assets carried at amortized cost are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Examples of events that could occur are:
|
▪ |
significant financial difficulty of the borrower; |
|
▪ |
a breach of contract, such as a default or past due event; |
|
▪ |
it is becoming probable that the borrower will enter bankruptcy or other financial reorganization; or |
|
▪ |
the disappearance of an active market for that financial asset because of financial difficulties. |
It may not be possible to identify a single discrete event; instead, the combined effect of several events may have caused financial assets to become credit-impaired.
Presentation of impairment:
Loss allowances for financial assets measured at amortized cost are deducted from the gross carrying amount of the assets. Impairment losses related to trade and other receivables are presented in selling, general and administrative expenses of the consolidated statement of loss and comprehensive loss.
Write-off:
The gross carrying amount of a financial assets is written off when the Corporation has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof.
|
(ii) |
Non-financial assets: |
The carrying amounts of the Corporation’s non-financial assets, other than inventories, tax credits receivable and recoverable and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same date.
The recoverable amount of an asset or cash-generating unit is the greater of its value-in-use (“VIU”) and its fair value less cost of disposal (“FVLCD”), as discussed under IAS 36. In assessing VIU and FVLCD, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific
12
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
to the asset. Costs of disposal are incremental costs directly attributable to the disposal of an asset, such as legal costs and similar transaction fees, costs of removing the asset and direct incremental costs to bring an asset into condition for its sale (excluding finance costs and income tax expense). For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the ''cash-generating unit'', or ''CGU'').
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
Goodwill:
Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. The Corporation defines its CGUs based on the way it internally monitors and derives economic benefits from the acquired goodwill. Impairment losses for a CGU is first allocated to reduce goodwill. An impairment loss in respect of goodwill is not reversed in future periods.
|
(g) |
Provisions: |
A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are usually determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost.
|
(i) |
Contingent liability: |
A contingent liability is a possible obligation that arises from past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not within the control of the Corporation; or a present obligation that arises from past events (and therefore exists), but is not recognized because it is not probable that a transfer or use of assets, provision of services or any other transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot be estimated reliably.
|
(h) |
Revenue: |
Sale of products:
Revenue from the sale of goods in the course of ordinary activities is recognized at a point in time when control of the assets is transferred to the customer. The Corporation transfers control generally on shipment of the goods or in some cases, upon reception by the customer. Revenue is measured based on the consideration the Corporation expects to be entitled to receive in exchange of assets as specified in contracts with customers. For some arrangements in which the Corporation is entitled to non-cash consideration, revenue is measured at the fair value of exchanged assets as specified in contracts with customers. Revenue is presented net of returns. If the consideration in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the goods to the customer. Where the Corporation cannot reasonably estimate the future returns, revenue is deferred and recognized when the right to return the product is no longer available to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur when the associated uncertainty with the variable consideration is subsequently resolved.
Processing services:
The Corporation is involved in the extraction, purification and formulation of health and wellness products. Revenue earned on processing services is recognized as the services are rendered in accordance with contractual terms, recovery of the consideration is probable and the amount of revenue can be measured reliably. The Corporation recognizes revenue from processing services in proportion to the stage of completion of the service at the reporting date. The stage of completion is assessed based on surveys of work performed. All related production costs are expenses as incurred.
Royalty revenues:
Royalties are earned under the terms of the applicable agreement and are recognized when it is probable that the economic benefits associated with the transaction will be received and the amount can be measured reliably.
13
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Principal versus agent arrangements:
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, therefore, 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 that it retains for its services when it does not meet the criteria to be considered a principal for accounting purposes.
|
(i) |
Government grants: |
Government grants, consisting of grants, subsidies and investment tax credits, are recorded as a reduction of the related expense or cost of the asset acquired. Government grants are recognized when there is reasonable assurance that the Corporation has met or will meet the requirements of the approved grant program and there is reasonable assurance that the grant will be received.
Grants that compensate the Corporation for expenses incurred are recognized in profit or loss in reduction thereof on a systematic basis in the same years in which the expenses are recognized. Grants that compensate the Corporation for the cost of an asset are recognized in profit or loss on a systematic basis over the useful life of the asset.
|
(j) |
Leases: |
The Company adopted IFRS 16, Leases, on April 1, 2019 . At inception, the Corporation assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The Corporation recognizes a right-of-use asset and a lease liability at the commencement date of the lease, i.e. the date the underlying asset is available for use.
Right-of-use assets
Right-of-use assets are measured at cost, less any accumulated depreciation and accumulated impairment losses, and adjusted for remeasurement of lease liabilities. Cost of right-of-use assets is comprised of:
|
• |
the initial measurement amount of the lease liabilities recognized; |
|
• |
any lease payments made at or before the commencement date, less any lease incentives received; |
|
• |
any initial direct costs incurred; and |
|
• |
an estimate of costs to dismantle and remove the underlying asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease contract. |
Right-of-use assets are depreciated on a straight-line basis over the lesser of i) the estimated useful life of the underlying assets; and ii) the lease term.
Lease liabilities
Lease liabilities are initially measured at the present value of the lease payments that are not paid at the commencement date over the lease term. The present value of the lease payments is determined using the lessee’s incremental borrowing rate at the commencement date if the interest rate implicit in the lease is not readily determinable. The incremental borrowing rate is a function of the lessee’s incremental borrowing rate, the nature of the underlying asset, the location of the asset, the length of the lease and the currency of the lease contract. Generally, the Corporation uses the lessee’s incremental borrowing rate for the present value. At the commencement date, lease payments generally include fixed payments, less any lease incentives receivable, variable lease payments that depend on an index (e.g. based on inflation index) or a specified rate, lease extension options, if reasonably certain that it will be exercised, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising the option to terminate the lease. Lease payments also include amounts expected to be paid under residual value guarantees and the exercise price of a purchase option if the Corporation is reasonably certain to exercise that option.
Variable lease payments that do not depend on an index or a specified rate are not included in the measurement of lease liabilities but instead are recognized as expenses in the period in which the event or condition that triggers the payment occurs.
After the commencement date, the carrying amount of lease liabilities is increased to reflect the accretion of interest and reduced to reflect lease payments made. In addition, the carrying amount of lease liabilities is remeasured when there is a change in future lease payments arising from a change in an index or specified rate, if there is a modification to the lease terms and conditions, a change in the
14
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
estimate of the amount expected to be payable under residual value guarantee, or if the Corporation changes its assessment of whether it will exercise a termination, extension or purchase option. The remeasurement amount of the lease liabilities is recognized as an adjustment to the right-of-use asset, or in the consolidated statement of loss when the carrying amount of the right-of-use asset is reduced to zero.
Classification and presentation of lease-related expenses
Depreciation charge for right-of-use assets, expenses related to variable lease payments not included in the measurement of lease liabilities and loss (gain) related to lease modifications are allocated in the Corporation’s consolidated statement of loss based on their function within the Corporation, while interest expense on lease liabilities is presented within finance costs.
Cash flows classification
Lease payments related to the principal portion of the lease liabilities are classified as cash flows from financing activities and lease payments related to the interest portion of the lease liabilities are classified as interest paid within cash flows from financing activities. Lease incentives received are classified as cash flows from investing activities. Variable lease payments not included in the measurement of lease liabilities are classified as cash flows from operating activities.
Significant judgment in determining the lease term of contracts with extension options and termination options
The Corporation determines the lease term as the non-cancellable period of the lease, together with any periods covered by an option to extend the lease, if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Corporation applies judgment in assessing whether it is reasonably certain to exercise its options to extend its leases or to not exercise its options to terminate its leases, by considering all facts and circumstances that create an economic incentive to exercise an extension option or not to exercise a termination option. The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the Corporation.
The Corporation has elected to apply the following practical expedients available under IFRS 16:
|
• |
Short-term leases and leases of low-value items recognition exemptions: related lease payments are recognized as an expense on straight-line basis or another basis if that basis is more representative; and |
|
|
• |
Leases with a short remaining term: when lease term is 12 months or less, the lease may be classified as short-term leases. |
|
|
(k) |
Foreign currency: |
Transactions in foreign currencies that are not hedged are translated to the respective functional currencies of the Corporation’s subsidiaries at the exchange rate in effect on the date of the transaction. The monetary assets and liabilities denominated in currencies other than the functional currency of a subsidiary are translated at the exchange rates prevailing at the statement of financial position date and translation gains and losses are included in the consolidated statement of loss and comprehensive loss. Non-monetary items denominated in foreign currencies other than the functional currency are translated at historical rates.
The assets and liabilities of foreign operations, whose functional currency is not the Canadian dollar, are translated into Canadian dollars at the exchange rates in effect at the statement of financial position date. Revenue and expenses that are not hedged are translated at the exchange rate in effect on the date of the transaction. Differences arising from the exchange rate changes are included in other comprehensive loss in the cumulative translation account.
On disposal of a foreign operation where control is lost, the cumulative amount of the exchange differences recognized in other comprehensive loss relating to that particular foreign operation is recognized in the consolidated statement of loss and comprehensive loss as part of the gain or loss on disposal.
|
(l) |
Employee benefits: |
|
(i) |
Short-term employee benefits: |
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.
A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Corporation has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.
15
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
(ii) |
Long-term employee benefits: |
The Corporation’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Remeasurements are recognised in profit or loss in the period in which they arise.
|
(iii) |
Share-based payment transactions: |
The grant date fair value of share-based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in contributed surplus, over the period that the employees unconditionally become entitled to the awards. The grant date fair value takes into consideration market performance conditions when applicable. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market performance vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date.
The fair value of the share-based payment transactions is measured based on valuation models. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on the historical volatility), weighted average expected life of the instruments (based on contractual life, tranche vesting term and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions, if any, are not taken into account in determining fair value.
The fair value of share-based payment awards granted to non-employees is the fair value of the identifiable goods or services or the fair value of the equity instrument granted if the goods or services are not reliably measurable. Measurement date of the fair value is the date at which the Corporation receives the goods or services from the non-employees. Goods or services are recognized in expense, with a corresponding increase in equity over the period that the services are received. Unvested awards whose measurement was determined using the fair value of the equity instrument are remeasured at the end of each reporting period.
|
(iv) |
Termination benefits: |
Termination benefits are recognized as an expense when the Corporation is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Corporation has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting year, then they are discounted to their present value.
|
(m) |
Finance income and finance costs: |
Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss, using the effective interest method.
Finance costs comprise interest expense and accretion on borrowings, unwinding of the discount on provisions and long-term payables, financing costs, issuance of warrants costs, penalty on debt reimbursement and bank charges. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method.
Foreign currency gains and losses are reported on a net basis.
The Corporation recognizes interest income as components of investing activities and interest cost as a component of financing activities in the consolidated statements of cash flows.
|
(n) |
Income tax: |
Income tax expense comprises current and deferred taxes. Current and deferred taxes are recognized in profit or loss except to the extent that they relate to a business combination, or items recognized directly in equity or in other comprehensive income or loss.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising
16
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
|
(o) |
Loss per share: |
Basic loss per share (“EPS”) is calculated by dividing the profit or loss attributable to common shareholders of the Corporation by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise warrants, share options and deferred share units granted to employees and directors.
|
(p) |
New standards and interpretations adopted during the previous year: |
|
(i) |
Leases: |
In January 2016, the IASB issued IFRS 16, Leases, which replaced IAS 17, Leases. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, the customer (lessee) and the supplier (lessor). IFRS 16 eliminates the classification of leases as either operating leases or finance leases, introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.
The Corporation adopted IFRS 16 using the modified retrospective method of adoption, with the effect of initially applying this standard recognized at the date of initial application, i.e. April 1, 2019. Under this method, the Corporation elected to measure right-of-use of asset as equal to lease liability, adjusted for amounts previously recorded for deferred lease inducements or prepaid rent as at the date of adoption. Accordingly, the cumulative effect of initially applying IFRS 16 is nil on the opening balance of retained loss as at April 1, 2019. The comparative information has not been restated, i.e. it is presented, as previously reported, under IAS 17 and related interpretations.
Transition options and practical expedients
The Corporation has elected to apply the following transition options and practical expedients available under IFRS 16:
|
• |
Lease definition: to grandfather the assessment of which transactions are leases on the date of initial application. Accordingly, the Corporation applied IFRS 16 only to contracts that were previously identified as leases under IAS 17, Leases, and IFRIC 4, Determining whether an Arrangement contains a Lease, and applied the definition of leases under IFRS 16 only to contracts entered on or after the date of initial application; |
|
|
• |
Short-term leases and leases of low-value items recognition exemptions: related lease payments are recognized as an expense on straight-line basis or another basis if that basis is more representative; and |
|
|
• |
Leases with a short remaining term: when lease term ends within 12 months of the date of initial application, the lease may be classified as short-term leases. |
|
The Corporation has elected not to apply the following transition options and practical expedients available under IFRS 16:
|
• |
Use of hindsight; |
|
|
• |
Impairment and onerous leases; |
|
|
• |
Initial direct costs; |
|
|
• |
Discount rates; and |
|
|
• |
Non-lease components. |
|
17
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
|
|
Impact of adopting IFRS 16
The most significant impact as a result of adopting IFRS 16 related to the accounting for the Corporation’s operating leases, as the nature of expenses related to most of the Corporation’s leases changed as IFRS 16 replaced the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities.
Under IAS 17, the Corporation classified each of its leases at the inception date as either a finance lease or an operating lease, based on the extent to which risks and rewards of ownership were transferred to the Corporation. Most of the Corporation’s leases were classified as operating leases as they did not transfer substantially all the risks and rewards of ownership to the Corporation. Lease payments related to the Corporation’s operating leases were recognized as rent expense in the consolidated income statements on a straight-line basis over the lease term and presented as part of cash flows from operating activities in the consolidated statements of cash flows. Any prepaid rent and deferred lease inducements were recognized under “Prepaid expenses” and “Deferred lease inducements”, respectively, in the consolidated statements of financial position as at March 31, 2019.
Upon adoption of IFRS 16, the Corporation recognized right-of-use assets for leases previously classified as operating leases. Right-of-use assets were measured for an amount equal to the lease liability adjusted for prepaid rent and deferred lease inducements. Lease liabilities were measured at the present value of the remaining lease payments on a discounted basis, using the incremental borrowing rate at the date of initial application.
The following table summarizes the impacts of adopting IFRS 16 on the Corporation’s consolidated statement of financial position as at April 1, 2019:
Prepaid expenses and deferred lease inducements related to previous operating leases were derecognized and netted against the right-of-use assets.
Lease liabilities of $1,362,362 and related right-of-use assets of $1,176,744 were recognized and presented separately on the consolidated statement of financial position. There was no adjustment from the adoption of IFRS 16 on the opening retained loss as at April 1, 2019 due to the Corporation choice on transition method.
18
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Reconciliation of operating lease commitments to lease liabilities recognized
When measuring lease liabilities, the Corporation discounted lease payments using its incremental borrowing rate as at April 1, 2019. The weighted average incremental borrowing rate applied as at April 1, 2019 was 5.14%. The lease liabilities as at April 1, 2019 can be reconciled to the operating lease commitments as at March 31, 2019 as follows:
Reconciliation of operating leases commitments to lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
Operating lease commitments as at March 31, 2019 |
|
|
$ |
1,587,571 |
|
Non-lease components separated from lease components |
|
|
|
(60,755 |
) |
Other |
|
|
|
(15,189 |
) |
Effect of discounting |
|
|
|
(149,265 |
) |
Discounted lease liabilities as at April 1st, 2019 |
|
|
$ |
1,362,362 |
|
|
(p) |
New standards and interpretations not yet adopted: |
A number of new standards, and amendments to standards and interpretations, are not yet effective for the years ended March 31, 2021 and 2020 and have not been applied in preparing these consolidated financial statements. Management does not expect that any of the new standards and amendments to existing standards issued but not yet effective would have a material impact on the Corporation’s consolidated financial statements.
For the purposes of non-current classification, the amendments removed the requirement for a right to defer settlement or roll over of a liability for at least twelve months to be unconditional. Instead, such a right must have substance and exist at the end of the reporting period.
The amendments also clarify how a company classifies a liability that includes a counterparty conversion option. The amendments state that:
|
• |
settlement of a liability includes transferring a company’s own equity instruments to the counterparty, and |
|
• |
when classifying liabilities as current or non-current, a company can ignore only those conversion options that are recognized as equity. |
The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted.
|
(ii) |
Covid-19-Related Rent Concessions (Amendment to IFRS 16) |
On May 28, 2020, the IASB issued Covid-19-Related Rent Concessions (Amendment to IFRS 16). Subsequently, on March 31, 2021, the IASB extended the practical expedient by 12 months – i.e. permitting lessees to apply it to rent concessions that reduce lease payments originally due on or before June 30, 2022.
The new 2021 amendments are effective for annual periods beginning on or after April 1, 2021. Early adoption is permitted.
The original version of the practical expedient under the 2020 amendment was (and remains) optional. However, the new amendment is, in effect, not optional because a lessee that chose to apply the practical expedient introduced by the 2020 amendment needs to consistently apply the extension to similar rent concessions. This means that lessees may need to reverse previous lease modification accounting if a rent concession was ineligible for the original version of the practical expedient under the 2020 amendment (i.e. because the concession extended beyond June 30, 2021) but becomes eligible as a result of the new amendment.
The Corporation does not intend to adopt any of the above amendment by anticipation. The extent of the impact of adoption of the standard has not yet been determined.
19
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
4. |
Business combinations: |
|
(a) |
Acquisition of SugarLeaf Labs: |
On July 24, 2019, Neptune completed the acquisition of the assets of SugarLeaf. Neptune paid an initial consideration for SugarLeaf of $23,737,370 (US $18,062,220), a combination of $15,770,400 (US $12,000,000) in cash and $7,966,970 (US $6,062,220) or 1,587,301 in common shares. Additionally, by achieving certain annual adjusted loss before interest, taxes, depreciation and amortization ("EBITDA") and other performance targets, earnouts could reach $173,474,400 (US $132,000,000). A portion of the earnout is to be paid by the issuance of a fixed number of shares upon the achievement of certain performance targets. The three additional earnout payments were to be paid over the next three years with a combination of cash or common shares, with at least 50% in cash.
As at the acquisition date, the Corporation recorded $114,965,763 as contingent consideration, which represented its fair value at the date of acquisition, net of the initial consideration paid. Of the total contingent consideration, an amount of $20,589,908 was classified as contributed surplus, representing the fair value at the date of acquisition of the fixed number of shares that are required to be issued upon the achievement of certain performance targets. The contingent consideration classified as contributed surplus will not be remeasured and settlement is accounted for in equity. Contingent consideration of $94,375,855 was classified as a liability representing the present value of the expected payout in cash or a variable number of common shares for the earnouts of the next three years. The contingent consideration classified as a liability is required to be remeasured at fair value at each reporting date and subsequent changes to the fair value will be recognized in the statement of earnings. As at March 31, 2020, the fair value of the contingent consideration liability was revalued to nil (refer to change in fair value of contingent consideration below).
The acquisition was accounted for using the acquisition method with the results of the operations of SugarLeaf being included in the consolidated financial statements since the date of acquisition. The contingent consideration liability is included in Level 3 of the fair value hierarchy. The fair value was determined considering the expected earnout payments, discounted to present value using a risk-adjusted discount rate of 16% for cash based payments and 26.3% for earnout payments payable in cash or common shares. The risk-adjusted discount rate was calculated based on SugarLeaf’s weighted average cost of capital. The key unobservable inputs used related to the risk-adjusted discount rate, forecasted sales growth and EBITDA, growth margin as well as projected selling, general and administrative expenses.
Varying the above risk-adjusted discount rate to reflect a 1% movement would have the following effects on the contingent consideration at the acquisition date, assuming that all other variables remained constant:
|
|
Increase |
|
|
Decrease |
|
||
Effect of change in assumption on: |
|
|
|
|
|
|
|
|
Contingent consideration - Classified as a liability |
|
$ |
(1,076,784 |
) |
|
$ |
1,105,768 |
|
Contingent consideration - Classified as contributed surplus |
|
|
(55,764 |
) |
|
|
56,704 |
|
|
|
$ |
(1,132,548 |
) |
|
$ |
1,162,472 |
|
Varying the above hemp derived CBD refined oil pricing to reflect a 10% movement would have the following effects on the contingent consideration at the acquisition date, assuming that all other variables remained constant:
|
|
Increase |
|
|
Decrease |
|
||
Effect of change in assumption on: |
|
|
|
|
|
|
|
|
Contingent consideration - Classified as a liability |
|
$ |
5,765,653 |
|
|
$ |
(18,166,584 |
) |
Contingent consideration - Classified as contributed surplus |
|
|
— |
|
|
|
— |
|
|
|
$ |
5,765,653 |
|
|
$ |
(18,166,584 |
) |
The following table summarizes the purchase price of the acquisition, the fair value of the identifiable assets acquired and liabilities assumed as of the acquisition date:
|
|
|
|
|
|
|
Adjusted Final Consideration |
|
|
Assets acquired |
|
|
|
|
Trade and other receivables |
$ |
|
151,178 |
|
Inventories |
|
|
1,130,965 |
|
Property and equipment |
|
|
1,936,574 |
|
Right-of-use asset |
|
|
499,797 |
|
Customer relationships |
|
|
9,173,116 |
|
Farmer relationships |
|
|
12,208,918 |
|
|
|
|
25,100,548 |
|
|
|
|
|
|
Liabilities assumed |
|
|
|
|
Trade and other payables |
$ |
|
125,956 |
|
Lease liability |
|
|
522,843 |
|
|
|
|
648,799 |
|
|
|
|
|
|
Net assets acquired |
|
|
24,451,749 |
|
|
|
|
|
|
Goodwill |
|
|
115,817,746 |
|
|
|
|
|
|
Gross purchase consideration |
$ |
|
140,269,495 |
|
|
|
|
|
|
Less: Settlement of pre-existing relationship |
|
|
(1,566,362 |
) |
|
|
|
|
|
Purchase price |
$ |
|
138,703,133 |
|
|
|
|
|
|
Consist of: |
|
|
|
|
Cash |
$ |
|
15,770,400 |
|
Common shares |
|
|
7,966,970 |
|
Contingent consideration - Classified as a liability |
|
|
94,375,855 |
|
Contingent consideration - Classified as contributed surplus |
|
|
20,589,908 |
|
Purchase price |
$ |
|
138,703,133 |
|
Through SugarLeaf, Neptune established a U.S.-based hemp extract supply chain, gaining a 24,000 square foot facility located in North Carolina. SugarLeaf's cold ethanol processing facility uses hemp cultivated by licensed American growers to yield high-quality full and broad-spectrum hemp extracts.
The 2018 Farm Bill, which was signed into law on December 20, 2018, amended federal law to provide that all parts of the cannabis plant (including its cannabinoids, derivatives and extracts) containing a delta-9 THC concentration of not more than 0.3% on a dry weight basis would be classified as hemp and would no longer be considered controlled substances. However, despite the passage of the 2018 Farm Bill, there remains a patchwork of Federal and State legislation and uncertainties in their application that could materially impact the Company's business and financial condition. Additionally, demand for products containing cannabis, hemp or their derivatives is dependent on a number of social, political and economic factors that are beyond the Company's control, each of which could cause price fluctuations or decreases in market demand or supply that could adversely affect the Company's business, financial condition, results of operations and prospects.From the date of acquisition, the SugarLeaf business has contributed $2,681,688 to the total revenues from sales and services and $12,340,025 to the consolidated loss from operating activities excluding the impairment loss on goodwill of SugarLeaf. Had this business acquisition been effective as at the beginning of the 2020 fiscal year, management estimates that the Corporation’s total revenues from sales and services for the year ended March 31, 2020 would have been approximately $29,232,317 and the consolidated loss from operating activities excluding the impairment loss on goodwill for the year ended March 31, 2020 would have been approximately $72,554,121. The Corporation considers these pro-forma figures to represent an initial approximate measure of the performance of the combined Corporation and to provide an initial reference point of comparisons in future periods. In determining these amounts, management has assumed the fair value adjustments, and acquisition costs related to this business combination, would have been the same as if the acquisition would have occurred on April 1, 2019.
20
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Neptune and SugarLeaf were parties to a pre-existing agreement under which Neptune made prepayments for the purchase of product from SugarLeaf of $1,566,362. The pre-existing relationship was effectively terminated when Neptune acquired SugarLeaf.
Acquisition-related costs for the year ended March 31, 2020 of $2,210,727 have been excluded from the consideration transferred and have been recognized as an expense within selling, general and administrative expenses in the consolidated statement of loss and comprehensive loss and within the corporate segment.
The fair value, as well as the gross amount of the trade accounts receivable amount to $151,178 of which a negligible amount was expected to be uncollectible at the acquisition date.
The goodwill recognized in connection with this acquisition is primarily attributable to synergies with existing business, and other intangibles that do not qualify for separate recognition including assembled workforce.
The contingent consideration classified as a liability is required to be remeasured at fair value at each reporting date. The fair value of the contingent liability was remeasured as at March 31, 2021 to nil (2020 – nil). As at March 31, 2020, the fair value was determined considering revised expected earnout payments, discounted at 15.0% for payments to be paid in cash (16.0% at acquisition) and 20.0% for payments to be paid in cash or in shares (26.3% at acquisition) for both periods. The change to the fair value was recognized in the statement of loss for the year ended March 31, 2020.
Change in fair value of contingent consideration liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2020 and 2019 |
|
$ |
— |
|
|
$ |
— |
|
Additions through a business combination |
|
|
— |
|
|
|
94,375,855 |
|
Change in fair value |
|
|
— |
|
|
|
(97,208,166 |
) |
Effect of movements in exchange rates |
|
|
— |
|
|
|
2,832,311 |
|
Balance at March 31, 2021 and 2020 |
|
$ |
— |
|
|
$ |
— |
|
As at March 31, 2020 the key unobservable inputs used related to the risk-adjusted discount rate, forecasted sales growth and EBITDA, growth margin as well as projected selling, general and administrative expenses. The forecasted sales growth and EBITDA decreased materially from those used at the date of acquisition due to a decline in hemp derived CBD refined oil pricing to $1,310 per kilogram at March 31, 2020 ($5,000 at acquisition), as well as a decrease in forecasted sales volumes.
|
(b) |
Acquisition of a controlling interest in Sprout Foods: |
On February 10, 2021, Neptune acquired a 50.1% interest in Sprout Foods, Inc. (“Sprout” or “Sprout Foods”). The transaction consideration includes a cash payment of $7,615,800 (USD$6.0 million) and the issuance of 6,741,573 Neptune common shares having a value of $22,333,976 (USD$17.6 million). Additionally, Neptune is guaranteeing a $12,562,000 (USD$10.0 million) note issued by Sprout in favor of Morgan Stanley Expansion Capital (“MSEC”).
Furthermore, Sprout’s other owners of equity interests 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. The total consideration payable for the additional shares (“Call Shares”) upon the exercise of the Call Option and the closing of Neptune's acquisition of the Call Shares would be equal to the total equity value of the Call Shares, which would be based upon the applicable percentage acquired by Neptune of the total enterprise value for Sprout.
As at the close of the transaction, the value of the asset related to the Call Option was determined to be $7,010,668 (USD$5.5 million), representing the difference between the market price and the contract value of the Call Option, discounted at a rate of 8.9% and assuming the transaction would take place on January 1, 2023. To establish the market price, the multiples selected were 2.3x for revenues and 12.0x for EBITDA, based on analysis of average and median industry multiples, and were adjusted to consider a 20% discount; the multiples to be used as per the contract are 3.0x for revenues and 15.0x for EBITDA, weighted at 50%. As at March 31, 2021, the fair value of this asset was remeasured to $7,043,114 (USD$5.6 million), generating a gain on remeasurement of $105,296 accounted under revaluation of derivatives and a foreign exchange loss of $72,849 for the year ended on that date.
A change in the discount rate of 1% would impact the fair vair value of the call option by approximately $120,000.
A change in the multiple for revenues of 0.1 would impact the fair vair value of the call option by approximately $1,650,000.
A change in the revenues of $1,000,000 would impact the fair vair value of the call option by approximately $183,000.
21
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
The acquisition has been accounted for using the acquisition method with the results of the operations of Sprout being included in the consolidated financial statements since the date of acquisition.
The cash consideration of this transaction was funded with the proceeds of previous issuances of shares.
The following table summarizes the purchase price of the acquisition, the fair value of the identifiable assets acquired and liabilities assumed as of the acquisition date:
|
|
Fair value recognized on acquisition |
|
|
Assets acquired |
|
|
|
|
Cash and cash equivalents |
$ |
|
3,633,699 |
|
Trade receivables |
|
|
2,618,278 |
|
Inventories |
|
|
9,780,303 |
|
Prepaid expenses and other current assets |
|
|
226,226 |
|
Property and equipment |
|
|
178,488 |
|
Right-of-use asset |
|
|
1,132,815 |
|
Tradenames |
|
|
28,386,625 |
|
Other assets |
|
|
7,044,969 |
|
|
|
|
53,001,403 |
|
|
|
|
|
|
Liabilities assumed |
|
|
|
|
Trade and other payables |
$ |
|
6,554,426 |
|
Lease liability |
|
|
1,132,815 |
|
Promissory note |
|
|
14,528,860 |
|
|
|
|
22,216,101 |
|
|
|
|
|
|
Total identifiable net assets at fair value |
|
|
30,785,302 |
|
|
|
|
|
|
Non-controlling interest measured at fair value (49.9%) |
|
|
(29,825,623 |
) |
Goodwill arising on acquisition |
|
|
28,990,097 |
|
|
|
|
|
|
Purchase price |
$ |
|
29,949,776 |
|
|
|
|
|
|
Consist of: |
|
|
|
|
Cash |
$ |
|
7,615,800 |
|
Common shares issued, at fair value |
|
|
22,333,976 |
|
Total consideration |
$ |
|
29,949,776 |
|
Note: As part of the acquisition of Sprout, net deferred tax assets of $19,358,652 were acquired for which a full valuation allowance was recognized. |
|
|
|
|
|
|
|
|
|
Through Sprout Foods, Neptune enters a new market: the organic baby food market. Sprout is committed to offering products that contain whole foods, no preservatives, no concentrates, no added sugar, are USDA certified organic and are non-GMO. Sprout’s products target four markets: 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).
On February 4, 2021, the United States House of Representatives Subcommittee on Economic and Consumer Policy, Committee on Oversight and Reform (the “Subcommittee”), published a report, “Baby Foods Are Tainted with Dangerous Levels of Arsenic, Lead, Cadmium, and Mercury” (the “Report”), which stated that, with respect to Sprout, “Independent testing of Sprout Organic Foods” has confirmed that their baby foods contain concerning levels of toxic heavy metals.” The Report further stated that after receiving reports alleging high levels of toxic metals in baby foods, the Subcommittee requested information from Sprout but did not receive a response. 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. 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 produced documents to the NMAG on March 10, 2021. The pending inquiries
22
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
and potential findings could result in material litigation and may have a material adverse effect on our business, financial condition, or results of operations.
From the date of acquisition, Sprout Foods has contributed $3,177,585 to the total revenues from sales and services and a net loss of $(2,899,546) to the consolidated loss from operating activities. Had this business acquisition been in effect as at the beginning of the 2021 fiscal year, management estimates that the Corporation’s total revenues from sales and services for the year ended March 31, 2021 would have been approximately $71,171,327 and the consolidated loss from operating activities for the year ended March 31, 2021 would have been approximately $(198,698,993).
The Corporation considers these pro-forma figures to represent an initial approximate measure of the performance of the combined Corporation and to provide an initial reference point of comparisons in future periods. In determining these amounts, management has assumed the fair value adjustments, and acquisition costs related to this business combination, would have been the same as if the acquisition would have occurred on April 1, 2020.
Acquisition-related costs for the year ended March 31, 2021 of $396,463 have been excluded from the consideration transferred and have been recognized as an expense within selling, general and administrative expenses in the consolidated statement of loss and comprehensive loss.
The gross amount of the trade accounts receivable amount to $4,856,786 of which $2,238,508 was expected to be uncollectible at the acquisition date.
The goodwill recognized in connection with this acquisition is primarily attributable to synergies with existing business, and other intangibles that do not qualify for separate recognition including assembled workforce. Goodwill and intangible assets are not deductible for income tax purposes.
As at March 31, 2021, the purchase price allocation is final.
Financial information of Sprout, which has a material non-controlling interest, is provided below:
Name |
Country of incorporation |
|
2021 |
|
|
Sprout Foods |
United States of America |
|
|
49.9 |
% |
|
|
|
2021 |
|
|
Accumulated balances of material non-controlling interest: |
$ |
|
28,080,004 |
|
|
Loss allocated to material non-controlling interest: |
|
|
(1,446,874 |
) |
|
Comprehensive loss allocated to material non-controlling interest: |
|
$ |
|
(1,745,619 |
) |
The summarised financial information of the subsidiary is provided below. This information is based on amounts before inter-company eliminations.
Summarised statement of loss:
|
|
|
February 10, 2021 to March 31, 2021 |
|
|
Revenue from contracts with customers |
|
$ |
|
3,177,585 |
|
Cost of sales |
|
|
|
(4,232,698 |
) |
Selling, general and administrative expenses |
|
|
|
(1,657,174 |
) |
Finance costs |
|
|
|
(185,410 |
) |
Loss before tax |
|
|
|
(2,897,697 |
) |
Income tax |
|
|
|
(1,849 |
) |
Net loss for the year from continuing operations |
|
|
|
(2,899,546 |
) |
Total comprehensive loss |
|
|
|
(598,689 |
) |
Loss attributable to non-controlling interest |
|
|
|
(1,446,874 |
) |
Comprehensive loss attributable to non-controlling interest |
|
$ |
|
(1,745,619 |
) |
|
|
|
|
|
|
Summarised statement of financial position:
23
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
|
|
As at March 31, 2021 |
|
|
Current assets |
|
$ |
|
14,243,058 |
|
Non-current assets |
|
|
|
64,839,010 |
|
Current liabilities |
|
|
|
7,695,092 |
|
Non-current liabilities |
|
|
|
15,114,423 |
|
Total equity |
|
|
|
56,272,553 |
|
Attributable to: |
|
|
|
|
|
Equity holders to parent |
|
$ |
|
28,192,549 |
|
Non-controlling interest |
|
$ |
|
28,080,004 |
|
Summarised cash flow information:
|
|
|
February 10, 2021 to March 31, 2021 |
|
|
Cash flow from operating activities |
|
$ |
|
(2,942,160 |
) |
Cash flow from investment activities |
|
|
|
— |
|
Cash flow from financing activities (dividends to NCI: nil) |
|
|
(34,758 |
) |
|
Foreign exchange gain (loss) on cash and cash equivalents held in foreign currencies |
|
|
(10,497 |
) |
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
|
(2,987,415 |
) |
5. |
Trade and other receivables: |
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Trade receivables |
|
$ |
7,662,352 |
|
|
$ |
8,836,645 |
|
Sales taxes receivable |
|
|
929,841 |
|
|
|
747,061 |
|
Accrued and other receivables |
|
|
687,190 |
|
|
|
1,190,640 |
|
Tax credits receivable |
|
|
— |
|
|
|
14,336 |
|
Grants and subsidies receivables |
|
|
1,608,365 |
|
|
|
4,889 |
|
|
|
$ |
10,887,748 |
|
|
$ |
10,793,571 |
|
Wage and rent subsidies related to the Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) were recorded during the year ended March 31, 2021 in the amount of $3,125,277 with $1,608,365 still receivable as at March 31, 2021 (2020 – nil). This has been recorded in cost of goods sold and selling, general and administrative expenses, against the related salary and rent expenses, in the amounts of $1,233,022 and $1,892,255, respectively, compared to nil for the previous year.
The Corporation’s exposure to credit and foreign exchange risks related to trade and other receivables is presented in note 21 (b).
6. |
Inventories: |
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
8,690,034 |
|
|
$ |
5,065,731 |
|
Work in progress |
|
|
7,427,829 |
|
|
|
2,790,815 |
|
Finished goods |
|
|
4,340,630 |
|
|
|
553,828 |
|
Supplies and spare parts |
|
|
1,295,654 |
|
|
|
682,164 |
|
|
|
$ |
21,754,147 |
|
|
$ |
9,092,538 |
|
24
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Cost of sales for the year ended March 31, 2021 was comprised of inventory costs of $57,361,951 (2020 - $28,038,207), other costs of $1,803,211 (2020 - $1,296,101), wage subsidy related to the Canada Emergency Wage Subsidy (CEWS) of $1,233,022 (2020 - nil), and impairment loss on inventories of $25,073,789 (2020 - $2,081,943).
7. |
Property, plant and equipment: |
|
|
|
|
|
|
Building |
|
|
Laboratory, |
|
|
Furniture |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
and building |
|
|
R&D and plant |
|
|
and office |
|
|
Computer |
|
|
|
|
|
||||
|
|
Land |
|
|
components |
|
|
equipment |
|
|
equipment |
|
|
equipment |
|
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019 |
|
$ |
228,630 |
|
|
$ |
25,453,898 |
|
|
$ |
32,067,665 |
|
|
$ |
446,143 |
|
|
$ |
472,671 |
|
|
$ |
58,669,007 |
|
Additions through a business acquisition (note 4) |
|
|
— |
|
|
|
1,161,182 |
|
|
|
683,498 |
|
|
|
89,288 |
|
|
|
2,606 |
|
|
|
1,936,574 |
|
Additions |
|
|
— |
|
|
|
5,488,474 |
|
|
|
8,229,923 |
|
|
|
74,902 |
|
|
|
172,657 |
|
|
|
13,965,956 |
|
Disposals |
|
|
— |
|
|
|
— |
|
|
|
(12,145 |
) |
|
|
— |
|
|
|
(2,788 |
) |
|
|
(14,933 |
) |
Effect of movements in exchange rates |
|
|
— |
|
|
|
81,288 |
|
|
|
45,957 |
|
|
|
6,251 |
|
|
|
182 |
|
|
|
133,678 |
|
Balance at March 31, 2020 |
|
|
228,630 |
|
|
|
32,184,842 |
|
|
|
41,014,898 |
|
|
|
616,584 |
|
|
|
645,328 |
|
|
|
74,690,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions through a business acquisition (note 4) |
|
|
— |
|
|
|
— |
|
|
|
68,502 |
|
|
|
80,067 |
|
|
|
29,919 |
|
|
|
178,488 |
|
Additions |
|
|
— |
|
|
|
1,399,237 |
|
|
|
5,128,064 |
|
|
|
37,586 |
|
|
|
199,762 |
|
|
|
6,764,649 |
|
Disposals |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(40,692 |
) |
|
|
— |
|
|
|
(40,692 |
) |
Effect of movements in exchange rates |
|
|
— |
|
|
|
(295,910 |
) |
|
|
(254,950 |
) |
|
|
(15,639 |
) |
|
|
(4,645 |
) |
|
|
(571,144 |
) |
Balance at March 31, 2021 |
|
$ |
228,630 |
|
|
$ |
33,288,169 |
|
|
$ |
45,956,514 |
|
|
$ |
677,906 |
|
|
$ |
870,364 |
|
|
$ |
81,021,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019 |
|
|
— |
|
|
|
4,223,425 |
|
|
|
6,778,252 |
|
|
|
326,304 |
|
|
|
317,053 |
|
|
|
11,645,034 |
|
Disposals |
|
|
— |
|
|
|
— |
|
|
|
(361 |
) |
|
|
— |
|
|
|
(407 |
) |
|
|
(768 |
) |
Depreciation for the year |
|
|
— |
|
|
|
872,351 |
|
|
|
2,023,525 |
|
|
|
38,952 |
|
|
|
70,189 |
|
|
|
3,005,017 |
|
Effect of movements in exchange rates |
|
|
— |
|
|
|
1,920 |
|
|
|
9,515 |
|
|
|
773 |
|
|
|
217 |
|
|
|
12,425 |
|
Balance at March 31, 2020 |
|
|
— |
|
|
|
5,097,696 |
|
|
|
8,810,931 |
|
|
|
366,029 |
|
|
|
387,052 |
|
|
|
14,661,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposals |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Depreciation for the year |
|
|
— |
|
|
|
918,208 |
|
|
|
2,903,021 |
|
|
|
32,877 |
|
|
|
125,722 |
|
|
|
3,979,828 |
|
Accelerated depreciation for the year |
|
|
— |
|
|
|
— |
|
|
|
1,258,221 |
|
|
|
— |
|
|
|
— |
|
|
|
1,258,221 |
|
Impairments for the year |
|
|
— |
|
|
|
715,391 |
|
|
|
13,450,631 |
|
|
|
34,418 |
|
|
|
11,233 |
|
|
|
14,211,673 |
|
Effect of movements in exchange rates |
|
|
— |
|
|
|
(739 |
) |
|
|
(2,713 |
) |
|
|
(56 |
) |
|
|
(27 |
) |
|
|
(3,535 |
) |
Balance at March 31, 2021 |
|
$ |
– |
|
|
$ |
6,730,556 |
|
|
$ |
26,420,091 |
|
|
$ |
433,268 |
|
|
$ |
523,980 |
|
|
$ |
34,107,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|
$ |
228,630 |
|
|
$ |
27,087,146 |
|
|
$ |
32,203,967 |
|
|
$ |
250,555 |
|
|
$ |
258,276 |
|
|
$ |
60,028,574 |
|
March 31, 2021 |
|
|
228,630 |
|
|
|
26,557,613 |
|
|
|
19,536,423 |
|
|
|
244,638 |
|
|
|
346,384 |
|
|
|
46,913,688 |
|
From the balance of property, plant and equipment (“PPE”), no amount (2020 - $8,263,652) represented assets which are not yet in service as at March 31, 2021.
As a result of Neptune’s transition into a Consumer Packaged Good (“CPG”) company, the Corporation tested its property, plant and equipment related to its cannabis processing business for impairment. As of March 31, 2021, certain equipment was no longer expected to
25
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
be used. The fair value has been estimated to $1,854,000 based on comparable transactions and market data (level 3) and the carrying amount of the Phase 3 equipment is $14,067,176. Consequently, an impairment loss of $12,213,176 is recognized as at March 31, 2021 on the consolidated statement of loss and comprehensive loss, under impairment loss related to property, plant and equipment.
During the year ended March 31, 2021, the Corporation impaired $1,998,497 of property, plant, and equipment related to the SugarLeaf CGU (refer to note 9). Subsequent to the impairment, the Corporation revised the useful life of certain plant equipment and as a result an amount of $1,258,221 accelerated amortization for this property, plant and equipment was recorded.
Depreciation expense has been recorded in the following accounts in the consolidated statements of loss and comprehensive loss:
|
|
Years ended |
|
|||||
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
3,229,331 |
|
|
$ |
2,755,243 |
|
Research and development expenses |
|
|
— |
|
|
|
— |
|
Selling, general and administrative expenses |
|
|
2,008,718 |
|
|
|
249,774 |
|
|
|
$ |
5,238,049 |
|
|
$ |
3,005,017 |
|
8. |
Leases: |
The Corporation has entered into lease contracts mainly for its premises, which expire through the year 2024.
|
(a) |
Right-of-use assets |
|
Buildings |
|
|
Equipment |
|
|
Total |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at April 1st, 2019 |
$ |
1,138,729 |
|
|
$ |
38,015 |
|
|
$ |
1,176,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisition (note 4) |
|
499,797 |
|
|
|
– |
|
|
|
499,797 |
|
Additions |
|
– |
|
|
|
54,063 |
|
|
|
54,063 |
|
Amortization for the period |
|
(364,740 |
) |
|
|
(13,569 |
) |
|
|
(378,309 |
) |
Effect of movements in exchange rates |
|
33,959 |
|
|
|
– |
|
|
|
33,959 |
|
Balance as at March 31, 2020 |
|
1,307,745 |
|
|
|
78,509 |
|
|
|
1,386,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisition (note 4) |
|
1,132,815 |
|
|
|
– |
|
|
|
1,132,815 |
|
Additions |
|
1,696,171 |
|
|
|
|
|
|
|
1,696,171 |
|
Amortization for the period |
|
(454,821 |
) |
|
|
(18,188 |
) |
|
|
(473,009 |
) |
Impairment loss for the period |
|
(142,345 |
) |
|
|
– |
|
|
|
(142,345 |
) |
Effect of movements in exchange rates |
|
(55,856 |
) |
|
|
(2,883 |
) |
|
|
(58,739 |
) |
|
. |
|
|
|
|
|
|
|
|
|
|
Balance as at March 31, 2021 |
$ |
3,483,709 |
|
|
$ |
57,438 |
|
|
$ |
3,541,147 |
|
Amortization of right-of-use assets is included in the consolidated statement of loss and comprehensive income (loss) in the following captions:
26
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
|
Year ended March 31, 2021 |
|
|
Year ended March 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
— |
|
|
$ |
56,378 |
|
General and administrative expenses |
|
|
473,009 |
|
|
|
321,931 |
|
Total amortization |
|
$ |
473,009 |
|
|
$ |
378,309 |
|
The Corporation recorded 28,191 revenue for the year ended March 31, 2021 (2020 - $111,366) from subleasing right-of-use of assets. There is no contract related to this sublease between the Corporation and the third party. Therefore, there is no lease term. Moreover, revenue varies depending on the use that is made by the third party.
|
(b) |
Lease liabilities |
The following table summarizes the lease liabilities amounts recognized in the consolidated statement of financial position:
|
|
March 31, 2021 |
|
March 31, 2020 |
|
||
|
|
|
|
|
|
|
|
Current |
|
$ |
288,947 |
|
$ |
450,125 |
|
Non-current |
|
|
3,626,574 |
|
|
1,141,314 |
|
The following table summarizes changes to the lease liabilities:
|
|
Year ended March 31, 2021 |
|
|
Year ended March 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
Balance as at April 1st 2020 and 2019 |
|
$ |
1,591,439 |
|
|
$ |
1,362,362 |
|
|
|
|
|
|
|
|
|
|
Business acquisition (note 4) |
|
|
1,132,815 |
|
|
|
522,843 |
|
Additions |
|
|
1,696,171 |
|
|
|
54,063 |
|
Payments |
|
|
(562,254 |
) |
|
|
(490,831 |
) |
Interest expense |
|
|
108,620 |
|
|
|
106,337 |
|
Effect of movements in exchange rate |
|
|
(51,270 |
) |
|
|
36,665 |
|
Balance as at March 31, 2021 and 2020 |
|
$ |
3,915,521 |
|
|
$ |
1,591,439 |
|
27
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
(c) |
Cash outflow for leases recognized in the consolidated statement of cash flows |
|
|
Year ended March 31, 2021 |
|
|
Year ended March 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Cash outflow for non-lease components not included in the measurement of lease liabilities |
|
$ |
(48,192 |
) |
|
$ |
(27,378 |
) |
Cash inflow for income from sublease |
|
|
28,191 |
|
|
|
111,366 |
|
|
|
$ |
(20,001 |
) |
|
$ |
83,988 |
|
Financing activities: |
|
|
|
|
|
|
|
|
Cash outflow for principal portion of lease liabilities |
|
$ |
(453,634 |
) |
|
$ |
(384,494 |
) |
Cash outflow for interest portion of lease liabilities - included within interest paid |
|
|
(108,620 |
) |
|
|
(106,337 |
) |
|
|
$ |
(562,254 |
) |
|
$ |
(490,831 |
) |
|
|
|
|
|
|
|
|
|
Total net cash outflow for leases |
|
$ |
(582,255 |
) |
|
$ |
(406,843 |
) |
Interest expense on leases liabilities for the year ended March 31, 2021 of $108,620 (2020 - $106,337) is presented under finance costs (note 17 (b)).
Expense for non-lease components presented in selling, general and administrative expenses amounted to $48,192 for the year ended March 31, 2021 (2020 - $27,378).
|
(d) |
Maturity analysis – contractual undiscounted cash flows |
|
|
March 31, 2021 |
|
March 31, 2020 |
|
||
|
|
|
|
|
|
|
|
Less than 1 year |
|
$ |
1,059,082 |
|
$ |
556,742 |
|
Between 1 and 5 years |
|
|
2,668,620 |
|
|
1,292,002 |
|
More than 5 years |
|
|
– |
|
|
– |
|
Total contractual undiscounted cash flows of lease liabilities |
|
$ |
3,727,702 |
|
$ |
1,848,744 |
|
28
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
9. |
Intangible assets and goodwill: |
|
|
|
Non-compete |
|
|
Customer |
|
|
Farmer |
|
|
|
|
|
|
License |
|
|
Website and |
|
|
Computer |
|
|
|
|
|
|
Intangible |
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
agreements |
|
|
relationships |
|
|
relationships |
|
|
Patents |
|
|
agreements |
|
|
trademarks |
|
|
software |
|
|
Tradenames |
|
|
assets |
|
|
Goodwill |
|
|
Total |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at March 31, 2019 |
|
|
$ |
400,000 |
|
|
$ |
4,100,000 |
|
|
$ |
— |
|
|
$ |
360,820 |
|
|
$ |
5,051,643 |
|
|
$ |
— |
|
|
$ |
373,100 |
|
|
$ |
— |
|
|
$ |
10,285,563 |
|
|
$ |
6,750,626 |
|
|
$ |
17,036,189 |
|
Additions through a business acquisition (note 4) |
|
|
|
— |
|
|
|
9,173,116 |
|
|
|
12,208,918 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21,382,034 |
|
|
|
115,817,746 |
|
|
|
137,199,780 |
|
Additions |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
61,455 |
|
|
|
119,616 |
|
|
|
— |
|
|
|
— |
|
|
|
181,071 |
|
|
|
— |
|
|
|
181,071 |
|
Effect of movements in exchange rates |
|
|
|
— |
|
|
|
642,160 |
|
|
|
854,680 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,496,840 |
|
|
|
8,107,771 |
|
|
|
9,604,611 |
|
Balance as at March 31, 2020 |
|
|
|
400,000 |
|
|
|
13,915,276 |
|
|
|
13,063,598 |
|
|
|
360,820 |
|
|
|
5,113,098 |
|
|
|
119,616 |
|
|
|
373,100 |
|
|
|
— |
|
|
|
33,345,508 |
|
|
|
130,676,143 |
|
|
|
164,021,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions through a business acquisition (note 4) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28,386,625 |
|
|
|
28,386,625 |
|
|
|
28,990,097 |
|
|
|
57,376,722 |
|
Additions |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
515,412 |
|
|
|
— |
|
|
|
515,412 |
|
|
|
— |
|
|
|
515,412 |
|
Effect of movements in exchange rates |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(292,716 |
) |
|
|
(292,716 |
) |
|
|
(299,196 |
) |
|
|
(591,912 |
) |
Balance as at March 31, 2021 |
|
|
$ |
400,000 |
|
|
$ |
13,915,276 |
|
|
$ |
13,063,598 |
|
|
$ |
360,820 |
|
|
$ |
5,113,098 |
|
|
$ |
119,616 |
|
|
$ |
888,512 |
|
|
$ |
28,093,909 |
|
|
$ |
61,954,829 |
|
|
$ |
159,367,044 |
|
|
$ |
221,321,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at March 31, 2019 |
|
|
$ |
400,000 |
|
|
$ |
1,330,771 |
|
|
$ |
— |
|
|
$ |
360,820 |
|
|
$ |
533,278 |
|
|
$ |
— |
|
|
$ |
10,096 |
|
|
$ |
— |
|
|
$ |
2,634,965 |
|
|
$ |
— |
|
|
$ |
2,634,965 |
|
Amortization for the year |
|
|
|
— |
|
|
|
1,030,433 |
|
|
|
2,745,599 |
|
|
|
— |
|
|
|
1,145,681 |
|
|
|
4,578 |
|
|
|
74,619 |
|
|
|
— |
|
|
|
5,000,910 |
|
|
|
— |
|
|
|
5,000,910 |
|
Impairment loss |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
85,548,266 |
|
|
|
85,548,266 |
|
Effect of movements in exchange rates |
|
|
|
— |
|
|
|
33,923 |
|
|
|
157,423 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
191,346 |
|
|
|
2,794,703 |
|
|
|
2,986,049 |
|
Balance as at March 31, 2020 |
|
|
|
400,000 |
|
|
|
2,395,127 |
|
|
|
2,903,022 |
|
|
|
360,820 |
|
|
|
1,678,959 |
|
|
|
4,578 |
|
|
|
84,715 |
|
|
|
— |
|
|
|
7,827,221 |
|
|
|
88,342,969 |
|
|
|
96,170,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization for the year |
|
|
|
— |
|
|
|
8,977,462 |
|
|
|
9,200,145 |
|
|
|
— |
|
|
|
1,222,800 |
|
|
|
26,267 |
|
|
|
288,384 |
|
|
|
252,620 |
|
|
|
19,967,678 |
|
|
|
— |
|
|
|
19,967,678 |
|
Impairment loss |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
35,567,246 |
|
|
|
35,567,246 |
|
Effect of movements in exchange rates |
|
|
|
— |
|
|
|
593,467 |
|
|
|
960,431 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(937 |
) |
|
|
1,552,961 |
|
|
|
3,482,303 |
|
|
|
5,035,264 |
|
Balance as at March 31, 2021 |
|
|
$ |
400,000 |
|
|
$ |
11,966,056 |
|
|
$ |
13,063,598 |
|
|
$ |
360,820 |
|
|
$ |
2,901,759 |
|
|
$ |
30,845 |
|
|
$ |
373,099 |
|
|
$ |
251,683 |
|
|
$ |
29,347,860 |
|
|
$ |
127,392,518 |
|
|
$ |
156,740,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|
|
$ |
— |
|
|
$ |
11,520,149 |
|
|
$ |
10,160,576 |
|
|
$ |
— |
|
|
$ |
3,434,139 |
|
|
$ |
115,038 |
|
|
$ |
288,385 |
|
|
$ |
— |
|
|
$ |
25,518,287 |
|
|
$ |
42,333,174 |
|
|
$ |
67,851,461 |
|
March 31, 2021 |
|
|
|
— |
|
|
|
1,949,220 |
|
|
|
— |
|
|
|
— |
|
|
|
2,211,339 |
|
|
|
88,771 |
|
|
|
515,413 |
|
|
|
27,842,226 |
|
|
|
32,606,969 |
|
|
|
31,974,526 |
|
|
|
64,581,495 |
|
Amortization expense has been recorded in the following accounts in the consolidated statements of loss and comprehensive loss:
|
|
Years ended |
|
|||||
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
1,192,524 |
|
|
$ |
40,384 |
|
Selling, general and administrative expenses |
|
|
18,775,154 |
|
|
|
4,960,526 |
|
|
|
$ |
19,967,678 |
|
|
$ |
5,000,910 |
|
29
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
An impairment test of goodwill is performed on an annual basis, or more frequently if an impairment indicator is triggered. Impairment is determined by assessing the recoverable amount of the group of CGUs to which goodwill is allocated and comparing it to the CGUs’ carrying amount. For the purpose of impairment testing, this represents the lowest level within the Corporation at which the goodwill is monitored for internal management purposes.
The aggregate amount of goodwill is allocated to each CGU as follows:
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Biodroga |
|
$ |
3,283,626 |
|
|
$ |
3,283,626 |
|
SugarLeaf |
|
|
— |
|
|
|
39,049,548 |
|
Sprout Foods |
|
|
28,690,900 |
|
|
|
— |
|
|
|
$ |
31,974,526 |
|
|
$ |
42,333,174 |
|
|
(a) |
Annual impairment testing of Biodroga: |
The Corporation performed its annual impairment testing of the Biodroga goodwill as at March 31, 2021. The recoverable amount of Biodroga operations CGU was determined using the value-in-use basis and was determined to be higher than the carrying value. no impairment expense was recorded in the year ended March 31, 2021. For the year ended March 31, 2020, the recoverable amount of Biodroga operations CGU was determined using the value-in-use basis and was determined to be lower than the carrying value testing of Biodroga and resulted in an impairment of goodwill of $3,467,000.
The value-in-use of the CGU was estimated using discounted cash flow forecasts with a pre-tax discount rate of 11.75% (2020 – 14.25%). The discount rate represents the WACC for comparable companies operating in similar industries as the CGU, based on publicly available information. Determination of the WACC requires separate analysis of the cost of equity and debt, and considers a risk premium based on an assessment of risks related to the projected cash flows of the CGU.
Cash flows were projected based on past experience, actual operating results and the three-year business plan including a terminal growth rate of 2.5% (2020 – 2.0%).
The assumptions used by the Corporation in the cash flow forecast discounting model are classified as Level 3 in the fair value hierarchy, signifying that they are not based on observable market data. The model is particularly sensitive to the future expected cash flows in the upcoming periods, should these not be realized, an impairment loss may be needed in future periods.
|
(b) |
Accelerated amortization and impairment of SugarLeaf Labs: |
|
(i) |
Fiscal year 2020 |
During the third quarter of fiscal year 2020, Management determined there was an impairment indicator due to a decline in hemp derived CBD refined oil pricing as well as a decrease in forecasted sales volumes for the SugarLeaf CGU. The recoverable amount of the SugarLeaf CGU was determined using the value-in-use basis and was determined to be lower than the carrying value, resulting in a goodwill impairment loss of $44,096,585. During the fourth quarter of 2020, the hemp derived CBD refined oil pricing continued to face a decline and the forecasted sales volume continued to decrease. As a result, during the fourth quarter of 2020, the Corporation recorded an additional goodwill impairment loss of $37,984,681 as it concluded that the recoverable amount based on the value in use was less than the carrying value of the CGU.
The value in use was then estimated using discounted cash flow forecasts with a pre-tax discount rate of 18% for the third and fourth quarter impairment tests. The discount rate represents the weighted average cost of capital ("WACC") for comparable companies operating in similar industries as the CGU, based on publicly available information. Determination of the WACC requires separate analysis of the cost of equity and debt, and considers a risk premium based on an assessment of risk related to the projected cash flows of the CGU. The recoverable amount of the SugarLeaf CGU at March 31, 2020 was $69,395,970.
|
(ii) |
Fiscal year 2021 |
During the 2021 fiscal year, as a result of the COVID-19 pandemic, the Company was forced to furlough a number of SugarLeaf employees. During the quarter ended December 31, 2020, the downturn in oil prices for cannabis persisted (as was the case for March 2020), and the commercial viability of the SugarLeaf CGU was reviewed.
30
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Management noted that the customers for which a customer relationship intangible asset was acquired with the SugarLeaf CGU had ceased placing orders and there were minimal active business relationships with these customers. As the CGU is no longer viable given declining pricing and demand, the Corporation will not benefit from these relationships and thus decided to take accelerated amortization for this intangible asset, in the amount of $7,673,486 during the year ended March 31, 2021.
Also, Neptune is not currently producing or selling any products resulting from the farmer relationships acquired with the SugarLeaf CGU. Furthermore, SugarLeaf does not currently have any contracts with customers and there is no commercial viability to these supplier relationships with the farmers. Neptune will not realize future economic benefits from these relationships and thus, Management decided to take accelerated amortization for this intangible asset, in the amount of $6,279,833 during the year ended March 31, 2021.
Amortization charges are recorded in selling, general and administrative expenses.
As a result of the above events, Management determined there was an impairment indicator during the quarter ended December 31, 2020. The recoverable amount of SugarLeaf has been estimated using the greater of the fair value less cost of disposal (“FVLCD”) and value-in-use (“VIU”) methodologies, as discussed under IAS 36. A recoverable amount was determined for the SugarLeaf CGU, based on a FVLCD of $7.5 million. Consequently, Neptune recorded an impairment loss on goodwill in the amount of $35,567,246.
The remaining excess of carrying value of the SugarLeaf CGU over its FVLCD was allocated on a pro-rata basis to the other assets of the CGU resulting in impairment charges of $1,998,497 and $142,345 for property, plant and equipment and right-of-use assets respectively for the year ended March 31, 2021, compared to nil for the year ended March 31, 2020.
10. |
Trade and other payables: |
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Trade payables |
|
$ |
15,268,779 |
|
|
$ |
5,157,772 |
|
Accrued liabilities and other payables |
|
|
7,338,312 |
|
|
|
3,271,958 |
|
Employee salaries and benefits payable |
|
|
2,198,821 |
|
|
|
3,089,673 |
|
Short-term portion of long-term payables |
|
|
169,852 |
|
|
|
932,266 |
|
|
|
$ |
24,975,764 |
|
|
$ |
12,451,669 |
|
The Corporation’s exposure to foreign exchange and liquidity risks related to trade and other payables is presented in note 21 (b).
31
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
11. |
Loans and borrowings: |
This note provides information about the contractual terms of the Corporation’s loans and borrowings, which are measured at amortized cost.
|
|
|
March 31, |
|
|
March 31, |
|
||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
Loans and borrowings: |
|
|
|
|
|
|
|
|
|
|
Revolving facility of $5,000,000 secured through a first-ranking mortgage on all movable assets of Biodroga current and future, corporeal and incorporeal, and tangible and intangible. The Corporation was subject to certain financial covenants under this secured facility. Reimbursed during the year. (i) |
|
$ |
— |
|
|
$ |
3,180,927 |
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note of US$10,000,000 issued by Sprout on February 10, 2021, 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 simple interest at the rate of 10.0% per annum, payable quarterly in arrears on the last day of each fiscal quarter during the term, commencing March 31, 2021. The principal is payable on February 1, 2024. |
|
|
14,211,339 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,211,339 |
|
|
|
3,180,927 |
|
Less current portion of loans and borrowings |
|
|
— |
|
|
|
3,180,927 |
|
|
Loans and borrowings |
|
$ |
14,211,339 |
|
|
$ |
— |
|
|
(i) |
During the year ended March 31, 2020, Neptune closed a revolving line of credit with a large Canadian financial institution for an amount of $5,000,000 to support its Biodroga subsidiary. As at March 31, 2021, this line of credit had been reimbursed by the Corporation, using some of the proceeds from various issuances of shares during the year, and is no longer available. |
During the year ended March 31, 2021, interest expense of $387,764 (2020 - $337,096) was recognized on loans and borrowings.
Neptune also closed a US$45 million letter of credit facility with Perceptive Advisors to support the Corporation’s inventory purchases. No fee was paid by Neptune for the establishment of this facility, but the Corporation will incur a fee of 2.5% on any funds actually drawn under the facility. No amounts were drawn from the letter of credit facility during the year ended March 31, 2021. As at March 31, 2021, the letter of credit facility is considered expired.
The Corporation’s exposure to liquidity risks related to loans and borrowings is presented in note 21 (b).
|
(a) |
During the year ended March 31, 2019, the Corporation received a judgment from the Superior Court of Québec in respect of certain royalty payments alleged to be owed and owing to a former chief executive officer of the Corporation (the “Former CEO”) pursuant to the terms of an agreement entered into on February 23, 2001 between Neptune and the Former CEO (the “Royalty Agreement”). The Corporation appealed the judgment which was dismissed by the Court of Appeal of Québec in February 2021. Under the terms of the Royalty Agreement and as maintained by the court, annual royalties of 1% of the sales and other revenue made by the Corporation on a consolidated basis are payable by the Corporation to a Former CEO biannually, but only to the extent that the cost of the royalty would not cause the Corporation to have a loss before interest, taxes and amortization (in which case, the payments would be deferred to the following fiscal year). |
As of March 31, 2021, a provision of $1,871,555 (2020 - $1,115,703) has been recorded by the Corporation. Subsequent to the year ended March 31, 2021, the Corporation made payments totalling $1,740,770 to the Former CEO in relation with this provision. A litigation provision of $2,130,074 was recorded in the consolidated statement of financial position of the year ended March 31, 2019 to cover the estimated cost of the judgement in accordance with the ruling above, including legal and administrative proceedings. During the year ended March 31, 2020, the Corporation paid $1,200,537 related to the portion of the judgment not contested by Neptune and also paid $106,817 in legal fees for the appeal. During the year ended March 31, 2021, an additional amount of $755,852 (2020 - $292,983) has been recorded as a provision for royalty payments owed on consolidated revenues and as expenses related to the litigation, in the selling, general and administrative expenses of the consolidated statements of loss and comprehensive loss.
|
(b) |
In addition to the above, a Former CEO of the Corporation was claiming the payment of approximately $8,500,000 and the issuance of equity instruments for severance entitlements under his employment contract terminated in April 2014. On May 10, 2019, Neptune |
32
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
announced a settlement regarding these claims. Pursuant to the agreement entered, Neptune agreed to issue 600,000 common shares from treasury (in accordance with securities regulation) and transfer 2,100,000 shares of Acasti held by the Corporation to a Former CEO. In addition, Neptune agreed to reimburse nominal legal fees. |
As at March 31, 2019, a provision of $5,834,502 was recorded in the consolidated statement of financial position relating to this settlement. During the year ended March 31, 2020, the 2,100,000 shares in Acasti held by the Corporation were transferred and the 600,000 common shares from treasury were issued to a Former CEO. Neptune received full and final release on all claims in connection with this case.
|
(c) |
In September 2020, Neptune submitted a claim and demand for arbitration against Peter M. Galloway and PMGSL Holdings, LLC (collectively “PMGSL”) in accordance with the Asset Purchase Agreement (“APA”) dated May 9, 2019 between, among others, Neptune and PMGSL. Separately, PMGSL submitted a claim and demand for arbitration against Neptune. The Neptune claims and PMGSL claims have been consolidated into a single arbitration and each are related to the purchase by Neptune of substantially all of the assets of the predecessor entities of PMGSL Holdings, LLC. Neptune is claiming, among other things, breach of contract and negligent misrepresentation by PMGSL in connection with the APA and is seeking, among other things, equitable restitution and any and all damages recoverable under law. PMGSL is claiming, among other things, breach of contract by Neptune and is seeking, among other things, payment of certain compensation contemplated by the APA. While Neptune believes there is no merit to the claims brought by PMGSL, a judgment in favor of PMGSL may have a material adverse effect on our business and Neptune intends to continue vigorously defending itself. Based on currently available information, a provision of $754,440 has been recognized for this case as at March 31, 2021. |
|
(d) |
During the year ended March 31, 2021, the Corporation recorded $195,000 of other provisions for other legal obligations. |
|
(a) |
On September 30, 2016, Neptune through its subsidiary Biodroga entered into an exclusive, worldwide and royalty bearing commercial agreement with Ingenutra Inc. for its patented and clinically studied MaxSimil specialty ingredient. The agreement provides Neptune with the right to manufacture, distribute and sell MaxSimil in the nutraceutical field. |
As at September 30, 2016, Neptune recorded an intangible asset of $935,804 at the discounted fair value (US$850,000) and a long-term payable of the same amount. The minimum annual volumes to be reached according to the agreement with Ingenutra were terminated under the termination agreement, signed on January 31, 2020 with retroactive effect to September 30, 2016, which requires the corporation to pay the remaining royalties attributable to the intangible asset in quarterly instalments until July 2021. Under the initial agreement, a royalty fee of $418,660 was recorded in selling, general and administrative expenses for the year ended March 31, 2021 (2020 - $376,940) in the consolidated statements of loss and comprehensive loss.
Also on January 31, 2020, the Corporation signed two agreements for the same patents with SCF Pharma Inc., the founder of the speciality ingredient. In connection with these new agreements, Neptune must pay royalties based on sales, using this specialty ingredient. Minimum annual volumes must be reached for the duration of the agreement of 8 years (refer to note 22 (a)(i)).
As at March 31, 2021, the total short-term and long-term payables to both Ingenutra Inc. and SCF Pharma Inc. in relation with MaxSimil are respectively $119,617 and $- (2020 - $362,266 and $106,886). The short-term portion is included in Trade and other payables in the consolidated statement of financial position.
|
(b) |
On December 21, 2018, Neptune entered into a multi-year IP licencing and capsule agreement with Lonza, a global leader in the life sciences industry (refer to note 22 (a)(ii)). |
On that date, Neptune has recorded an intangible asset of $2,718,208 with a corresponding amount in liabilities. The amount of liabilities consisted of an upfront payment of $1,768,260 (US$1,300,000), which was paid in February 2019, and payments in the next twelve months based on minimum volume commitments of $147,000 and future royalty payments based on minimum volume commitments, irrespective of the volume achieved, with a present value of $802,948 at the time of initial recognition. In addition, all royalties based on net sales of capsules greater than the minimum volume requirements will be recorded as incurred in cost of goods sold. The intangible asset will be amortized over a 31-month period and the expense will be presented in the cost of goods sold. This 5 year agreement also includes a supply agreement for empty capsules.
During the fourth quarter of fiscal year 2021, Lonza and Neptune entered into an amendment to the agreement which removed all minimum volume requirements, extended the term of the agreement to July 31, 2025 and waived certain penalties that would have been payable to Lonza.
Consequently, as at March 31, 2021, the short-term and long-term payable to Lonza were written off (2020 - $570,000 and $448,554 respectively) as it relates to minimum commitments and penalties. The short-term portion is included in Trade and other payables related to variable royalties based on sales of $50,235 in the consolidated statement of financial position. During the year ended March 31, 2021,
33
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
the Corporation recorded no penalty fee for late commercialization according to the agreement (2020 - $158,064) in the cost of sales in the consolidated statement of loss and comprehensive loss.
14. |
Liability related to warrants: |
During the year ended March 31, 2021, the Corporation issued warrants as part of financing arrangements and because they are of a fixed nature for a non-fixed consideration (due to having an exercise price in USD) they are classified as liabilities, rather than equity.
On October 22, 2020, Neptune issued a total of 10,532,401 warrants (“Warrants 2020”) with an exercise price of US$2.25 expiring on
October 22, 2025. The warrants, issued as part of the Private Placement entered into on October 20, 2020 (see note 15 (i)), are exercisable beginning anytime on or after April 22, 2021 until October 22, 2025. Proceeds were allocated amongst common shares and warrants by applying a relative fair value approach, with fair value of the warrants determined using the Black-Scholes model, resulting in an initial warrant liability of $11,620,307 which was recognized as a liability. The difference between the fair value of the warrants and their allocated amount was a discount of $3,927,997, which is being amortized on a straight-line basis over the five-year term of the warrants. Warrants are revalued each period-end at fair value through profit and loss. The change in fair value of the warrant liability for the year ended March 31, 2021 was a decrease of $7,473,661. An amortization charge of $334,296 related to the initial discount was recorded under revaluation of the liability related to warrants for the year ended March 31, 2021.
On February 19, 2021, the Corporation issued 6,875,000 warrants (“Warrants 2021”) with an exercise price of US$2.25 expiring on
August 19, 2026. The warrants, issued as part of a Registered Direct Offering entered into on February 17, 2021 (see note 15 (k)), are exercisable beginning anytime on or after August 19, 2021 until August 19, 2026. Proceeds were allocated amongst common shares and warrants by applying a relative fair value approach, with fair value of the warrants determined using the Black-Scholes model, resulting in an initial warrant liability of $8,163,181. The difference between the fair value of the warrants and their allocated amount was a premium of $168,607, which is being amortized on a straight-line basis over the
5.5-year term of the warrants. Warrants are revalued each period-end at fair value through profit and loss. The change in fair value of the warrant liability for the year ended March 31, 2021 was a decrease of $2,607,816. An amortization charge of $(3,486) related to the initial discount was recorded under revaluation of the liability related to warrants for the year ended March 31, 2021
The activities on the Corporation’s warrants for the year ended March 31, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
|
|
|
|
exercise |
|
|
Number of |
|
||
|
|
|
|
|
|
price (in USD) |
|
|
warrants |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at April 1st, 2020 |
|
|
|
|
|
$ |
— |
|
|
|
— |
|
Issued |
|
|
|
|
|
|
2.25 |
|
|
|
17,407,401 |
|
Exercised |
|
|
|
|
|
|
— |
|
|
|
— |
|
Cancelled |
|
|
|
|
|
|
— |
|
|
|
— |
|
Expired |
|
|
|
|
|
|
— |
|
|
|
— |
|
Warrants outstanding at March 31, 2021 |
|
|
|
|
|
$ |
2.25 |
|
|
|
17,407,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at March 31, 2021 |
|
|
|
|
|
$ |
— |
|
|
|
— |
|
Changes in the value of the liability related to the warrants for the year ended March 31, 2021 were as follows:
34
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
|
|
Warrants |
|
|
Amount |
|
||
|
|
|
|
|
|
|
|
|
|
Outstanding as at March 31, 2020 |
|
|
|
– |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
Warrants issued during the year |
|
|
|
17,407,401 |
|
|
|
23,542,874 |
|
Warrants exercised during the year |
|
|
|
– |
|
|
|
– |
|
Warrants cancelled during the year |
|
|
|
– |
|
|
|
– |
|
Warrants expired during the year |
|
|
|
– |
|
|
|
– |
|
Discount on warrants issued during the year |
|
|
|
|
|
|
|
(3,759,390 |
) |
Amortization of the discount on warrants issued |
|
|
|
|
|
|
|
330,810 |
|
Effect of revaluation of the warrants |
|
|
|
|
|
|
|
(10,081,477 |
) |
Effect of movements in exchange rates |
|
|
|
|
|
|
|
(152,837 |
) |
|
|
|
|
|
|
|
|
|
|
Outstanding as at March 31, 2021 |
|
|
|
17,407,401 |
|
|
$ |
9,879,980 |
|
The following assumptions were used in the Black & Scholes evaluation model for determining the fair value of the Warrants 2020 granted:
Warrants 2020 |
|
As at March 31, 2021 |
|
|
As at grant date |
|
||
|
|
|
|
|
|
|
|
|
Exercise price (in US dollars) |
|
$ |
2.25 |
|
|
$ |
2.25 |
|
Dividend |
|
‒ |
|
|
‒ |
|
||
Risk-free interest |
|
|
0.80 |
% |
|
|
0.34 |
% |
Expected life (years) |
|
|
4.57 |
|
|
|
5.00 |
|
Expected volatility |
|
|
76.10 |
% |
|
|
71.1 |
% |
The following assumptions were used in the Black & Scholes evaluation model for determining the fair value of the Warrants 2021 granted:
Warrants 2021 |
|
As at March 31, 2021 |
|
|
As at grant date |
|
||
|
|
|
|
|
|
|
|
|
Exercise price (in US dollars) |
|
$ |
2.25 |
|
|
$ |
2.25 |
|
Dividend |
|
‒ |
|
|
‒ |
|
||
Risk-free interest |
|
|
1.01 |
% |
|
|
0.66 |
% |
Expected life (years) |
|
|
5.39 |
|
|
|
5.50 |
|
Expected volatility |
|
|
72.03 |
% |
|
|
71.40 |
% |
The expected volatility is based on the historical volatility of the Corporation’s shares. The risk-free interest rate is the yield on various zero-coupon bonds issued by the Government of Canada with terms that correspond to the expected life of the warrants.
The following table provides the relevant information on the outstanding warrants as at March 31, 2021:
|
|
|
|
|
|
|
|
Exercise price |
|
|
|
|
Reference |
|
Date of issuance |
|
Number of warrants |
|
|
(in USD) |
|
|
Expiry date |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants 2020 |
|
October 22, 2020 |
|
|
10,532,401 |
|
|
$ |
2.25 |
|
|
October 22, 2025 |
Warrants 2021 |
|
February 19, 2021 |
|
|
6,875,000 |
|
|
$ |
2.25 |
|
|
August 19, 2026 |
|
|
|
|
|
17,407,401 |
|
|
$ |
2.25 |
|
|
|
35
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
15. |
Capital and other components of equity: |
|
(a) |
Share capital: |
Authorized capital stock:
Unlimited number of shares without par value:
|
➣ |
Common shares |
Preferred shares, issuable in series, rights, privileges and restrictions determined at time of issuance:
|
➣ |
Series A preferred shares, non-voting, non-participating, fixed, preferential and non-cumulative dividend of 5% of paid-up capital, exchangeable at the holder’s option under certain conditions into common shares (none issued and outstanding). |
All issued shares are fully paid.
|
(b) |
Share options exercised: |
During the year ended March 31, 2021, Neptune issued 5,001,793 common shares of the Corporation upon exercise of options at a weighted average exercise price of $1.96 per common share, including 25,000 common shares issued upon exercise of market performance options, for a total cash consideration of $9,769,951.
During the year ended March 31, 2020, Neptune issued 2,067,418 common shares of the Corporation upon exercise of options at a weighted average exercise price of $1.90 per common share for a total cash consideration of $3,930,424.
|
(c) |
DSUs released: |
During the year ended March 31, 2021, Neptune issued 48,313 common shares of the Corporation to former and current members of the Board of Directors at a weighted average price of $2.60 per common share for past services.
During the year ended March 31, 2020, Neptune issued 333,279 common shares of the Corporation to a former CEO, a former Chief Financial Officer and to a former member of the Board of Directors at a weighted average price of $1.48 per common share for past services.
|
(d) |
RSUs released: |
During the year ended March 31, 2021, Neptune issued 574,464 common shares of the Corporation to the CEO as part of his employment agreement at a weighted average price of $5.50 per common share. Withholding taxes of $1,009,657 were paid pursuant to the issuance of these RSUs resulting in the Corporation not issuing an additional 358,872 RSUs.
During the year ended March 31, 2020, Neptune issued 437,849 common shares of the Corporation to the CEO as part of his employment agreement at a weighted average price of $5.80 per common share. Withholding taxes of $962,077 were paid pursuant to the issuance of these RSUs resulting in the Corporation not issuing an additional 262,153 RSUs.
36
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
(e) |
Restricted shares: |
During the year ended March 31, 2021, Neptune issued 29,733 common shares of the Corporation to employees at a weighted average price of $4.19 per common share for past services. Although issued as restricted shares under the equity incentive plan, there was no actual restriction nor restricted period on the shares, and they immediately converted into registered shares upon acceptance by the employees.
|
(f) |
Warrants: |
Warrants of the Corporation classified as equity are composed of the following as at March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
March 31, |
|
||
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
2020 |
|
||
|
|
Number |
|
|
Number |
|
|
|
|
|
|
Number |
|
|
Number |
|
|
|
|
|
||||
|
|
outstanding |
|
|
vested |
|
|
Amount |
|
|
outstanding |
|
|
vested |
|
|
Amount |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants IFF (i) |
|
|
2,000,000 |
|
|
|
1,000,000 |
|
|
$ |
1,089,243 |
|
|
|
2,000,000 |
|
|
|
— |
|
|
$ |
388,281 |
|
Warrants AMI (ii) |
|
|
4,175,000 |
|
|
|
4,175,000 |
|
|
|
22,857,868 |
|
|
|
4,175,000 |
|
|
|
3,300,000 |
|
|
|
18,209,495 |
|
|
|
|
6,175,000 |
|
|
|
5,175,000 |
|
|
$ |
23,947,111 |
|
|
|
6,175,000 |
|
|
|
3,300,000 |
|
|
$ |
18,597,776 |
|
|
(ii) |
During the year ended March 31, 2020, Neptune granted 4,175,000 warrants (“Warrants AMI”) with an exercise price of US$8.00 expiring on October 3, 2024 and February 5, 2025. The warrants, granted in exchange for services to be rendered by non-employees, vest proportionally to the services rendered. The fair value of the warrants is based on the fair value of the services which are reliably measurable. As at March 31, 2021, the fair value has been estimated to $22,857,868 (US$16.7 million) of which $4,648,373 was recognized as an expense during the year ended March 31, 2021 (2020 - $18,209,495). |
|
(iii) |
During the year ended March 31, 2020, Neptune issued 750,000 common shares of the Corporation for warrants exercised for a total cash consideration of $2,527,500. |
|
(g) |
At-The-Market Offering: |
On March 11, 2020, Neptune entered into an Open Market Sale Agreement with Jefferies LLC pursuant to which the Corporation may from time to time sell, through at-the-market (ATM) offerings with Jefferies LLC acting as sales agent, such common shares as would have an aggregate offer price of up to $70,310,000 (US$50,000,000).
The Corporation sold a total of 4,159,086 common shares of the Corporation through the ATM over the NASDAQ stock market during the year ended March 31, 2020, for gross proceeds of $7,069,220 (US$4,971,104) and net proceeds of $6,760,099. The 3% commissions paid and transaction costs amounted to $309,121. The shares were sold at the prevailing market prices which resulted in a weighted average price of US$1.20 per share.
During the year ended March 31, 2021, the Corporation sold a total of 5,411,649 shares through the ATM program over the NASDAQ stock market, for gross proceeds of $19,045,446 and net proceeds of $18,210,042. The 3% commissions paid and transaction costs amounted to $835,404. The shares were sold at the prevailing market prices which resulted in an average of approximately US$2.53 per share.
The ATM Offering was terminated as of February 16, 2021 and Neptune will make no further sales under the ATM Offering. As of that date, Neptune had sold 9,570,735 of its common shares under the ATM Offering, raising approximately $26,114,666 (US$18.6 million) in gross proceeds.
|
(h) |
Direct Offering: |
37
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
|
During the year ended March 31, 2021, the Corporation issued 4,773,584 common shares at an offering price of US$2.65 per share for gross proceeds of $17,089,372 and net proceeds of $16,006,155. The offering expense and deducting costs amounted to $1,083,217.
|
(i) |
Private placements: |
During the year ended March 31, 2021, Neptune completed a private placement with certain US healthcare focused institutional investors for a private placement of 16,203,700 common shares and 10,532,401 warrants. Each warrant is exercisable for one common share at an exercise price of US$2.25. The gross proceeds of this offering were $45,997,000 (US$35 million) before deducting fees and other offering expenses.
Proceeds were allocated amongst common shares and warrants by applying a relative fair value approach, resulting in an initial warrant liability of $11,620,307 (note 14) and $34,376,693 recorded in the equity of the Corporation. Purchase warrants are recognized as liabilities, as the exercise price of the warrants is in USD, whereas the Corporation’s functional currency is the Canadian dollar. Total issue costs related to this private placement amounted to $2,714,273, of which $2,034,974 were recorded against share capital and the portion related to the warrants, in the amount of $679,299, was recorded under finance costs.
On July 18, 2019, Neptune completed a private placement of 9,415,910 common shares of the Corporation at a purchase price of US$4.40 per common share for total gross proceeds to the Corporation of $53,970,867 (US$41,430,004). Total issue costs related to this transaction amounted to $2,538,736 and were recorded against share capital.
|
(j) |
Business combinations: |
On February 10, 2021, as part of the consideration paid for the acquisition of a 50.1% interest in Sprout Foods, Inc., Neptune issued 6,741,573 common shares of the Corporation, for a total consideration of $22,333,976 (USD$17.6 million) representing the fair value of the common shares at the date of acquisition (refer to note 4 (b)).
On July 24, 2019, as part of the initial consideration paid for the acquisition of SugarLeaf, Neptune issued 1,587,301 common shares of the Corporation for total consideration of $7,966,970, representing the fair value of the common shares at the date of acquisition (refer to note 4 (a)).
|
(k) |
Registered Direct Offering Priced At-The-Market and Concurrent Private Placement: |
On February 17, 2021, Neptune entered into definitive agreements with institutional investors for the purchase of 27,500,000 common shares. The Corporation has also agreed to issue to the investors, in a concurrent private placement, unregistered common share purchase warrants to purchase an aggregate of 6,875,000 common shares. Each common share and accompanying quarter of a warrant are being sold together at a combined offering price of US$2.00, pursuant to a registered direct offering, priced at-the-market under Nasdaq rules, for aggregate gross proceeds of approximately $69,916,000 (US$55.0 million) before deducting fees and other estimated offering expenses (the "Offering"). The warrants will have an exercise price of US$2.25 per share, will be exercisable commencing on the six-month anniversary of the date of issuance, and will expire 5.5 years from the date of issuance. The Offering closed on February 19, 2021.
Proceeds were allocated amongst common shares and warrants by applying a relative fair value approach, resulting in an initial warrant liability of $8,163,181 (note 14) and $61,752,819 recorded in the equity of the Corporation. Purchase warrants are recognized as liabilities, as the exercise price of the warrants is in USD, whereas the Corporation’s functional currency is the Canadian dollar. Total issue costs related to this private placement amounted to $3,911,901, of which $3,449,938 were recorded against share capital and the portion related to the warrants, in the amount of $461,963, was recorded under finance costs.
During the year ended March 31, 2021, the Corporation amortized at-the-market transactions costs of $439,010.
|
(l) |
Provision and liability settled in shares: |
During the year ended March 31, 2020, Neptune issued 600,000 common shares of the Corporation to a Former CEO of the Corporation as part of a settlement regarding severance entitlements under his employment contract terminated in April 2014 (refer to note 12 (b)).
38
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
16. |
Personnel expenses: |
|
|
Years ended |
|
|||||
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Salaries and other short-term employee benefits |
|
$ |
23,079,225 |
|
|
$ |
17,245,401 |
|
Severance |
|
|
804,787 |
|
|
|
385,182 |
|
Share-based compensation |
|
|
13,069,174 |
|
|
|
16,471,766 |
|
|
|
$ |
36,953,186 |
|
|
$ |
34,102,349 |
|
17. |
Finance income and finance costs: |
(a) Finance income:
|
|
Years ended |
|
|||||
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
50,680 |
|
|
$ |
151,219 |
|
Other finance income |
|
|
1,041,202 |
|
|
|
— |
|
Finance income |
|
$ |
1,091,882 |
|
|
$ |
151,219 |
|
(b) Finance costs:
|
|
Years ended |
|
|||||
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Interest charges and other finance costs |
|
$ |
(833,635 |
) |
|
$ |
(140,274 |
) |
Interest expense on loans and borrowings (note 11) |
|
|
(387,764 |
) |
|
|
(337,096 |
) |
Interest on lease liabilities (note 8) |
|
|
(108,620 |
) |
|
|
(106,337 |
) |
Warrants issuance costs (note 15 (f)) |
|
|
(1,141,262 |
) |
|
|
— |
|
Finance costs |
|
$ |
(2,471,281 |
) |
|
$ |
(583,707 |
) |
18. |
Share-based payments: |
Under the Corporation’s share-based payments, a total stock-based compensation of $13,069,174 was recognized in the consolidated statement of loss and comprehensive income (loss) for the year ended March 31, 2021 ($16,594,588
At March 31, 2021, the Corporation had the following share-based payment arrangements:
|
(a) |
Corporation stock option plan: |
|
(i) |
Stock option plan: |
The Corporation has established a stock option plan for directors, employees and consultants. Awards under the plan grants a participant the right to purchase a certain number of Common Shares, subject to certain conditions described below, at an exercise price equal to at least 100% of the Market Price (as defined below) of the Common Shares on the grant date. The “Market Price” of Common Shares as of a particular date shall generally mean the volume weighted average trading price of the Common Shares (“VWAP”), calculated by dividing the total value by the total volume of Common Shares traded for a relevant period on the TSX (and if listed on more than one stock exchange, then the highest of such closing prices) during the last ten (10) Business Days prior to the Grant Date (“10-day VWAP”).
The terms and conditions for exercising options and purchasing the underlying Common Shares are set by the Board of Directors, and subject to, among others, the following limitations: the term of the options cannot exceed ten years and every stock option granted
39
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
under the stock option plan will be subject to conditions no less restrictive than a minimum vesting period of 18 months with gradual and equal acquisition vesting on no less than a quarterly basis; the Corporation can issue a number of Common Shares not exceeding 25% of the number of Common Shares issued and outstanding at the time of any grant pursuant to the stock option plan; the total number of Common Shares issuable to a single holder pursuant to the stock option plan cannot exceed 20% 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:
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
2020 |
|
||
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
||
|
|
average |
|
|
|
|
|
|
average |
|
|
|
|
|
||
|
|
exercise |
|
|
Number of |
|
|
exercise |
|
|
Number of |
|
||||
|
|
price |
|
|
options |
|
|
price |
|
|
options |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at April 1st, 2020 and 2019 |
|
$ |
2.50 |
|
|
|
8,042,427 |
|
|
$ |
2.02 |
|
|
|
9,651,085 |
|
Granted |
|
|
2.15 |
|
|
|
2,024,341 |
|
|
|
5.35 |
|
|
|
1,597,939 |
|
Exercised (note 15 (b)) |
|
|
1.96 |
|
|
|
(4,976,793 |
) |
|
|
1.90 |
|
|
|
(2,067,418 |
) |
Forfeited (i) |
|
|
4.81 |
|
|
|
(847,762 |
) |
|
|
3.53 |
|
|
|
(1,139,179 |
) |
Options outstanding at March 31, 2021 and 2020 |
|
$ |
2.49 |
|
|
|
4,242,213 |
|
|
$ |
2.50 |
|
|
|
8,042,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2021 and 2020 |
|
$ |
2.54 |
|
|
|
2,153,378 |
|
|
$ |
2.20 |
|
|
|
3,666,651 |
|
|
(i) |
On July 8, 2019, Neptune announced the appointment of its new Chief Executive Officer (CEO) and Member of the Board of Directors following the resignation of the previous CEO. According to the immediately preceding CEO’s amended employment agreement, the immediately preceding CEO was entitled to his unvested options that vested on a pro-rata basis as of his termination employment date. |
As a result of applying the clauses of this agreement, 638,493 of his outstanding unvested options vested with an accelerated vesting date and 510,794 of his unvested options were forfeited at the separation date resulting in a stock-based compensation expense of $32,854 during the year ended March 31, 2020.
The Vice-President & Chief Financial Officer (CFO) of the Corporation left the Corporation with an effective date of November 11, 2019. According to his separation agreement, the former Vice-President and CFO was entitled to his unvested options with an accelerated vesting date resulting in an expense of $264,274 during the year ended March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
Exercisable options |
|
||||||||||
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|||
|
|
contractual |
|
|
Number of |
|
|
number of |
|
|
average |
|
||||
Exercise |
|
life |
|
|
options |
|
|
options |
|
|
exercise |
|
||||
price |
|
outstanding |
|
|
outstanding |
|
|
exercisable |
|
|
price |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.24 - $1.91 |
|
|
2.02 |
|
|
|
338,272 |
|
|
|
188,272 |
|
|
|
1.26 |
|
$1.92 - $2.05 |
|
|
5.87 |
|
|
|
2,945,261 |
|
|
|
1,480,140 |
|
|
|
1.98 |
|
$2.06 - $2.36 |
|
|
1.70 |
|
|
|
75,000 |
|
|
|
75,000 |
|
|
|
2.13 |
|
$2.37 - $5.19 |
|
|
3.65 |
|
|
|
549,680 |
|
|
|
190,733 |
|
|
|
4.27 |
|
$5.20 - $6.65 |
|
|
5.60 |
|
|
|
334,000 |
|
|
|
219,233 |
|
|
|
6.00 |
|
|
|
|
|
|
|
|
4,242,213 |
|
|
|
2,153,378 |
|
|
|
|
|
40
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
The fair value of options granted has been estimated according to the Black-Scholes option pricing model and based on the weighted average of the following assumptions for options granted to employees during the years ended March 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Exercise price |
|
$ |
2.15 |
|
|
$ |
5.35 |
|
Dividend |
|
‒ |
|
|
‒ |
|
||
Risk-free interest |
|
|
0.46 |
% |
|
|
1.47 |
% |
Estimated life (years) |
|
3.74 |
|
|
4.17 |
|
||
Expected volatility |
|
|
98.65 |
% |
|
|
65.63 |
% |
The weighted average fair value of the options granted to employees during the year ended March 31, 2021 is $2.04 (2020 - $2.37). There were no options granted to non-employees during the year ended March 31, 2021 (100,000 for 2020).
Stock-based compensation recognized under this plan amounted to $1,802,716 for the year ended March 31, 2021 (2020 - $4,075,689).
|
(ii) |
Non-market performance options: |
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 US$4.43 per share to the new 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 revaluated up to the date of approbation (grant date). None of these non-market performance options have vested as at March 31, 2021.
The number and weighted average exercise prices of performance options are as follows:
|
|
2021 |
|
|
2020 |
|
||||||||||
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
||
|
|
average |
|
|
|
|
|
|
average |
|
|
|
|
|
||
|
|
exercise |
|
|
Number of |
|
|
exercise |
|
|
Number of |
|
||||
|
|
price |
|
|
options |
|
|
price |
|
|
options |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at April 1st, 2020 and 2019 |
|
$ |
5.90 |
|
|
|
3,500,000 |
|
|
$ |
— |
|
|
|
— |
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
5.90 |
|
|
|
3,500,000 |
|
Options outstanding at March 31, 2021 and 2020 |
|
$ |
5.90 |
|
|
|
3,500,000 |
|
|
$ |
5.90 |
|
|
|
3,500,000 |
|
The fair value of the CEO non-market performance options granted was estimated according to the Black-Scholes option pricing model at the grant date using the following assumptions:
|
|
|
|
Year ended March 31, 2020 |
|
|
|
|
|
|
|
|
|
Exercise price |
|
|
|
$ |
5.90 |
|
Dividend |
|
|
|
‒ |
|
|
Risk-free interest |
|
|
|
|
1.59 |
% |
Estimated life (years) |
|
|
|
10 |
|
|
Expected volatility |
|
|
|
|
69.00 |
% |
The expected volatility was based on the historical volatility of the Corporation’s stock.
The weighted average fair value of the non-market performance options granted to the CEO during the year ended March 31, 2020 was $4.86.
The fair value at grant date is $17,011,365 and the period over which the expense is being recognized was initially up to 9.7 years. During the year ended March 31, 2020, management revised the estimated probability of achievement of the non-market performance conditions. The last tranche was not expected to vest, and the recognition of the expense related to the two first tranches was estimated
41
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
to be over a longer number of years, ranging from 7.7 to 9.7 years from grant date. As at March 31, 2020, the change in the estimated probability of achievement of the non-market performance conditions resulted in a reversal of expense related to the last tranche not expected to vest, and the recognition of the expense related to the two first tranches over a longer number of years, ranging from 7.7 to 9.7 years. This change in the estimated probability of achievement of the non-market performance conditions resulted in a revised amount to be expensed of $9,720,798, of which an expense of $747,128 had already been recorded, thus the remaining unrecognized amount to be recognized over the remaining period was $8,973,670.
During the year ended March 31, 2021, management revised the estimated probability of achievement of the non-market performance conditions and determined that the second tranche is not expected to vest, and the recognition of the expense related to the first tranche is now estimated to be over 9.7 years from grant date. As at March 31, 2021, the change in the estimated probability of achievement of the non-market performance conditions resulted in a reversal of expense of $1,088,121 related to the second tranche not expected to vest. The remaining unrecognized amount to be recognized over the remaining period is $2,996,374.
Stock-based compensation recognized under this plan amounted to $117,184 for the year ended March 31, 2021 (2020 – expense of $747,124).
|
(iii) |
Market performance options: |
On July 8, 2019, the Corporation granted 5,500,000 market performance options under the Corporation stock option plan at an exercise price of US$4.43 per share to the new 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 approbation (grant date). As at March 31, 2021 and 2020, 775,000 of these market performance options had vested, and 25,000 options were exercised as at March 31, 2021.
The number and weighted average exercise prices of market performance options are as follows:
|
|
2021 |
|
|
2020 |
|
||||||||||
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
||
|
|
average |
|
|
|
|
|
|
average |
|
|
|
|
|
||
|
|
exercise |
|
|
Number of |
|
|
exercise |
|
|
Number of |
|
||||
|
|
price |
|
|
options |
|
|
price |
|
|
options |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at April 1st, 2020 and 2019 |
|
$ |
5.86 |
|
|
|
5,525,000 |
|
|
$ |
1.55 |
|
|
|
25,000 |
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
5.88 |
|
|
|
5,500,000 |
|
Exercised (note 15 (b)) |
|
|
1.55 |
|
|
|
(25,000 |
) |
|
|
— |
|
|
|
— |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Options outstanding at March 31, 2021 and 2020 |
|
$ |
5.88 |
|
|
|
5,500,000 |
|
|
$ |
5.86 |
|
|
|
5,525,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2021 and 2020 |
|
$ |
5.80 |
|
|
|
750,000 |
|
|
$ |
5.66 |
|
|
|
775,000 |
|
|
|
2021 |
|
|||||||||||||
|
|
Options outstanding |
|
|
Exercisable options |
|
||||||||||
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|||
|
|
contractual |
|
|
Number of |
|
|
number of |
|
|
average |
|
||||
Exercise |
|
life |
|
|
options |
|
|
options |
|
|
exercise |
|
||||
price |
|
outstanding |
|
|
outstanding |
|
|
exercisable |
|
|
price |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.88 |
|
|
8.28 |
|
|
|
5,500,000 |
|
|
|
750,000 |
|
|
|
5.80 |
|
|
|
|
8.28 |
|
|
|
5,500,000 |
|
|
|
750,000 |
|
|
$ |
5.80 |
|
42
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
The fair value of market performance options granted has been estimated according to a risk-neutral Monte Carlo simulation pricing model based on the grant date following assumptions for options granted to the CEO:
|
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
Exercise price |
|
|
|
$ |
5.88 |
|
Dividend |
|
|
|
‒ |
|
|
Risk-free interest |
|
|
|
|
1.69 |
% |
Estimated life (years) |
|
|
|
10 |
|
|
Expected volatility |
|
|
|
|
68.13 |
% |
The expected volatility was based on the historical volatility of the Corporation’s stock.
The weighted average fair value of the market performance options granted to the CEO during the year ended March 31, 2020 was $4.29.
The fair value at grant date was $23,614,977 and the period over which the expense is being recognized is 9.78 years and will be recognized regardless of whether the market conditions are achieved.
Stock-based compensation recognized under this plan amounted to $3,090,327 for the year ended March 31, 2021 (2020 - $2,260,597). Unrecognized compensation cost at March 31, 2021 is $18,264,053 (2020 - $21,354,380).
|
(b) |
Deferred Share Units, Restricted Share Units and Restricted Shares: |
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.
|
(i) |
Deferred Share Units (‘’DSUs’’) |
The number and weighted average share prices of DSUs are as follows:
|
|
2021 |
|
|
2020 |
|
||||||||||
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
||
|
|
average |
|
|
|
|
|
|
average |
|
|
|
|
|
||
|
|
share |
|
|
Number of |
|
|
share |
|
|
Number of |
|
||||
|
|
price |
|
|
DSUs |
|
|
price |
|
|
DSUs |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSUs outstanding at April 1st, 2020 and 2019 |
|
$ |
2.60 |
|
|
|
48,313 |
|
|
$ |
1.56 |
|
|
|
448,387 |
|
Granted |
|
|
2.38 |
|
|
|
41,960 |
|
|
|
5.60 |
|
|
|
8,924 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
1.75 |
|
|
|
(75,719 |
) |
Released through the issuance of common shares (note 15 (c)) |
|
|
2.60 |
|
|
|
(48,313 |
) |
|
|
1.48 |
|
|
|
(333,279 |
) |
DSUs outstanding at March 31, 2021 and 2020 |
|
$ |
2.38 |
|
|
|
41,960 |
|
|
$ |
2.60 |
|
|
|
48,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSUs exercisable at March 31, 2021 and 2020 |
|
$ |
2.21 |
|
|
|
28,290 |
|
|
$ |
2.47 |
|
|
|
45,730 |
|
Of the 41,960 DSUs outstanding as at March 31, 2021 (2020 – 48,313), 28,290 DSUs vested upon services to be rendered during a period of twelve months from date of grant (2020 – 11,058), no DSUs vested upon achievement of performance conditions (2020 – 6,596), no DSUs vested after the completion of service to be rendered (2020 – 2,583) and — vested DSUs were granted for past services (2020 – 28,076). 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 contributed surplus, over the vesting period.
The weighted average fair value of the DSUs granted during the year ended March 31, 2021 was $2.38 (2020 - $5.60).
Stock-based compensation recognized under this plan amounted to $83,843 for the year ended March 31, 2021 (2020 – ($14,445)).
43
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
(ii) |
Restricted Share Units (‘’RSUs’’) |
During the year ended March 31, 2020, as part of the employment agreement of the new 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 on 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 contributed surplus, over the vesting period. The fair value of the RSUs granted during the year ended March 31, 2021 was $2.21 per unit (2020 - $5.80).
|
|
2021 |
|
|
2020 |
|
||||||||||
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
||
|
|
average |
|
|
|
|
|
|
average |
|
|
|
|
|
||
|
|
share |
|
|
Number of |
|
|
share |
|
|
Number of |
|
||||
|
|
price |
|
|
RSUs |
|
|
price |
|
|
RSUs |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs outstanding at April 1st, 2020 and 2019 |
|
$ |
5.80 |
|
|
|
2,099,998 |
|
|
$ |
— |
|
|
|
— |
|
Granted |
|
|
2.21 |
|
|
|
2,187,969 |
|
|
|
5.80 |
|
|
|
2,800,000 |
|
Released through the issuance of common shares (note 15 (d)) |
|
|
5.80 |
|
|
|
(574,464 |
) |
|
|
5.80 |
|
|
|
(437,849 |
) |
Withheld as payment of withholding taxes (note 15 (d)) |
|
|
5.80 |
|
|
|
(358,872 |
) |
|
|
5.80 |
|
|
|
(262,153 |
) |
RSUs outstanding at March 31, 2021 and 2020 |
|
$ |
3.46 |
|
|
|
3,354,631 |
|
|
$ |
5.80 |
|
|
|
2,099,998 |
|
Stock-based compensation recognized under this plan amounted to $7,843,861 for the year ended March 31, 2021 (2020 - $9,525,623). Unrecognized compensation cost at March 31, 2021 is $6,718,656 (2020 - $6,718,656).
|
(iii) |
Restricted Shares |
During the year ended March 31, 2021, the Corporation granted restricted shares to employees for past services. The fair value of the restricted shares is determined to be the higher of the 10-day VWAP on TSX and Nasdaq prior to the date of grant and is recognized as stock-based compensation, through contributed surplus on date of release.
The number and weighted average share prices of restricted shares are as follows:
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
Number of |
|
||
|
|
|
|
|
|
share |
|
|
restricted |
|
||
|
|
|
|
|
|
price (in USD) |
|
|
shares |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares outstanding at April 1st, 2020 |
|
|
|
|
|
$ |
— |
|
|
|
— |
|
Granted |
|
|
|
|
|
|
4.19 |
|
|
|
35,111 |
|
Forfeited |
|
|
|
|
|
|
4.19 |
|
|
|
(5,378 |
) |
Released through the issuance of common shares (note 15 (e)) |
|
|
|
|
|
|
4.19 |
|
|
|
(29,733 |
) |
Restricted shares outstanding at March 31, 2021 |
|
|
|
|
|
$ |
— |
|
|
|
— |
|
Stock-based compensation recognized under this plan amounted to $131,243 for the year ended March 31, 2021.
44
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
19. |
Income taxes: |
Deferred taxes expense:
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Origination and reversal of temporary differences |
|
$ |
(40,147,243 |
) |
|
$ |
(6,300,795 |
) |
Change in unrecognized deductible temporary differences |
|
|
35,548,666 |
|
|
|
10,902,135 |
|
Deferred tax (recovery) expense |
|
$ |
(4,598,577 |
) |
|
$ |
4,601,340 |
|
Reconciliation of effective tax rate:
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
$ |
(173,192,200 |
) |
|
$ |
(56,261,922 |
) |
|
|
|
|
|
|
|
|
|
Basic combined Canadian statutory income tax rate 1 |
|
|
26.50 |
% |
|
|
26.58 |
% |
Income tax |
|
$ |
(45,895,933 |
) |
|
$ |
(14,954,419 |
) |
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
Change in unrecognized deductible temporary differences |
|
|
35,548,666 |
|
|
|
10,902,135 |
|
Permanent difference on impairment on goodwill |
|
|
1,322,012 |
|
|
|
4,525,915 |
|
Non deductible and tax exempt items |
|
|
(2,122,277 |
) |
|
|
— |
|
Non-deductible stock-based compensation |
|
|
3,489,768 |
|
|
|
4,410,842 |
|
Difference in statutory tax rates of foreign subsidiaries |
|
|
3,673,690 |
|
|
|
(190,567 |
) |
Other permanent differences and other |
|
|
(614,503 |
) |
|
|
(92,566 |
) |
Total tax expense |
|
$ |
(4,598,577 |
) |
|
$ |
4,601,340 |
|
|
1 |
The Canadian combined statutory income tax rate has decreased due to a reduction in the provincial statutory income tax rate. |
Recognized deferred tax assets and liabilities:
The details of changes of deferred income taxes are as follows for the year ended March 31, 2021:
|
|
Balance as at |
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
Balance as at |
|
|||
|
|
March 31, |
|
|
Business |
|
|
exchange |
|
|
Recognized in |
|
|
March 31, |
|
|||||
|
|
2020 |
|
|
Acquisition |
|
|
effect |
|
|
net income |
|
|
2021 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax losses carried forward |
|
$ |
7,933,206 |
|
|
$ |
6,972,625 |
|
|
$ |
(549,926 |
) |
|
$ |
(1,648,432 |
) |
|
$ |
12,707,473 |
|
Research and development expenses |
|
|
311,911 |
|
|
|
— |
|
|
|
— |
|
|
|
(311,911 |
) |
|
|
— |
|
Intangible assets |
|
|
(327,848 |
) |
|
|
(6,701,220 |
) |
|
|
22,726 |
|
|
|
(306,899 |
) |
|
|
(7,313,241 |
) |
Right-of-use assets |
|
|
(349,530 |
) |
|
|
(267,373 |
) |
|
|
24,229 |
|
|
|
(248,986 |
) |
|
|
(841,660 |
) |
Goodwill |
|
|
(7,055,900 |
) |
|
|
— |
|
|
|
489,112 |
|
|
|
6,566,788 |
|
|
|
— |
|
Property, plant and equipment |
|
|
(4,656,049 |
) |
|
|
(4,032 |
) |
|
|
322,756 |
|
|
|
579,081 |
|
|
|
(3,758,244 |
) |
Lease liabilities |
|
|
207,881 |
|
|
|
— |
|
|
|
(14,410 |
) |
|
|
(193,471 |
) |
|
|
— |
|
Tax credits receivable |
|
|
(48,885 |
) |
|
|
— |
|
|
|
— |
|
|
|
59 |
|
|
|
(48,826 |
) |
Prepaid royalty income |
|
|
(1,029,892 |
) |
|
|
— |
|
|
|
— |
|
|
|
441,352 |
|
|
|
(588,540 |
) |
Warrants |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other assets |
|
|
— |
|
|
|
— |
|
|
|
122,042 |
|
|
|
(279,004 |
) |
|
|
(156,962 |
) |
|
|
$ |
(5,015,106 |
) |
|
$ |
— |
|
|
$ |
416,529 |
|
|
$ |
4,598,577 |
|
|
$ |
— |
|
45
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
The details of changes of deferred income taxes are as follows for the year ended March 31, 2020:
|
|
Balance as at |
|
|
Foreign |
|
|
|
|
|
|
Balance as at |
|
|||
|
|
March 31, |
|
|
exchange |
|
|
Recognized in |
|
|
March 31, |
|
||||
|
|
2019 |
|
|
effect |
|
|
net income |
|
|
2020 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax losses carried forward |
|
$ |
5,926,010 |
|
|
$ |
104,541 |
|
|
$ |
1,902,655 |
|
|
$ |
7,933,206 |
|
Research and development expenses |
|
|
244,173 |
|
|
|
— |
|
|
|
67,738 |
|
|
|
311,911 |
|
Intangible assets |
|
|
(1,041,732 |
) |
|
|
27,293 |
|
|
|
686,591 |
|
|
|
(327,848 |
) |
Right-of-use assets |
|
|
— |
|
|
|
(5,165 |
) |
|
|
(344,365 |
) |
|
|
(349,530 |
) |
Goodwill |
|
|
— |
|
|
|
(311,098 |
) |
|
|
(6,744,802 |
) |
|
|
(7,055,900 |
) |
Property, plant and equipment |
|
|
(3,813,728 |
) |
|
|
(37,777 |
) |
|
|
(804,544 |
) |
|
|
(4,656,049 |
) |
Lease liabilities |
|
|
— |
|
|
|
5,621 |
|
|
|
202,260 |
|
|
|
207,881 |
|
Tax credits receivable |
|
|
(40,555 |
) |
|
|
— |
|
|
|
(8,330 |
) |
|
|
(48,885 |
) |
Prepaid royalty income |
|
|
(1,471,349 |
) |
|
|
— |
|
|
|
441,457 |
|
|
|
(1,029,892 |
) |
|
|
$ |
(197,181 |
) |
|
$ |
(216,585 |
) |
|
$ |
(4,601,340 |
) |
|
$ |
(5,015,106 |
) |
As at March 31, 2021, no deferred tax liability was recognized for temporary differences arising from investments in subsidiaries because the Corporation controls the decisions affecting the realization of such liabilities and it is probable that the temporary differences will not reverse in the foreseeable future.
As at March 31, 2021, the amounts and expiry dates of tax attributes and temporary differences, for which no tax assets have been recognized, which are available to reduce future years’ taxable income were as follows. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Corporation can utilise the benefits there from.
|
|
Federal |
|
|
Provincial |
|
||
Tax losses carried forward |
|
|
|
|
|
|
|
|
2032 |
|
$ |
— |
|
|
$ |
— |
|
2033 |
|
|
1,827,000 |
|
|
|
— |
|
2034 |
|
|
14,786,000 |
|
|
|
8,091,000 |
|
2035 |
|
|
7,876,000 |
|
|
|
7,522,000 |
|
2036 |
|
|
21,426,000 |
|
|
|
22,875,000 |
|
2037 |
|
|
11,667,000 |
|
|
|
11,667,000 |
|
2038 |
|
|
15,708,000 |
|
|
|
15,703,000 |
|
2039 |
|
|
23,953,000 |
|
|
|
24,577,000 |
|
2040 |
|
|
46,997,000 |
|
|
|
55,464,000 |
|
2041 |
|
|
101,989,000 |
|
|
|
101,301,000 |
|
|
|
$ |
246,229,000 |
|
|
$ |
247,200,000 |
|
|
|
|
|
|
|
|
|
|
Research and development expenses, without time limitation |
|
$ |
11,415,368 |
|
|
$ |
16,091,596 |
|
|
|
|
|
|
|
|
|
|
Other deductible temporary differences, without time limitation |
|
$ |
55,502,620 |
|
|
$ |
55,645,953 |
|
As at March 31, 2021, the Corporation had realized and unrealized capital losses of $3,582,430 ($20,386,757 in 2020) that can be carried forward indefinitely, for which no deferred tax assets have been recognized. These losses may only be applied against future capital gains and the Corporation does not expect to generate capital gains in the near future.
Tax credits receivable and recoverable:
Tax credits receivable comprise research and development investment tax credits receivable from the provincial government amounting to nil ($14,336 as at March 31, 2020) which relate to qualifiable research and development expenditures under the applicable tax laws.
Tax credits recoverable of nil ($184,470 as at March 31, 2020) comprise research and development investment tax credits recoverable against income taxes otherwise payable to the federal government.
46
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Unused federal Research and Development investment tax credits, for which no benefit has been recognized, may be used to reduce future federal income taxes payable and expire as follows:
2022 |
|
$ |
76,000 |
|
2023 |
|
|
217,000 |
|
2024 |
|
|
75,000 |
|
2025 |
|
|
54,000 |
|
2026 |
|
|
91,000 |
|
2027 |
|
|
145,000 |
|
2028 |
|
|
64,000 |
|
2029 |
|
|
107,000 |
|
2030 |
|
|
206,000 |
|
2031 |
|
|
244,000 |
|
2032 |
|
|
129,000 |
|
2033 |
|
|
124,000 |
|
2034 |
|
|
106,000 |
|
2035 |
|
|
263,000 |
|
2036 |
|
|
210,000 |
|
2037 |
|
|
159,000 |
|
2038 |
|
|
63,000 |
|
2039 |
|
|
41,000 |
|
|
|
$ |
2,374,000 |
|
The amounts recorded as tax credits receivable or recoverable are subject to a government tax audit and the final amount received may differ from those recorded.
20. |
Supplemental cash flow disclosure: |
|
(a) |
Changes in operating assets and liabilities: |
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Trade and other receivables |
|
$ |
(11,283,812 |
) |
|
$ |
(5,103,348 |
) |
Prepaid expenses |
|
|
(1,249,255 |
) |
|
|
(2,895,616 |
) |
Inventories |
|
|
(23,096,133 |
) |
|
|
(4,737,264 |
) |
Trade and other payables |
|
|
15,691,747 |
|
|
|
5,165,884 |
|
Deferred revenues |
|
|
693,734 |
|
|
|
14,539 |
|
Provisions |
|
|
950,852 |
|
|
|
(1,226,873 |
) |
Changes in operating assets and liabilities |
|
$ |
(18,292,867 |
) |
|
$ |
(8,782,678 |
) |
47
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
(b) |
Non-cash transactions: |
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Acquired property, plant and equipment included in trade and other payables |
|
$ |
198,868 |
|
|
$ |
1,637,180 |
|
Intangible assets included in trade and other payables |
|
|
90,500 |
|
|
|
712,553 |
|
Intangible assets included in long-term payables |
|
|
— |
|
|
|
379,948 |
|
Provision settled in shares of the Corporation (note 12 (b)) |
|
|
— |
|
|
|
3,312,000 |
|
Deferred lease inducements against right-of-use assets for IFRS 16 transition (note 3 (q)(i)) |
|
|
— |
|
|
|
207,745 |
|
Prepaid rent applied against right-of-use assets for IFRS 16 transition (note 3 (q)(i)) |
|
|
— |
|
|
|
22,127 |
|
Settlement of pre-existing relationship included in prepaid expenses (note 4) |
|
|
— |
|
|
|
1,228,635 |
|
Common shares of Acasti held by the Corporation transferred to settle provision (note 12 (b)) |
|
|
— |
|
|
|
2,310,000 |
|
|
(c) |
Reconciliation of movements of liabilities to cash flows arising from financing activities: |
|
|
|
|
Cash (used in) provided by financing activities |
|
|
Non-cash changes |
|
|
|
|
||||||||||||||
|
Balance as at April 1, 2020 |
|
Proceeds |
|
Repayments |
|
|
Business acquisition (note 4) |
|
Accretion of interest |
|
Financing and discounted fees |
|
Effect of movements in exchange rates |
|
Balance as at March 31, 2021 |
|
||||||||
Loan |
$ |
– |
|
$ |
– |
|
$ |
– |
|
|
$ |
14,528,860 |
|
$ |
– |
|
$ |
– |
|
$ |
(317,521 |
) |
$ |
14,211,339 |
|
Facility of credit |
|
3,180,927 |
|
|
– |
|
|
(3,250,000 |
) |
|
|
– |
|
|
– |
|
|
69,073 |
|
|
– |
|
|
– |
|
Bank line of credit |
|
– |
|
|
– |
|
|
– |
|
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
Total long-term debt |
$ |
3,180,927 |
|
$ |
– |
|
$ |
(3,250,000 |
) |
|
$ |
14,528,860 |
|
$ |
– |
|
$ |
69,073 |
|
$ |
(317,521 |
) |
$ |
14,211,339 |
|
|
|
|
|
Cash (used in) provided by financing activities |
|
|
Non-cash changes |
|
|
|
|
||||||||
|
Balance as at April 1, 2019 |
|
Proceeds |
|
Repayments |
|
|
Accretion of interest |
|
Financing and discounted fees |
|
Balance as at March 31, 2020 |
|
||||||
Loan |
$ |
2,846,501 |
|
$ |
– |
|
$ |
(2,957,132 |
) |
|
$ |
110,631 |
|
$ |
– |
|
$ |
– |
|
Facility of credit |
|
– |
|
|
4,100,000 |
|
|
(850,000 |
) |
|
|
34,535 |
|
|
(103,608 |
) |
|
3,180,927 |
|
Bank line of credit |
|
620,000 |
|
|
– |
|
|
(620,000 |
) |
|
|
– |
|
|
– |
|
|
– |
|
Total long-term debt |
$ |
3,466,501 |
|
$ |
4,100,000 |
|
$ |
(4,427,132 |
) |
|
$ |
145,166 |
|
$ |
(103,608 |
) |
$ |
3,180,927 |
|
|
(a) |
Financial instruments – carrying values and fair values: |
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:
Level 1 ‒ Fair value based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
|
Level 2 ‒ |
Fair value based on inputs other than the quoted prices used in Level 1, that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); |
|
Level 3 ‒ |
Fair value based on valuation techniques which includes inputs related to the asset or liability that are not based on observable market data (unobservable inputs). |
48
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Financial assets and liabilities measured at fair value on a recurring basis are the investment in Acasti Pharma Inc. (“Acasti”), the Call Option (refer to note 4), and the liability related to warrants.
As at March 31, 2021, the Corporation has 250,000 common shares of Acasti (1,000,000 as at March 31, 2020). The investment is measured using Acasti’s stock market price, a level 1 input. The fair value of the investment in Acasti was determined to be $190,000 or $0.76 per share as at March 31, 2021 ($530,000 or $0.53 per share as at March 31, 2020).
During the year ended March 31, 2020, 2,100,000 Acasti shares held by the Corporation were transferred to settle a litigation with a Former CEO (refer to note 12 (b)) with a change in fair value loss of $525,000 and 1,964,694 Acasti shares held by the Corporation were sold for net proceeds of $5,317,770 and a change in fair value loss of $896,313. During the year ended March 31, 2021, 750,000 Acasti shares were sold on the market for a value of $532,277.
The net change in fair value of the investment including any gain or loss on the transfer or sale of the shares amounted to a $192,278 gain (2020 - $1,320,431 gain), for the year ended March 31, 2021 and was recognized in other comprehensive loss.
As at the close of the transaction with Sprout, the value of the asset related to the Call Option, presented as derivative in other assets, was determined to be $7,035,730 (USD$5.5 million), using level 3 inputs, including a discount rate of 8.9% and assuming the transaction would take place on January 1, 2023. Also, to establish the market price, the multiples selected were 2.3x for revenues and 12.0x for EBITDA, based on analysis of average and median industry multiples, and were adjusted to consider a 20% discount; the multiples to be used as per the contract are 3.0x for revenues and 15.0x for EBITDA, weighted at 50%. As at March 31, 2021, the fair value of this asset was remeasured, also using level 3 inputs, to $7,043,114 (USD$5.6 million), generating a gain on remeasurement of $105,296 accounted under revaluation of derivatives and a foreign exchange loss of $72,849 for the year ended March 31, 2021. A change in the market price multiple of revenues of 1% would impact the fair value of the call option by approximately $380,000 and a change in the discount rate of 1% would impact the fair value of the call option by approximately $120,000.
The Corporation has determined that the carrying values of its short-term financial assets and liabilities approximate their fair value 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.
The warrants were recorded at their relative fair value using a Black-Scholes pricing model. Warrants are revalued each period-end at fair value through profit and loss. To revalue the liability as at March 31, 2021, the Corporation used level 3 inputs (note 14)..
|
(b) |
Management of risks arising from financial instruments: |
In the normal course of business, the Corporation is subject to various risks relating to credit, foreign exchange, interest rate and liquidity. The Corporation manages these risk exposures on an ongoing basis. The Corporation’s management is responsible for determining the acceptable level of risk and only uses derivative financial instruments to manage existing or anticipated risks, commitments or obligations based on its past experience. The following analysis provides a measurement of risks arising from financial instruments.
|
(i) |
Credit risk: |
Credit risk is the risk of a loss if a customer or counterparty to a financial asset fails to meet its contractual obligations, and arises primarily from the Corporation’s trade receivables. The Corporation may also have credit risk relating to cash and cash equivalents and short-term investments, which are managed by dealing only with highly-rated Canadian institutions. The carrying amount of these financial assets, as disclosed in the consolidated statements of financial position, represents the Corporation’s credit exposure at the reporting date. The Corporation’s trade receivables and credit exposure fluctuate throughout the year. The Corporation’s average trade receivables and credit exposure during the year may be higher than the balance at the end of that reporting period.
As at March 31, 2021, one customer accounted for 23% of total trade accounts included in trade and other receivables. As at March 31, 2020, two customers accounted for respectively 13.3% and 11.4% of total trade accounts included in trade and other receivables.
Most of the Corporation's customers are distributors for a given territory and are privately-held 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
49
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
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 Corporation accounts for credit risk by primarily allocating specific provisions to trade accounts. During the year ended March 31, 2021, the Corporation transacted with a few new customers for which financial positions deteriorated during the year. The Corporation has recorded specific provisions related to these customers.
The aging of trade receivable balances and the allowance for doubtful accounts as at March 31, 2021 and 2020 were as follows:
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Current |
|
$ |
3,563,099 |
|
|
$ |
5,744,599 |
|
Past due 0-30 days |
|
|
1,259,657 |
|
|
|
930,050 |
|
Past due 31-120 days |
|
|
1,258,588 |
|
|
|
1,993,731 |
|
Past due over 121 days |
|
|
12,106,765 |
|
|
|
891,888 |
|
Trade receivables |
|
|
18,188,109 |
|
|
|
9,560,268 |
|
|
|
|
|
|
|
|
|
|
Less expected credit loss |
|
|
(10,525,757 |
) |
|
|
(723,623 |
) |
|
|
$ |
7,662,352 |
|
|
$ |
8,836,645 |
|
The Corporation recognizes an impairment loss allowance under IFRS 9 based on expected credit losses on trade accounts receivable. In its assessment, management estimates the expected credit losses based on actual credit loss experience and informed credit assessment, taking into consideration current conditions and forward-looking information.
The movement in expected credit loss in respect of trade receivables was as follows:
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
723,623 |
|
|
$ |
616,846 |
|
Bad debt expenses |
|
|
10,287,505 |
|
|
|
132,283 |
|
Foreign exchange loss |
|
|
(30,660 |
) |
|
|
8,896 |
|
Reversal of the expected credit loss |
|
|
(454,711 |
) |
|
|
(34,402 |
) |
Balance, end of year |
|
$ |
10,525,757 |
|
|
$ |
723,623 |
|
|
(ii) |
Foreign exchange rate risk: |
The Corporation is exposed to the financial risk related to the fluctuation of foreign exchange rates and the degrees of volatility of those rates. Foreign currency risk is limited to the portion of the Corporation's business transactions denominated in currencies other than the Canadian dollar. Fluctuations related to foreign exchange rates could cause unforeseen fluctuations in the Corporation's operating results.
Approximately 61% (2020 – 35%) of the Corporation’s revenues are in US dollars. Most of the expenses, including for the purchase of raw materials are made in US dollars. There is a financial risk related to the fluctuation in the value of the US dollar in relation to the Canadian dollar.
50
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
The following table provides an indication of the Corporation’s significant foreign exchange currency exposures as stated in US dollars at the following dates:
|
|
|
March 31, |
|
|
|
March 31, |
|
|
||
|
|
|
2021 |
|
|
|
2020 |
|
|
||
|
|
|
US$ |
|
|
|
US$ |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
$ |
55,336,399 |
|
|
|
$ |
8,422,874 |
|
|
Trade and other receivables |
|
|
$ |
1,742,393 |
|
|
|
$ |
4,224,026 |
|
|
Trade and other payables and lease liabilities |
|
|
$ |
(216,583 |
) |
|
|
$ |
(7,115,681 |
) |
|
Long-term payables |
|
|
$ |
— |
|
|
|
$ |
(448,554 |
) |
|
Liability related to warrants |
|
|
$ |
(7,863,965 |
) |
|
|
$ |
— |
|
|
|
|
|
$ |
48,998,244 |
|
|
|
$ |
5,082,665 |
|
|
The following exchange rates are those applicable for the years ended March 31, 2021 and 2020:
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
March 31, |
|
||
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
2020 |
|
||
|
|
Average |
|
|
Reporting |
|
|
Average |
|
|
Reporting |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$ per CAD |
|
|
1.3223 |
|
|
|
1.2562 |
|
|
|
1.3306 |
|
|
|
1.4062 |
|
Based on the Corporation’s foreign currency exposures noted above, varying the above foreign exchange rate to reflect a 5% strengthening of the US dollar would have increased (decreased) the net loss as follows, assuming that all other variables remained constant:
|
|
|
March 31, |
|
|
|
March 31, |
|
||
|
|
|
2021 |
|
|
|
2020 |
|
||
|
|
|
US$ |
|
|
|
US$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net loss |
|
|
$ |
2,242,060 |
|
|
|
$ |
254,132 |
|
An assumed 5% weakening of the foreign currency would have had an equal but opposite effect on the basis that all other variables remained constant.
|
(iii) |
Interest rate risk: |
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market rates.
The Corporation’s exposure to interest rate risk as at March 31, 2021 and 2020 is as follows:
|
|
Cash and cash equivalents |
Short-term fixed interest rate |
Short-term investments |
Short-term fixed interest rate |
Loans and borrowings |
Fixed and variable interest rates |
|
|
The risk that the Corporation will realize a loss as a result of the decline in the fair value of its short-term investments is limited because these short-term investments have short-term maturities and are generally held to maturity.
The capacity of the Corporation to reinvest the short-term amounts with equivalent returns will be impacted by variations in short-term fixed interest rates available in the market.
The fixed rate borrowings expose the Corporation to a fair value risk but not cash flow interest rate risk.
51
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Based on currently outstanding loans and borrowings at variable rates, an assumed 0.5% interest rate increase during the year ended March 31, 2021 would have increased consolidated net loss by $62,870 with an equal opposite effect for an assumed 0.5% decrease.
|
(iv) |
Liquidity risk: |
Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they fall due. The Corporation manages liquidity risk through the management of its capital structure and financial leverage, as outlined in note 23. It also manages liquidity risk by continuously monitoring actual and projected cash flows. The Audit Committee and the Board of Directors review and approve the Corporation's operating budgets, and review certain material transactions outside the normal course of business.
The following are the contractual maturities of financial liabilities as at March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
Carrying |
|
|
Contractual |
|
|
Less than |
|
|
1 to |
|
|
More than |
|
|||||
Required payments per year |
|
amount |
|
|
cash flows |
|
|
1 year |
|
|
5 years |
|
|
5 years |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables and long-term payables |
|
$ |
24,975,764 |
|
|
$ |
24,975,764 |
|
|
$ |
24,975,764 |
|
|
$ |
– |
|
|
$ |
– |
|
Lease liabilities |
|
|
3,915,521 |
|
|
|
3,866,307 |
|
|
|
690,071 |
|
|
|
3,176,236 |
|
|
|
— |
|
Loans and borrowings * |
|
|
14,211,339 |
|
|
|
16,130,985 |
|
|
|
1,256,200 |
|
|
|
14,874,785 |
|
|
– |
|
|
|
|
$ |
43,102,624 |
|
|
$ |
44,973,056 |
|
|
$ |
26,922,035 |
|
|
$ |
18,051,021 |
|
|
$ |
– |
|
|
* |
Includes interest payments to be made at the contractual rate. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
|
|
Carrying |
|
|
Contractual |
|
|
Less than |
|
|
1 to |
|
|
More than |
|
|||||
Required payments per year |
|
amount |
|
|
cash flows |
|
|
1 year |
|
|
5 years |
|
|
5 years |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables and long-term payable |
|
$ |
13,007,109 |
|
|
$ |
13,007,109 |
|
|
$ |
12,451,669 |
|
|
$ |
555,440 |
|
|
$ |
– |
|
Loans and borrowings * |
|
|
3,180,927 |
|
|
|
3,208,864 |
|
|
|
3,208,864 |
|
|
|
– |
|
|
– |
|
|
|
|
$ |
16,188,036 |
|
|
$ |
16,215,973 |
|
|
$ |
15,660,533 |
|
|
$ |
555,440 |
|
|
$ |
– |
|
|
* |
Includes interest payments to be made at the contractual rate. |
|
(a) |
Commitments: |
|
(i) |
On November 2, 2017, Neptune entered into an exclusive commercial agreement for a speciality ingredient in combination with cannabinoids coming from cannabis or hemp for a period of 11 years with minimum annual volumes of sales starting in 2019. On January 31, 2020, Neptune entered into other commercial agreements for the same speciality ingredient in combination with fish oil products for a period of 8 years in replacement of a previous terminated agreement (refer to note 13 (a)). According to these agreements signed with the same third-party’s beneficial owner, Neptune will pay royalties on sales. To maintain the exclusivity, Neptune must reach minimum annual volumes of sales for the duration of the agreements for which minimum volumes are being reached. The corresponding total remaining amount of minimum royalties is $5,100,383. |
|
(ii) |
On December 21, 2018, Neptune entered into a 5-year IP licencing and capsule agreement with Lonza pursuant to which royalties based on net sales of capsules will be payable to Lonza (refer to note 13 (b)). During the fourth quarter of fiscal year 2021, Lonza and Neptune entered into an amendment to the agreement, with an effective date of August 1, 2020, which removed all minimum volume requirements, extended the term of the agreement to July 31, 2025 and waived certain penalties that would have been payable to Lonza. |
|
(iii) |
As of March 31, 2021, Neptune has purchase commitments in the approximate amount of $283,189 related to projects that are capital in nature. |
|
(iv) |
During the year ended March 31, 2019, the Corporation has entered into a contract for security of its cannabis manufacturing facility. This contract results in an annual expense of approximately $172,000 for 5 years. The Corporation has also entered into various other contracts and the remaining commitment related to those contracts amounts to $1,258,933 as of March 31, 2021. |
52
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
(v) |
As at March 31, 2021, the Corporation has agreements with various partners to execute research and development projects for a total remaining amount of $727,864. |
|
(vi) |
On April 14, 2020, the Corporation signed a two-year agreement with The Jane Goodall Institute (“JGI”) in which Neptune agreed to donate 5% of the net sales of products branded as Forest Remedies with the JGI identification to support continued research, conservation and education efforts. In the year ended March 31, 2021, the donations on sales are negligeable. |
|
(vii) |
On February 10, 2021, as part of the consideration for the acquisition of a 50.1% interest in Sprout Foods, Neptune agreed to guarantee a $12,562,000 (USD$10.0 million) note issued by Sprout in favor of Morgan Stanley Expansion Capital (refer to note 4 (b)). |
|
(viii) |
On May 28, 2021, subsequent to the year ended March 31, 2021, Sprout entered into a licence agreement with Moonbug Entertainment Limited (“Moonbug”), pursuant to which it would license certain intellectual property, relating to characters from the children’s entertainment property CoComelon, for use on certain Sprout products through December 31, 2023 in exchange for a royalty on net sales. Sprout is required to make minimum guaranteed payments to Moonbug of $260,000 (USD$200,000) over the term of the agreement. The agreement may be extended for an additional three years in exchange for an additional minimum guaranteed payment to Moonbug of $260,000 (USD$200,000) over the extended term of the agreement. Royalties payable under the agreement are set off against minimum guaranteed payments made. |
|
(b) |
Contingencies: |
In the normal course of operations, the Corporation is involved in various claims and legal proceedings. The most significant of which are ongoing are as follows:
|
(i) |
On March 21, 2019, the Corporation received a judgment from the Superior Court of Québec (the “Court”) regarding certain previously disclosed claims made by a corporation controlled by a Former CEO against the Corporation in respect of certain royalty payments alleged to be owed and owing to a Former CEO pursuant to the terms of an agreement entered into on February 23, 2001 between Neptune and a Former CEO (the “Agreement”). The Court declared that under the terms of the agreement, the Corporation is required to pay royalties of 1% of its revenues in semi-annual instalments, for an unlimited period. Based on currently available information, a provision of $1,871,555 has been recognized (refer to note 12 (a)) for this claim as of March 31, 2021 ($1,115,703 as at March 31, 2020). |
|
(ii) |
In September 2020, Neptune submitted a claim and demand for arbitration against Peter M. Galloway and PMGSL Holdings, LLC (collectively “PMGSL”) in accordance with the Asset Purchase Agreement (“APA”) dated May 9, 2019 between, among others, Neptune and PMGSL. Separately, PMGSL submitted a claim and demand for arbitration against Neptune. The Neptune claims and PMGSL claims have been consolidated into a single arbitration and each are related to the purchase by Neptune of substantially all of the assets of the predecessor entities of PMGSL Holdings, LLC. Neptune is claiming, among other things, breach of contract and negligent misrepresentation by PMGSL in connection with the APA and is seeking, among other things, equitable restitution and any and all damages recoverable under law. PMGSL is claiming, among other things, breach of contract by Neptune and is seeking, among other things, payment of certain compensation contemplated by the APA. While Neptune believes there is no merit to the claims brought by PMGSL, a judgment in favor of PMGSL may have a material adverse effect on our business and Neptune intends to continue vigorously defending itself. Based on currently available information, a provision of $754,440 has been recognized for this case as at March 31, 2021. |
|
(iv) |
On February 4, 2021, the United States House of Representatives Subcommittee on Economic and Consumer Policy, Committee on Oversight and Reform (the “Subcommittee”), published a report, “Baby Foods Are Tainted with Dangerous Levels of Arsenic, Lead, Cadmium, and Mercury” (the “Report”), which stated that, with respect to Sprout, “Independent testing of Sprout Organic Foods” has confirmed that their baby foods contain concerning levels of toxic heavy metals.” The Report further stated that after receiving reports alleging high levels of toxic metals in baby foods, the Subcommittee requested information from Sprout but did not receive a response. |
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 is cooperating with the Subcommittee requests.
53
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
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 and is producing documents to the NMAG on March 10, 2021 as requested by the NMAG. The pending inquiries and potential findings could result in material litigation and may have a material adverse effect on our business, financial condition, or results of operations.
|
(v) |
On March 16, 2021, a purported shareholder class action was filed in United States District Court for the Eastern District of New York against the Company and certain of its current and former officers alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The Corporation believes these claims are without merit and intends to vigorously defend itself. |
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.
23. |
Capital management: |
The Corporation’s objective in managing capital is to ensure sufficient liquidity to develop its technologies and commercialize its products, finance its research and development activities, including the cannabis activities, selling, general and administrative expenses, its overall capital expenditures and those related to its debt reimbursement. The Corporation also needs to ensure adequate financing to support M&A activities. The Corporation is not exposed to external requirements by regulatory agencies regarding its capital.
In recent years, the Corporation has financed its liquidity needs primarily through the cash coming from the sale of the krill business, as well as the issuance of debt, warrants and common shares through private placements, an At-The-Market Offering and a Direct Offering. The Corporation optimizes its liquidity needs by non-dilutive sources whenever possible, including research tax credits, investment tax credits, interest income and revenues from strategic partnerships, collaboration agreements and government assistance (including the Canada Emergency Wage Subsidy).
The Corporation defines capital as being the total of shareholders’ equity, liability related to warrants and loans and borrowings.
The Corporation’s primary objectives when managing capital are to:
|
• |
Ensure that the Corporation will continue as a going concern while providing an appropriate investment return to its shareholders; |
|
• |
Optimize leverage position of the Biodroga subsidiary by generating positive cash flows and reducing the short-term debt; |
|
• |
Have sufficient liquidity until the generation of positive cash-flows from the cannabis activities while preserving a financial flexibility in order to continue to develop unique extracts and formulations in high potential growth areas such as medical and wellness cannabinoid-based products; |
|
• |
Develop a sustainable and profitable portfolio of branded products with a focus on good-for-you, good-for-the-planet consumer profile and accelerate their brand equity in the global marketplace. |
|
• |
Maintain financial flexibility in order to have access to capital in the event of future acquisitions. |
As at March 31, 2021 cash amounted to $75,167,100 (2020 – $16,577,076).
54
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
The Corporation’s short-term investment as at March 31, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
March 31, |
|
||
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
2020 |
|
||
|
|
Maturity |
|
|
|
|
|
|
|
|
|
Maturity |
|
|
|
|
|
|
|
|
|
|
date |
|
Rate |
|
|
Amount |
|
|
date |
|
Rate |
|
|
Amount |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investment |
|
April 28, 2021 |
|
|
1.40 |
% |
|
|
24,050 |
|
|
April 28, 2020 |
|
|
1.40 |
% |
|
|
36,000 |
|
24. |
Operating segments: |
As of April 1, 2020, the Corporation revised its management structure and performance is now measured based on a single segment, which is the consolidated level, as the previous segment income (loss) before corporate expenses is no longer used in internal management reports that are reviewed by the Corporation’s Chief Operating Decision Maker, management believing that such information is no longer relevant in evaluating the results of the Corporation.
In the prior year, the Corporation’s reportable segments were the nutraceutical and the cannabis segments.
As opposed to a change in reportable segments involving multiple segments, where the comparatives for the previous period would be restated to show the results of the comparative period according to the new reportable segments, there is no need to restate the comparatives, nor show the reportable segments, as the Corporation’s Chief Operating Decision Maker uses the consolidated statement of financial position and the consolidated statement of loss and comprehensive loss to evaluate the results of the Corporation.
|
(a) |
Geographical information: |
Revenue is attributed to geographical locations based on the origin of customers’ location.
|
|
Years ended |
|
|||||
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Canada |
|
$ |
17,763,182 |
|
|
$ |
14,525,570 |
|
United States |
|
|
27,579,333 |
|
|
|
14,936,087 |
|
Other countries |
|
|
1,467,327 |
|
|
|
116,147 |
|
|
|
$ |
46,809,842 |
|
|
$ |
29,577,804 |
|
The Corporation’s property plant and equipment located in Canada are in the amount of $44,776,974 (2020 - $54,212,677) and the property plant and equipment located in the United States of America are in the amount of $2,136,714 (2020 - $5,815,897).
The Corporation’s intangible assets located in Canada are in the amount of $4,764,744 (2020 - $6,196,787) and the intangible assets located in the United States of America are in the amount of $27,842,225 (2020 - $19,321,500).
The Corporation’s goodwill located in Canada is of $3,283,626 (2020 - $3,283,626) and the goodwill located in the United States is of $28,690,900 (2020 - $39,049,548).
|
(b) |
Non-cash consideration: |
During the year ended March 31, 2021, the Corporation realized revenues for non-cash consideration amounting to $nil (2020 – 168,955).
|
(c) |
Information about major customers: |
During the year ended March 31, 2021, the Corporation realized revenues amounting to $6,957,915 from one customer accounting for 14.86% of consolidated revenues.
During the year ended March 31, 2020, the Corporation realized revenues amounting to $7,248,853 from two customers accounting for 24.51% of consolidated revenues.
55
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
|
(d) |
Revenues: |
The Corporation derives revenue from the sales of goods which are recognized at a point in time and the processing services which are recognized over time as follows:
|
|
|
Years ended |
|
|||||
|
|
|
March 31, |
|
|
March 31, |
|
||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
At a point in time |
|
|
|
|
|
|
|
|
|
Nutraceutical products |
|
|
$ |
16,110,060 |
|
|
$ |
19,647,501 |
|
Cannabis and hemp products |
|
|
|
416,296 |
|
|
|
636,630 |
|
Innovation products |
|
|
|
14,492,883 |
|
|
|
- |
|
Food and beverages products |
|
|
|
3,177,585 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
Over time |
|
|
|
|
|
|
|
|
|
Processing services |
|
|
|
11,107,352 |
|
|
|
7,438,440 |
|
|
|
|
$ |
45,304,176 |
|
|
$ |
27,722,571 |
|
25. |
Related parties: |
Key management personnel compensation:
The key management personnel are the officers of the Corporation and members of the Board of Directors. They control 5% of the voting shares of the Corporation as at March 31, 2021 (9% as at March 31, 2020).
Key management personnel compensation includes the following for the years ended March 31, 2021 and 2020:
|
|
Years ended |
|
|||||
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Short-term benefits |
|
$ |
9,628,918 |
|
|
$ |
5,680,693 |
|
Share-based compensation costs |
|
|
12,352,218 |
|
|
|
15,787,235 |
|
Severance (i) |
|
|
536,398 |
|
|
|
272,788 |
|
Long-term incentive (ii) |
|
|
1,108,350 |
|
|
|
1,150,298 |
|
|
|
$ |
23,625,885 |
|
|
$ |
22,891,014 |
|
|
(i) |
During the year ended March 31, 2021, an expense $332,266 (2020 - $272,788) was recorded related to the change in the management team as part of termination severance. |
|
|
(ii) |
According to the employment agreement with the CEO, a long-term incentive of $18,843,000 (US$15 million million) is payable if the Corporation’s US market capitalization is at least $1.3 billion (US$1 billion) during its term agreement. Based on the risk-neutral Monte Carlo simulation, the Corporation could reach this market capitalization in 5.56 years and therefore the incentive is being recognized over the estimated period to achievement of 5.56 years (2020 – 7.64 years). The assumptions used in the simulation include a risk free-rate of 1.74% and a volatility of 66.46% (respectively 0.70% and 67.9% for the previous year). As at March 31, 2021, the liability related to this long-term incentive of $2,258,648 ($1,217,769 as at March 31, 2020) is presented under Other liability in the consolidated statement of financial situation. During the year ended March 31, 2021, an expense of $1,108,350 (2020 - $1,150,298) was recorded in connection with the long-term incentive under selling, general and administrative expenses in the consolidated statement of loss and comprehensive loss. |
|
On November 11, 2019, Neptune announced that it 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.
56
NEPTUNE wellness solutions INC.
Notes to Consolidated Financial Statements
For the years ended March 31, 2021 and 2020
Under this strategic product development partnership, IFF will leverage its intellectual property for taste, scent and nutrition to provide essential oils and product development resources. Neptune will leverage its proprietary cold ethanol extraction processes and formulation intellectual property to deliver high quality, full- and broad-spectrum extracts for the development, manufacture and commercialization of hemp-derived products, infused with essential oils, for the cosmetics, personal care and household cleaning products markets.
Neptune will be responsible for the marketing and sale of the products. Neptune will receive amounts from product sales and in turn will pay a royalty to each of IFF and App Connect associated with the sales of co-developed products. The payment of royalties to App Connect, subject to certain conditions, has been approved by the TSX.
During the year ended March 31, 2021, the Corporation recorded a negligeable amount of royalty expense pursuant to the co-development contract. No royalties were paid to date.
The warrants issued in exchange of services provided by IFF amounted to $700,962 during the year ended March 31, 2021 (2020 - $388,281)
57
Exhibit 99.3
2021 ANNUAL REPORT
NASDAQ/TSX: NEPT
1
management discussion and analysis
2
management discussion and analysis
MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS
AND FROM THE PRESIDENT & CHIEF EXECUTIVE OFFICER
On behalf of the Board of Directors and the Management Team, we are proud to present the annual report of the 2021 fiscal year to our shareholders.
The last year was full of operating challenges in the face of a global pandemic, which tested us in ways few could have imagined. Those challenges also tested our resilience, which made our employees and operations much stronger, making us better prepared for a fast-changing world. We responded with speed and agility, transforming our entire business structure, while improving our financial results and strengthening our balance sheet. Few things rival the power of humans working together to bring about great change. At Neptune Wellness Solutions, we are on a mission to change consumption behavior through environmentally friendly and innovative products that create a positive impact on the world so you can live longer and feel better. Together, we can build a more sustainable world.
Despite the COVID-19 pandemic, we still delivered significant top-line growth, by developing new products and acquiring a controlling interest in Sprout Foods, which allowed us to enter new product categories and geographic markets.
However, the most important point is that Neptune completed its strategic transition to a diversified Consumer Packaged Goods (“CPG”) company, with revenues of $46.8 million in fiscal year 2021 compared to revenues of $29.6 million for the year ended March 31, 2020, an increase of $17.2 million or 58%. In addition, Neptune acquired a controlling stake in Sprout Foods and gained a new strategic shareholder in Morgan Stanley Expansion Capital. Finally, Neptune raised a total of $161.8 million in gross proceeds from equity financings, demonstrating the strong support from our investors for our strategic transition to a CPG company.
Our vision is to provide better-for-you and better-for-the-planet products to consumers. Looking forward, we will continue to grow our brands organically across all our verticals through innovative new products and increased distribution. Additionally, the company will continue to complement its strong organic growth with strategic, accretive acquisitions. Our strategy to build leading health and wellness brands should lead to improved margins and returns, and ultimately outsized shareholder value for our investors. All of this, with a focus on diligent execution.
We want to thank our shareholders for their continued support during this most challenging year. We could not be more excited about Neptune’s future, and we hope you will continue to share this amazing journey with us.
Finally, we want to thank our stakeholders, our business partners, our directors, and our team for their support.
Have a good read!
/s/ Michael Cammarata |
|
/s/ John Moretz |
Michael Cammarata |
|
John Moretz |
President, CEO & Board Member |
|
Chairman of the Board |
|
|
|
|
|
|
3
management discussion and analysis
BOARD OF DIRECTORS AND EXECUTIVE MANAGEMENT
John Moretz |
|
Chairman of the Board |
|
Mr. Moretz currently serves as Chief Executive Officer and President of Moretz Marketing, LLC, and is Managing Director of Kathy Ireland, LLC. In addition, he is the Managing Director of various real estate entities, including LaMoe, LLC, and Moretz Mills, LLC. Mr. Moretz spent 39 years in the textile industry building and marketing numerous consumer brands. He served as the Chairman and Chief Executive Officer of Gold Toe Moretz Holdings Corp. and its subsidiaries prior to its acquisition by Gildan Activewear Inc. in 2012. In 1987 Mr. Moretz founded Moretz Marketing to create and manage lifestyle brands licensing opportunities. He serves on the following boards: Neptune Wellness Solutions, LED Technologies, Blowing Rock Brewery, and McCubbin Hosiery, LLC. |
|
Michael Cammarata |
President, CEO & Board Member |
|
Michael became President and CEO of Neptune Wellness Solutions in July 2019. Michael is the founder of Random Occurrence, a venture capital and private equity firm. He invested in and cofounded Schmidt’s Naturals, one of the world’s fastest growing wellness brands, leading it from fledgling start-up to acquisition in 2017 by Unilever and onto record breaking growth in 2018. He remained CEO of Schmidt’s Naturals until June 2019, leading its rapid expansion into new and innovative products, retailers and global markets. Michael is a new breed of unconventional CEO with a personal mission to invest and scale companies globally that will make sustainable innovation and modern wellness solutions accessible to the world. He believes that natural products are the future and that every person deserves natural products that work and minimize their harm to people, the planet and animals. Through all his investments, Michael is looking toward future technologies, including AI and machine learning to create stronger connections and personalized products for customers. He is a passionate advocate for plant-based solutions a leader for sustainability and has pushed for an end to animal testing in cosmetics. Raised in New York, Michael’s dyslexia made school challenging, but that perspective allowed him to identify opportunities others missed. He became a technology and marketing wunderkind by his mid-teens. |
Dr. Ronald Denis |
|
Director |
|
Dr. Ronald Denis is Chief of Surgery and Director of the Trauma Program at Hôpital du Sacré-Coeur and Centre intégré universitaire de santé et des services sociaux in Montreal. Dr. Denis is also the Medical Co-Director of the Canadian Formula 1 Grand Prix. Dr. Denis sits on several scientific boards and management committees. |
Joseph Buaron |
|
Director |
|
Mr. Buaron is Co-founder and CTO of goPeer, Canada’s first regulated consumer peer-to-peer lender, he additionally serves as Chief Strategy Officer to Loti Wellness Inc., a Canadian self-care consumer brand. Prior, Mr. Buaron served as CTO to Unilever’s, Schmidt’s Naturals, where he led the technology, AI, digital marketing and consumer support divisions through transition from start-up to enterprise, and subsequently through the acquisition by Unilever, and the integration that followed. Mr. Buaron is a seasoned CTO with over two-decades related experience as an entrepreneur, investor, programmer, solutions architect, and DevOps engineer. His passion for technology reflects his recognition for the tremendous impact it has on our lives and its potential for creating a better tomorrow. Immersed in technology, Mr. Buaron strives to provide vision, leadership, form relationships, and eliminate barriers to allow the brightest minds to flourish. |
4
management discussion and analysis
|
Michael de Geus |
Director |
|
Mr. de Geus is a highly accomplished security executive with domestic and international cyber investigative and physical security experience. He is the founder and Chief Executive Officer of Leatherback Gear, LLC., a producer of bullet proof backpacks. He also served as a Special Agent in federal law enforcement with the Department of Homeland Security and has served on various assignments both physically and with cyber security since 2008. Previously, he served as the Director of Sales at Koro Sun Report in the Fiji Islands and as a consultant for MD Consulting, working on various projects from developing branding and new store layouts to helping with various start-up companies. Mr. de Geus is a Ph.D. Candidate in Public Policy specializing in Homeland Security at Walden University, holds a Master of Science in International Relations from the Troy State University and holds a Bachelor of Science in Criminal Justice from California State University Fullerton. |
|
Frank Rochon |
Director |
|
Mr. Rochon has built a distinguished career over the past 30 years, serving in numerous key leadership positions with the past 20 years at Deloitte Canada. He most recently served as Vice Chairman and Managing Partner of Clients and Industries leading Deloitte Canada’s client and market portfolio, overseeing the firm’s most significant client relationships and opportunities. Mr. Rochon is widely sought after for his business insights and hands-on experience in all aspects of professional services within the Canadian business landscape. At Deloitte, he served in many roles such as Regional Managing Partner roles and also as Deloitte Canada M&A Executive Leader. In addition, Mr. Rochon served on the Deloitte Global executive leadership and the Canadian Board of Directors. Mr. Rochon holds a degree in Business from the University of Ottawa. |
|
Jane Pemberton |
Director |
|
Ms. Pemberton is a growth driven, brand loving, digital first executive with over 25 years of experience building and investing in highly profitable business with a focus on “good for you” businesses around the world. Ms. Pemberton is currently the Operating Advisor at North Castle Partners, a leading private equity firm focused exclusively in the Health, Wellness & Active Living Sector. Prior to North Castle Partners, she served in multiple leadership roles at Gaiam, The Mommy & Me Company, Fox Filmed Entertainment and The Walt Disney Company. Ms. Pemberton currently serves on the Board of Directors for ProSupps USA and The Escape Game. |
|
Dr. Toni Rinow |
Chief Financial Officer & Global Operating Officer |
|
Dr. Toni Rinow is a catalyst for growth and expansion and is well known for accelerating revenue streams through acquisitions, corporate development, sales and marketing, and financings. With a proven track record of success in international corporate development and the sales and financing of companies in the healthcare market, Toni has successfully facilitated the negotiation of international corporate alliances valued over $100M and overseen a life science investment portfolio with $400M under management. She was appointed General Manager of Jubilant DraxImage in 2018, a global leader in nuclear medicine with $200M in sales in 22 countries. Her professional career has included leadership roles in both public and private pharmaceutical and healthcare organizations, where she spearheaded acquisitions across Canada, Latin America, and India and supported the transition of two biotechnology companies to an initial public offering at the Toronto Stock Exchange. With a focus on strategic growth, Toni is that rare C-level business manager with blended business expertise in finance, science and engineering. In addition to a double Masters of Business Administration and Accounting from McGill University, she holds a doctorate in physical chemistry from the Université de Montréal (Ph.D), and a chemical engineering degree from the European Higher Institute of Chemistry in Strasbourg, France. As a forward thinker, she is trained in Artificial Intelligence from MIT. Toni believes in giving back to the community and sits on Board of Directors for non-for-profit organizations. |
5
management discussion and analysis
MANAGEMENT DISCUSSION AND ANALYSIS
FOR THE YEARS ENDED MARCH 31, 2021 AND 2020
INTRODUCTION
This management discussion and analysis (‟MD&A”) comments on the consolidated financial results and the consolidated financial situation of Neptune Wellness Solutions Inc. (‟Neptune”, the ‟Corporation” or the ‟Company”) for the three-month periods and years ended March 31, 2021 and 2020. It is based on the audited consolidated financial statements of the Corporation, which were prepared in accordance with International Financial Reporting Standards (‟IFRS”), as issued by the International Accounting Standards Board (‟IASB”). Unless otherwise noted, all amounts in this report refer to Canadian dollars. References to ‟CAD” and ‟USD” refer to Canadian dollars and US dollars, respectively. This MD&A should be read in conjunction with our audited consolidated financial statements for the years ended March 31, 2021 and 2020. Additional information about the Corporation, as well as registration statements and other public filings, are available on SEDAR at www.sedar.com or on EDGAR at www.sec.gov/edgar.shtml.
In accordance with its terms of reference, the Audit Committee of the Corporation’s Board of Directors reviews the contents of the MD&A and recommends its approval to the Board of Directors. The Board of Directors approved this MD&A on July 15, 2021. Disclosure contained in this document is current to that date, unless otherwise noted.
Unless otherwise indicated, all references to the terms ‟we”, ‟us”, ‟our”, ‟Neptune”, ‟enterprise”, ‟Company” and ‟Corporation” refer to Neptune Wellness Solutions Inc. and its subsidiaries.
TABLE OF CONTENTS
CAUTION REGARDING FORWARD-LOOKING STATEMENTS6
RECENT CORPORATE DEVELOPMENTS10
SELECTED CONSOLIDATED ANNUAL AND QUARTERLY INFORMATION12
CONSOLIDATED FINANCIAL ANALYSIS13
FINANCIAL AND CAPITAL MANAGEMENT19
CONSOLIDATED CONTRACTUAL OBLIGATIONS25
FINANCIAL MEASURES AND ACCOUNTING POLICIES28
ISSUED AND OUTSTANDING SECURITIES47
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Statements in this MD&A that are not statements of historical or current fact constitute ‟forward-looking statements” within the meaning of the U.S. securities laws and Canadian securities laws. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of Neptune to be materially different from historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes," "belief," “feels,” "expects," "intends," "projects," “seeks,” “may,” "anticipates," "will," "should," or "plans" or the negative use of those words or other similar expressions to be uncertain and forward-looking. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this management analysis of the financial situation and operating results. Forward-looking information in this MD&A includes, but is not limited to, information or statements about our ability to successfully develop, produce, supply, promote or generate any revenue from the sale of any cannabis-based products in the legal cannabis market. The forward-looking statements contained in this MD&A are expressly qualified in their entirety by this cautionary statement and the ‟Cautionary Note Regarding Forward-Looking Information” section contained in Neptune’s latest Annual Information Form (the ‟AIF”), which also forms part of Neptune’s latest annual report on Form 40-F, and which is available on SEDAR at www.sedar.com, on EDGAR at www.sec.gov/edgar.shtml and on the Investors section of Neptune’s website at www.neptunecorp.com. All forward-looking statements in this MD&A are made as of the date of this MD&A. Neptune does not undertake to update any such forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in Neptune public securities filings with the Securities and Exchange Commission (“SEC”) and the Canadian securities commissions. Additional information about these assumptions and risks and uncertainties is contained in this MD&A (under “Risk Disclosure”) and the AIF (under ‟Risk Factors”).
6
management discussion and analysis
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 legal cannabis and hemp, nutraceuticals and white label consumer packaged goods. The Company has a strong position in cannabis and hemp with research, development and commercialization focused on the use of cannabinoids in household products to make them safer, healthier and more effective. Neptune has expanded its operations in June 2020 into several brand units in order to better address its markets. The main brand units are the following: Cannabis, Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages.
BUSINESS UPDATE
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 at both the business-to-business (“B2B”) and business-to-consumer (“B2C”) segments in the consumer-packaged goods (“CPG”) market. Over the past year, Neptune underwent a significant transformation from a B2B cannabis and hemp extraction company to a fully integrated and diversified consumer products company. The Company's long-term strategy is focused on the health and wellness sector with an emphasis on select CPG verticals, including Cannabis, Nutraceuticals, Beauty & Personal Care, and the newly added Organic Foods & Beverages. Neptune's current brand portfolio across these verticals include Mood Ring™, PanHash™, Sprout®, NurturMe®, Nosh!®, Neptune Wellness™, Forest Remedies®, and Ocean Remedies®.
Neptune has a dual go-to market B2B and B2C strategy focused on dramatically expanding its global distribution reach. The strategy sets Neptune apart from its competition and has started to yield a consistent, long-term revenue opportunity for the Company. Accordingly, Neptune has transitioned the focus of its Sherbrooke facility from B2B to B2C in the second and third quarters of FY2021. Also, the operations of SugarLeaf at the Conover facility were paused; at the moment, no date has been set for resumption of operations.
Neptune’s flagship innovative consumer-facing brands, Forest Remedies™ and Ocean Remedies™, that were launched in 2020, continue to get international recognition as Neptune’s collaboration with Jane Goodall on the Wonders of Africa Essential Oil Kit and Jane Goodall by Forest Remedies Hand Sanitizer spray won a 2020 OK! Wellness Award.
Neptune plans to expand its line of cannabis consumer packaged goods readying itself for expansion into the United States when permitted by United States Federal law, based on the results of a comprehensive and independent survey commissioned by the Company. While we do not anticipate Federal legalization in the near term, we continue to prepare for potential U.S. cannabis legalization under Federal law, Neptune is proactively primed for larger distribution. Neptune’s Mood Ring™ line—which was launched in select Canadian markets during the third quarter of FY2021, providing consumer demand for high-quality, affordable, and environmentally friendly cannabis products—positions the Company to scale its owned and operated brands to introduce additional cannabis products to complement our hemp and essential oil lines. Furthermore, the PanHashTM line was launched in Quebec during spring 2021.
On February 10, 2021, Neptune announced the acquisition of a 50.1% interest in Sprout Foods, Inc. (“Sprout”), a portfolio investment of Morgan Stanley Expansion Capital ("MSEC"). As part of the transaction, investment funds managed by MSEC became a shareholder in Neptune. Sprout is an organic plant-based baby food and toddler snack company. Sprout’s focus on wholesome organic baby food products resonates strongly with Neptune’s core values. By combining high-quality plant-based ingredients and cruelty-free ingredients, Sprout has created a trusted brand with a comprehensive range of products.
Sprout represents an opportunity for Neptune to:
|
o |
Capitalize on a shared mission to redefine health and wellness for children; |
|
o |
Focus on building a portfolio of high quality, organic and affordable consumer products; |
|
o |
Capitalize on the market demand for natural, plant-based, sustainable, and purpose-driven brands. |
Neptune's future will be focused on brand creation, accelerated organic growth complemented by new acquisitions with operational excellence as our foundation. The first step toward this new strategy is a lineup of CBD-infused beverages starting with teas and lemonades, that is expected to launch into the U.S. market later this year. Additionally, we will introduce a disruptive plant-based Omega 3-6-9 product in the U.S. market as well as plant-based tableware and utensils.
Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical. This includes expanding the supply and manufacturing base, which is expected to significantly lower production costs and improve gross margins and returns on invested capital. 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 plans to launch 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.
7
management discussion and analysis
Neptune also made significant progress expanding its product distribution in the Canadian cannabis market over the last several months. The Company received authorization to sell its Mood Ring™ and PanHash™products in four provinces. Products are currently sold in British Columbia and Ontario, with plans to begin sales in Alberta and Quebec soon. Additionally, Neptune recently received a license amendment from Health Canada to allow the sale of dried cannabis flower and pre-rolled cannabis joints throughout the Canadian market.
The Company intends to continue organically building out its existing brand portfolio through innovation and contributions from its product development and research and development teams. No matter the market or brand unit, Neptune intends to grow its business in an efficient and sustainable manner. Neptune intends to grow its revenues organically, by developing new products and by selling to new markets. Neptune also intends to grow its business by the acquisition and integration of businesses.
Cannabis
Neptune obtained its sale license from Health Canada on June 29, 2020; the amendment to the processing license held by Neptune authorizing the sale of certain cannabis products to provincially and territorially authorized retailers, and to holders of a license for sale for medical purposes was authorized. This amendment includes the authorization of the activity of the sale of cannabis edible products, cannabis extracts, and cannabis topicals. Neptune also added cold storage and operating space at the time the processing license was amended. Consequently, Neptune introduced its proprietary Mood Ring™ cannabis brand for the Canadian market on August 18, 2020 and received its first orders on November 25, 2020. A further amendment to its sale license was announced on March 22, 2021, allowing Neptune to sell dried cannabis flower and pre-rolled cannabis in the Canadian recreational market. A letter of intent was also signed with SQDC, for the sale of Neptune’s new cannabis brand, PanHash™, in Quebec.
As mentioned above, Neptune sells or will sell cannabis products in four Canadian provinces (British Columbia, Ontario, Quebec and Alberta), representing 87% of the Canadian population, through its brands, Mood Ring™ and PanHash™. Mood Ring™ is a non-GMO and environmentally friendly packaged product with several lines integrating high CBD oil, legacy hashish and high CBD capsules. Mood Ring™ is produced using Neptune’s patented cold ethanol extraction process, which creates a full spectrum concentrate that preserves terpenes to retain its earthy aroma and flavor. PanHash™ includes two product lines with a high concentration of CBD in cannabis oil and capsules, leveraging the Company’s cold ethanol extraction technology, which produces full-spectrum extracts, preserving all the plant’s terpenes.
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 plans to launch 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 Neutraceuticals.
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 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. With more than 50 years of combined experience in the nutrition industry, Neptune, through its nutraceuticals products business, also formulates, develops and provides customers with turnkey nutrition solutions.
Beauty & Personal Care
Neptune is leveraging the power of cannabinoids and other plant-based ingredients to help consumers generally feel better than they did before. The Company sells wellness brands to the Beauty & Personal Care market through its leading brand, Forest Remedies. Forest Remedies offers several lines of CBD-based oils and extracts, and is expanding into plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free.
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 Sprouts' distribution across substantially all of Target's U.S. retail stores. The Company also expects to launch Sprout products in Canada during the second fiscal quarter of 2022. 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 well as an exciting new product pipeline to be launched under the Sprout brand. Sprout’s three main brands are Sprout®, Nosh!® and NurturMe®.
8
management discussion and analysis
OUR B2C BRAND PORTFOLIO STRATEGY
We are currently working on accelerating brand equity for our brand portfolio:
9
management discussion and analysis
Neptune Obtains Sale License from Health Canada
On June 29, 2020, Neptune announced that Health Canada has approved an amendment to the processing license held by Neptune authorizing the sale of certain cannabis products to provincially and territorially authorized retailers and to holders of a license for sale for medical purposes. This amendment includes the authorization of the activity of the sale of cannabis edible products, cannabis extracts, and cannabis topicals. Neptune also added cold storage and operating space at the time the processing license was amended.
On March 22, 2021, Neptune also announced that Health Canada has provided the Company with a license amendment to allow it to sell dried cannabis flower and pre-rolled cannabis in the Canadian recreational market. Neptune currently supplies the market with premium cannabis extracts, under its Mood Ring™ and PanHash™ brands, and will expand its offering to include all regulated product categories. This empowers the Company to provide a comprehensive portfolio, enhance its total addressable market and target the lucrative flower segment, which is a dominant force in the industry both in sales and revenue. All cannabis products are manufactured and packaged at the Company's purpose-built facility in Sherbrooke, Quebec.
Changes to the Board of Directors and New Auditors
On August 12, 2020, two new directors were elected to the Board of Directors of Neptune during the Annual General Meeting (“AGM”): Jane Pemberton and Frank Rochon.
Ms. Pemberton is an experienced growth driven executive, who has spent her career focused on driving accelerated revenue growth, earnings and brand equity, without compromising core values, culture, authenticity or purpose. She is currently the CEO of Vital Nutrients Holdings and an Operating Advisor at North Castle Partners, a leading private equity firm focused exclusively in the Health, Wellness & Active Living Sector. Mr. Rochon built a distinguished career over the past 30 years, serving in numerous key leadership positions with the past 20 years at Deloitte Canada. He most recently served as Vice Chairman and Managing Partner of Clients and Industries leading Deloitte Canada’s client and market portfolio, overseeing the firm’s most significant client relationships and opportunities.
Effective with the election of the two new Board members, Hélène Fortin ceased to be a director of Neptune.
Ernst & Young, LLP were also appointed as the Corporation's auditors during the AGM, replacing KPMG LLP.
Finally, on May 17, 2021, Neptune announced that Richard Schottenfeld resigned as a director of the Company for personal considerations.
Neptune Introduces Mood Ring™ and PanHash™ Cannabis Brands for Canadian Market
Mood Ring™
On August 18, 2020, Neptune introduced its proprietary Mood Ring™ cannabis brand for the Canadian market. The Mood Ring™ brand and product line officially launched in select Canadian markets during the fall of 2020 to meet consumer demand for high-quality, affordable and environmentally friendly cannabis products. Mood Ring™ leverages Neptune’s decades of experience in the wellness, extraction and consumer packaged goods (“CPG”) industries to bring product offerings to market that are designed to meet the specific demands of Canadian consumers. Mood Ring CBD products primarily target wellness focused consumers looking for natural products, whereas Mood Ring THC concentrates focus on the recreational market. Mood Ring™ will use Neptune’s proprietary cold ethanol extraction process technology to create full spectrum extracts for the Company’s tincture and capsule products and newly implemented solventless extraction for THC concentrates. These processes allow Mood Ring™ to provide consumers with all of the cannabinoid and terpene benefits of the plant with a significantly lower environmental impact, requiring significantly less energy use when compared to CO2 extraction. The Company expects to launch new Mood Ring and PanHash branded products, including flower, across its licensed Canadian footprint throughout the coming year.
British Columbia
The Company entered into an agreement on September 24, 2020 with the British Columbia Liquor Distribution Branch (“BCLDB”), the wholesaler and public retailer of nonmedical cannabis throughout the province, for the sale and distribution of Neptune’s new proprietary Mood Ring™ product line. The agreement marks the launch of Neptune’s Mood Ring™ product line for sale into the Canadian non-medical cannabis market. Products became available for purchase in December 2020 through the BC Cannabis Store online, in addition to its government-run retail locations across British Columbia and to private licensed retailers in British Columbia. On June 10, 2021, Neptune launched three new Mood Ring branded cannabis products, including the first branded flower product (Mood Ring High THC Capsules, Mood Ring High THC Oil and Mood Ring Florida Citrus Kush Flower), in the province of British Columbia. The Mood Ring Florida Citrus Kush is Neptune's first branded flower product introduced to the Canadian market.
Ontario
The Company entered into a supply agreement on October 27, 2020 with the Ontario Cannabis Store (“OCS”), the wholesaler and sole online retailer for recreational cannabis, for the sale and distribution of Neptune's new proprietary recreational product line, Mood Ring™. Ontario is Canada's largest market for adult-use cannabis products. The agreement authorizes Neptune to supply Mood Ring™ products to the OCS for sale and wholesale distribution. The products have been available for purchase since February 22, 2021 through the OCS online store. Additionally, the Mood Ring™ product line is available to licensed private retailers in Ontario.
10
management discussion and analysis
Quebec (PanHashTM)
On March 22, 2021, Neptune announced it entered into a letter of intent with Société québécoise du cannabis (“SQDC”), the province’s sole legal retailer for recreational cannabis, for the sale of Neptune’s new cannabis brand, PanHash™, exclusively for the Province of Quebec. The initial PanHash™ launch will include two products with a high concentration of CBD: cannabis oil and capsules. These products benefit from Neptune’s proprietary cold ethanol extraction technology, which produces full-spectrum extracts, preserving all of the plant’s terpenes. The agreement authorizes Neptune to supply PanHash™ products to the SQDC for sale in Quebec. PanHash™ products have been available for purchase since May 27, 2021.
Alberta
Neptune announced on April 28, 2021 it entered into a supply agreement with Alberta Gaming, Liquor and Cannabis (“AGLC”), the wholesaler and sole online retailer for recreational cannabis in Alberta, for the sale and distribution of Neptune's proprietary recreational cannabis brand, Mood Ring™. This is the fourth supply agreement the Company has secured with a provincial cannabis wholesaler, and enables Neptune to sell recreational cannabis products, through its Mood Ring™ and PanHashTM brands, to over 1,600 retailers across British Columbia, Alberta, Ontario and Quebec; these four provinces accounted for over 80% of the Canadian cannabis retail sales in 2020.
Launch of Legendary Wildlife Conservationist Jane Goodall’s First Product with the Company
On September 17, 2020, Neptune announced the first of its product lines made in collaboration with legendary animal behavior expert and conservationist, Dr. Jane Goodall, under its Forest Remedies™ brand. Inspired by her love of Africa and passion for protecting wildlife and built with the world-recognized leader International Flavors and Fragrances, this exclusive line of natural, plant-based wellness products directly supports the legendary conservationist’s efforts to create a better world for all living things. With every purchase, 5% of the sale price is donated directly to the Jane Goodall Institute to support continued research, conservation, and education efforts.
Neptune to Open a Florida-based Office
On November 25, 2020, Neptune announced that it intends to open a Florida-based office, which is expected to open in late calendar year 2021. The office will focus on U.S. legislation matters in Cannabis and global growth opportunities. This office will lead the Company’s international institutional advocacy program to drive the conversion of cannabis from an illicit to regulated market.
Neptune Completes its Strategic Transition from Extraction to Cannabis Consumer Packaged Goods
In April 2021, Neptune completed its transition from revenue derived from hemp and cannabis extraction to revenue from consumer packaged goods and branded products, such as Mood Ring™ — an end-to-end developed and manufactured cannabinoid-based product portfolio targeting both wellness-focused CBD consumers looking for natural products, and the recreational market with THC concentrate product. Neptune is beginning its first commercial production of hashish (or hash) — comprised of extracted cannabis trichomes utilizing its own proprietary technologies at the Company’s purpose-built facility in Sherbrooke, Quebec. The hashish products are focused on the recreational market for high THC products.
Neptune Acquires Controlling Interest in Sprout Foods, Inc.
On February 10, 2021, Neptune announced the acquisition of a 50.1% interest in Sprout Foods, Inc. ("Sprout"), a portfolio investment of Morgan Stanley Expansion Capital ("MSEC"). As part of the transaction, investment funds managed by MSEC became shareholders in Neptune. Sprout is an organic plant-based baby food and toddler snack company. The transaction consideration included a cash payment of USD$6.0 million and the issuance of 6,741,573 Neptune common shares having a value at issuance of USD$17.6 million. Additionally, Neptune is guaranteeing a USD$10.0 million note issued by Sprout in favor of MSEC.
Arbitrator Rules for Neptune in Dispute with Azpa Pharmaceuticals Pty. Ltd.
An independent arbitrator engaged to resolve a commercial dispute between Neptune and Azpa Pharmaceuticals Pty. Ltd. ("Azpa") rendered a decision in favor of Neptune on February 15, 2021, awarding Neptune its full claimed damages, legal fees, and interest of roughly CAD$8 million. In 2007 and again in 2011, Azpa entered into a distribution agreement with Neptune for exclusive distribution rights for specific Neptune products in Australia and New Zealand. In 2013, Azpa failed to pay Neptune for shipments of products, giving rise to the arbitration. The arbitrator's award entirely upheld Neptune's interpretation of the distributorship agreement and fully rejected Azpa's CAD$137 million counter claim. However, no receivable was accounted for the moment, as Azpa is going through financial difficulties; the receivable will be accounted if and when it is probable that the economic benefits associated with the independent arbitrator’s ruling will be received and the amount can be measured reliably.
Neptune Announces Exclusive Licensing Agreement Between Sprout Foods and CoComelon®
On June 9, 2021, the Company announced a multi-year licensing agreement between Sprout and CoComelon®, the world's leading children's entertainment brand, owned and operated by Moonbug Entertainment Ltd (“Moonbug”). With more than 110 million subscribers worldwide, CoComelon is the #1 children's entertainment and educational show in the world claiming a #1 ranking on YouTube with its top three episodes generating nearly nine billion views around the world. Additionally, the show was #1 on Netflix and maintains a Top 10 ranking across all genres with the recent launch of Season 3. Sprout products bearing the licensed property are expected to launch in the summer of 2021 in North America.
11
management discussion and analysis
SELECTED CONSOLIDATED ANNUAL AND QUARTERLY INFORMATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets out selected consolidated financial information, in thousands of dollars, except for the basic and diluted loss per share which are shown in dollars.
|
|
Three-month periods ended |
|
|
Twelve-month periods ended |
|
||||||||||||||||||
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
||||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Total revenues |
|
|
6,768 |
|
|
|
9,530 |
|
|
|
5,664 |
|
|
|
46,810 |
|
|
|
29,578 |
|
|
|
24,442 |
|
Adjusted EBITDA1 |
|
|
(24,677 |
) |
|
|
(5,783 |
) |
|
|
(2,707 |
) |
|
|
(52,694 |
) |
|
|
(19,948 |
) |
|
|
(8,114 |
) |
Net loss |
|
|
(60,328 |
) |
|
|
(39,239 |
) |
|
|
(12,384 |
) |
|
|
(168,594 |
) |
|
|
(60,863 |
) |
|
|
(23,192 |
) |
Net loss attributable to equity holders of the Corporation |
|
|
(58,881 |
) |
|
|
(39,239 |
) |
|
|
(12,384 |
) |
|
|
(167,147 |
) |
|
|
(60,863 |
) |
|
|
(23,192 |
) |
Basic and diluted loss per share attributable to equity holders of the Corporation |
|
|
(0.40 |
) |
|
|
(0.41 |
) |
|
|
(0.16 |
) |
|
|
(1.38 |
) |
|
|
(0.68 |
) |
|
|
(0.29 |
) |
|
|
As at March 31, 2021 |
|
|
As at March 31, 2020 |
|
|
As at March 31, 2019 |
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Total assets |
|
|
234,745 |
|
|
|
168,776 |
|
|
|
90,220 |
|
Working capital2 |
|
|
81,879 |
|
|
|
21,579 |
|
|
|
4,665 |
|
Non-current financial liabilities |
|
|
29,976 |
|
|
|
7,930 |
|
|
|
855 |
|
Equity attributable to equity holders of the Corporation |
|
|
146,103 |
|
|
|
143,630 |
|
|
|
68,985 |
|
SELECTED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
The following tables set out selected consolidated financial information for the last eight quarters. All amounts in these tables are in thousands of dollars, except for basic and diluted income (loss) per share which are shown in dollars. More details and explanations on each of the quarterly financial data above can be found in the corresponding Management Discussion and Analysis.
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
||||
|
|
2021 |
|
|
2020 |
|
|
2020 |
|
|
2020 |
|
||||
|
|
|
|
|
|
(restated)3 |
|
|
(restated)3 |
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total Revenues |
|
|
6,768 |
|
|
|
3,320 |
|
|
|
25,097 |
|
|
|
11,247 |
|
Adjusted EBITDA1 |
|
|
(24,677 |
) |
|
|
(12,492 |
) |
|
|
(13,041 |
) |
|
|
(2,484 |
) |
Net loss |
|
|
(60,328 |
) |
|
|
(74,877 |
) |
|
|
(21,961 |
) |
|
|
(11,428 |
) |
Net loss attributable to equity holders of the Corporation |
|
|
(58,881 |
) |
|
|
(74,877 |
) |
|
|
(21,961 |
) |
|
|
(11,428 |
) |
Basic and diluted loss per share attributable to equity holders of the Corporation |
|
|
(0.40 |
) |
|
|
(0.60 |
) |
|
|
(0.20 |
) |
|
|
(0.13 |
) |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
||||
|
|
2020 |
|
|
2019 |
|
|
2019 |
|
|
2019 |
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total Revenues |
|
|
9,530 |
|
|
|
9,175 |
|
|
|
6,512 |
|
|
|
4,361 |
|
Adjusted EBITDA1 |
|
|
(5,783 |
) |
|
|
(6,001 |
) |
|
|
(4,581 |
) |
|
|
(3,583 |
) |
Net income (loss) |
|
|
(39,239 |
) |
|
|
5,603 |
|
|
|
(20,775 |
) |
|
|
(6,452 |
) |
Net income (loss) attributable to equity holders of the Corporation |
|
|
(39,239 |
) |
|
|
5,603 |
|
|
|
(20,775 |
) |
|
|
(6,452 |
) |
Basic and diluted loss per share attributable to equity holders of the Corporation |
|
|
(0.41 |
) |
|
|
0.06 |
|
|
|
(0.23 |
) |
|
|
(0.08 |
) |
__________
1 The Adjusted EBITDA is not a standard measure endorsed by IFRS requirements. A reconciliation to the Corporation’s net loss is presented below.
2 The working capital is presented for information purposes only and represents a measurement of the Corporation’s short-term financial health mostly used in financial circles. The working capital is calculated by subtracting current liabilities from current assets. Because there is no standard method endorsed by IFRS, the results may not be comparable to similar measurements presented by other public companies.
3 The restatements are discussed below under “Revenues” in the Consolidated Results section of this MD&A. The interim financial statements for the periods ended September 30, 2020 and December 31, 2020 have not been refiled, but the comparatives will be corrected when the interim financial statements for the periods ended September 30, 2021 and December 31, 2021 are filed.
12
management discussion and analysis
CONSOLIDATED FINANCIAL ANALYSIS
ADJUSTED EBITDA
Although the concept of Adjusted EBITDA is not a financial or accounting measure defined under IFRS and it may not be comparable to other issuers, it is widely used by companies. Neptune obtains its Adjusted EBITDA measurement by adding to net loss, net finance costs and depreciation and amortization, and by subtracting income tax recovery. Other items such as stock-based compensation, non-employee compensation related to warrants, litigation provisions, acquisition costs, signing bonuses, severances and related costs, impairment losses, write-downs, revaluations, and changes in fair values of the Corporation are also added back as they may vary significantly from one period to another. Adjusting for these items does not imply they are non-recurring.
Adjusted EBITDA1 reconciliation, in thousands of dollars
|
|
Three-month periods ended |
|
|
Twelve-month periods ended |
|
||||||||||
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) for the period |
|
$ |
(60,328 |
) |
|
$ |
(39,239 |
) |
|
$ |
(168,594 |
) |
|
$ |
(60,863 |
) |
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,360 |
|
|
|
2,612 |
|
|
|
11,725 |
|
|
|
8,384 |
|
Acceleration of amortization of long-lived non-financial assets |
|
|
— |
|
|
|
— |
|
|
|
13,953 |
|
|
|
— |
|
Revaluation of derivatives |
|
|
(4,635 |
) |
|
|
— |
|
|
|
(10,001 |
) |
|
|
— |
|
Net finance costs |
|
|
1,820 |
|
|
|
(1,545 |
) |
|
|
6,724 |
|
|
|
(1,452 |
) |
Stock-based compensation |
|
|
3,340 |
|
|
|
3,356 |
|
|
|
13,069 |
|
|
|
16,595 |
|
Non-employee compensation related to warrants |
|
|
238 |
|
|
|
17,544 |
|
|
|
5,349 |
|
|
|
18,598 |
|
Provisions |
|
|
1,145 |
|
|
|
62 |
|
|
|
1,705 |
|
|
|
293 |
|
Acquisition costs |
|
|
396 |
|
|
|
— |
|
|
|
396 |
|
|
|
2,211 |
|
Signing bonuses, severances and related costs |
|
|
— |
|
|
|
— |
|
|
|
601 |
|
|
|
1,263 |
|
Cybersecurity incident |
|
|
— |
|
|
|
— |
|
|
|
1,983 |
|
|
|
— |
|
Write-down of inventories and deposits |
|
|
17,683 |
|
|
|
2,082 |
|
|
|
25,074 |
|
|
|
2,082 |
|
Impairment loss on long-lived assets |
|
|
12,213 |
|
|
|
41,452 |
|
|
|
49,921 |
|
|
|
85,548 |
|
Change in fair value of contingent consideration |
|
|
— |
|
|
|
(36,782 |
) |
|
|
— |
|
|
|
(97,208 |
) |
Income tax expense (recovery) |
|
|
91 |
|
|
|
4,675 |
|
|
|
(4,599 |
) |
|
|
4,601 |
|
Adjusted EBITDA1 |
|
$ |
(24,677 |
) |
|
$ |
(5,783 |
) |
|
$ |
(52,694 |
) |
|
$ |
(19,948 |
) |
Please note that non-employee compensation related to warrants and signing bonuses are new additions to the Company’s calculation methodology since the quarter ended September 30, 2020. Signing bonuses did not occur previously, so no restatement of the previous periods was needed, but there were non-employee compensation expenses related to warrants in previous quarters; consequently, the amounts for the years ended March 31, 2021 and 2020 reflect the sum of those expenses for all quarters of respective fiscal years. Please also note that the change in fair value of the contingent consideration and the write-down of inventories and deposits were also added to the calculation of the adjusted EBITDA for the comparative periods.
1.The Adjusted EBITDA is not a standard measure endorsed by IFRS requirements.
13
management discussion and analysis
CONSOLIDATED RESULTS
Revenues
Total revenues for the three-month period ended March 31, 2021 amounted to $6.8 million representing a decrease of $2.8 million or 29% compared to $9.5 million for the three-month period ended March 31, 2020. For the twelve-month period ended March 31, 2021, revenues totalled $46.8 million representing an increase of $17.2 million or 58% compared to $29.6 million for the twelve-month period ended March 31, 2020.
During the twelve-month period ended March 31, 2021, the Corporation realized an expansion in its health and wellness product portfolio including hand sanitizers, non-contact thermometers and gloves; this expansion is a strategic response to the needs related to Covid-19. However, during the three-month period ended December 31, 2020, Neptune experienced production and transportation issues with third parties (such as FDA requirements, lack of raw materials and supply chain challenges) related to the pandemic situation, resulting in non-significant revenues from the health and wellness innovation expansion. Whenever third parties experience delays, disruptions, capacity constraints, regulatory issues or quality control problems in their operations, or fail to meet Neptune’s requirements for timely delivery, Neptune’s ability to ship and deliver certain of its products to its customers can be impacted and can cause the loss of sales and existing or potential customers, delayed revenue recognition or an increase in expenses, all of which can harm Neptune’s business, as seen during the last quarter. Also, Neptune acquired a controlling interest in Sprout, adding food and beverages revenues to its revenues.
Consequently, the increase for the twelve-month period ended March 31, 2021 was mainly attributable to new health and wellness products (increase of $14.5 million) and the addition of the food and beverages revenues from Sprout ($3.3 million). As for the quarter ended March 31, 2021, the decrease came mainly from cannabis related products (decrease of $3.5 million largely attributable to the shift from B2B to B2C) and turnkey solutions (decrease of $1.5 million), partly offset by the increase in food and beverages revenues ($3.3 million). When compared to the previous quarter of fiscal year 2021, the revenues increase by $3.4 million or 104%, which was mainly attributable to acquisition of Sprout (increase of $3.3 million).
Total revenues for the three-month and twelve-month periods ended March 31, 2021 include $0.2 million and $1.5 million respectively of royalty revenues compared to $0.6 million and $1.6 million for the three-month and twelve-month periods ended March 31, 2020. Royalty streams come from licensing agreements on MaxSimil® and on an existing licensing agreement that was excluded from the sale of assets that occurred in 2017. The decrease of royalty revenues for the three-month and twelve-month periods ended March 31, 2021 is related to the timing of sales of our licensees, which has an impact on royalty revenues.
The Company restated its previously reported condensed consolidated interim financial statements as at and for the three-month and six-month periods ended September 30, 2020 and as at and for three-month and nine-month periods December 31, 2020 with respect to recognition of revenue relating to two transactions, for which revenues were recognized during the three-month period ended September 30, 2020, that did not meet the conditions for recognition of revenue pursuant to the guidance of IFRS 15, specifically related to transfer of control of goods. Accordingly, the cost of sales, trade receivables and inventories were adjusted. The related inventories were written down during the third and fourth quarters of fiscal year 2021, resulting in a restatement for the three-month and nine-month periods ended December 31, 2020.
The impacts of these restatements are as follow:
|
|
Previously reported |
|
|
Effect of restatement |
|
|
Amended |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated interim statement of loss and comprehensive loss for the three-month period ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from sales and services |
|
$ |
28,308,364 |
|
|
$ |
(3,211,560 |
) |
|
$ |
25,096,804 |
|
Cost of sales |
|
|
(33,238,654 |
) |
|
|
3,090,888 |
|
|
|
(30,147,766 |
) |
Gross profit (loss) |
|
|
(4,930,290 |
) |
|
|
(120,672 |
) |
|
|
(5,050,962 |
) |
Net loss |
|
|
(21,840,121 |
) |
|
|
(120,672 |
) |
|
|
(21,960,793 |
) |
Total comprehensive loss |
|
|
(23,265,276 |
) |
|
|
(120,672 |
) |
|
|
(23,385,948 |
) |
Adjusted EBITDA |
|
|
(12,920,783 |
) |
|
|
(120,672 |
) |
|
|
(13,041,455 |
) |
Basic and diluted loss per share |
|
$ |
(0.20 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated interim statement of loss and comprehensive loss for the six-month period ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from Sales and Services |
|
$ |
39,214,637 |
|
|
$ |
(3,211,560 |
) |
|
$ |
36,003,077 |
|
Cost of sales |
|
|
(41,229,266 |
) |
|
|
3,090,888 |
|
|
|
(38,138,378 |
) |
Gross profit (loss) |
|
|
(1,295,746 |
) |
|
|
(120,672 |
) |
|
|
(1,416,418 |
) |
Net loss |
|
|
(33,267,532 |
) |
|
|
(120,672 |
) |
|
|
(33,388,204 |
) |
Total comprehensive loss |
|
|
(36,134,165 |
) |
|
|
(120,672 |
) |
|
|
(36,254,837 |
) |
Adjusted EBITDA |
|
|
(15,402,147 |
) |
|
|
(120,672 |
) |
|
|
(15,522,819 |
) |
Basic and diluted loss per share |
|
$ |
(0.31 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated interim statement of financial position as at September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other receivables |
|
$ |
22,400,059 |
|
|
$ |
(3,211,560 |
) |
|
$ |
19,188,499 |
|
Inventory |
|
|
21,609,305 |
|
|
|
3,090,888 |
|
|
|
24,700,193 |
|
Deficit |
|
|
(196,802,158 |
) |
|
|
(120,672 |
) |
|
|
(196,922,830 |
) |
14
management discussion and analysis
|
|
Previously reported |
|
|
Cumulative effect of restatements |
|
|
Amended |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated interim statement of loss and comprehensive loss for the three-month period ended December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
$ |
(12,227,982 |
) |
|
$ |
(1,078,494 |
) |
|
$ |
(13,306,476 |
) |
Gross profit (loss) |
|
|
(8,907,668 |
) |
|
|
(1,078,494 |
) |
|
|
(9,986,162 |
) |
Net loss |
|
|
(73,798,616 |
) |
|
|
(1,078,494 |
) |
|
|
(74,877,110 |
) |
Total comprehensive loss |
|
|
(75,323,895 |
) |
|
|
(1,078,494 |
) |
|
|
(76,402,389 |
) |
Adjusted EBITDA |
|
|
(11,413,814 |
) |
|
|
(1,078,494 |
) |
|
|
(12,492,308 |
) |
Basic and diluted loss per share |
|
$ |
(0.59 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated interim statement of loss and comprehensive loss for the nine-month period ended December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from sales and services |
|
$ |
41,983,273 |
|
|
$ |
(3,211,560 |
) |
|
$ |
38,771,713 |
|
Cost of sales |
|
|
(53,457,248 |
) |
|
|
2,012,394 |
|
|
|
(51,444,854 |
) |
Gross profit (loss) |
|
|
(10,203,417 |
) |
|
|
(1,199,166 |
) |
|
|
(11,402,583 |
) |
Net loss |
|
|
(107,066,151 |
) |
|
|
(1,199,166 |
) |
|
|
(108,265,317 |
) |
Total comprehensive loss |
|
|
(111,458,063 |
) |
|
|
(1,199,166 |
) |
|
|
(112,657,229 |
) |
Adjusted EBITDA |
|
|
(15,402,147 |
) |
|
|
(1,199,166 |
) |
|
|
(16,601,313 |
) |
Basic and diluted loss per share |
|
$ |
(0.95 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated interim statement of financial position as at December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other receivables |
|
$ |
19,145,001 |
|
|
$ |
(3,211,560 |
) |
|
$ |
15,933,441 |
|
Inventory |
|
|
19,407,453 |
|
|
|
2,012,394 |
|
|
|
21,419,847 |
|
Deficit |
|
|
(270,600,777 |
) |
|
|
(1,199,166 |
) |
|
|
(271,799,943 |
) |
These restatements did not impact the Corporation’s cash and cash equivalent amounts and reported amounts of operating, investing and financing activities within the consolidated interim statements of cash flows for three-month and six-month periods ended September 30, 2020 and the three-month and nine-month periods ended December 31, 2020.
Gross Profit (Loss)
Gross profit (loss) is calculated by deducting the cost of sales from total revenues. Cost of sales consists primarily of costs incurred to manufacture products, including sub-contractors, freight expenses and duties on raw materials, storage and handling costs and lab testing on raw materials, and to acquire finished goods.
The consolidated gross profit (loss) for the three-month period ended March 31, 2021 amounted to $(24.8) million compared to $(1.1) million for the three-month period ended March 31, 2020, a decrease of $23.7 million or 2161%. As for the gross profit (loss) for the twelve-month period ended March 31, 2021, it totalled $(36.2) million compared to $(1.8) million for the twelve-month period ended March 31, 2020, a decrease of $34.4 million or 1869%. The changes in gross profit (loss) for the three-month and twelve-month periods ended March 31, 2021, compared to the three-month and twelve-month periods ended March 31, 2020, are mainly attributable to health and wellness innovations products, which represent the bulk of the negative gross margin increases ($20.0 million and $34.4 million respectively). Increases in cost of sales expenses were partly offset by government wage subsidies related to the Canada Emergency Wage Subsidy (“CEWS”) of $0.3 million and $1.2 million respectively, for the three-month and twelve-month periods.
On April 23, 2020, Neptune announced that it was successfully accelerating production of hand sanitizer products to over one million units weekly in a variety of formats. Neptune, through its Neptune Health & Wellness Innovation unit, began selling its branded hand sanitizer line shortly thereafter. Market demand shifted from smaller formats such as 2 oz and 4 oz to larger formats such as 1 liter and 1 gallon, affecting unit base volumes. Neptune successfully launched an expanded line of hand sanitizer products in the club store channel in July 2020. Neptune has engaged third-party manufacturers of hand sanitizer in the United States to supply Neptune with hand sanitizer products. The Company has seen, during the third quarter of FY2021, a reduction in demand for new hand sanitizer shipments, primarily due to oversaturation of the market with such products. Consequently, the Company wrote-down its inventory of hand sanitizer products to its net realizable value during the quarter ended December 31, 2020 ($7.4 million), with an additional write-down of those inventories during the quarter ended March 31, 2021 ($17.7 million). Other factors affecting gross margin include lack of raw materials and components, supply chain challenges and transportation issues, all increasing costs. Furthermore, Neptune launched numerous new products since the beginning of fiscal 2021, such as hand sanitizer and Mood RingTM, causing high production ramp-up costs to temporarily reduce the gross margin of those new products. As an example, hand sanitizer that was made in Mexico for sale in the United States is now made in the USA in accordance with customer requirements. To respect that requirement, Neptune had to find new suppliers, which ended up being more expensive, but that cost increase could not be passed on to the customer. Moreover, due to the worldwide Covid-19 pandemic, supply chains are experiencing many challenges, such as delays and unexpected failures in third party manufacturers and logistics, including delays at customs or ports of entry.
The consolidated gross margin decreased from (11.5)% for the three-month period ended March 31, 2020 to (366.4)% for the three-month ended March 31, 2021, a decrease of 354.9%. As for the twelve-month periods ended March 31, 2021 and 2020, the gross margin went from (6.2)% in 2020 to (77.3)% in 2021, a decrease of 71.1%. The changes in gross margin versus last year are directly related to the factors mentioned above.
15
management discussion and analysis
Research and Development (“R&D”) Expenses Net of Tax Credits and Grants
R&D expenses net of tax credits and grants amounted to $0.7 million in the quarter ended March 31, 2021 compared to $0.9 million for the quarter ended March 31, 2020; they amounted to $2.2 million in the twelve-month period ended March 31, 2021 compared to $2.9 million for the same period the prior year.
The decrease of $0.2 million or 24% for the quarter ended March 31, 2021 is mainly due to lower expenses for the R&D projects related to cannabis (decrease of $0.4 million). As for the twelve-month period ended March 31, 2021, the decrease of $0.7 million or 25% is again mainly due to cannabis related projects (decrease of $0.6 million). Those lower expenses are mainly attributable to an adjustment on the accounting of a co-development agreement on new cannabis related products.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses amounted to $25.0 million in the three-month period ended March 31, 2021 compared to $29.4 million for the three-month period ended
March 31, 2020, a decrease of $4.4 million or 15% which is the result of multiple movements mainly due to the decrease in advertising fees ($17.6 million), partly offset by bad debts (increase of $6.1 million), salaries and benefits (increase of $3.8 million), depreciation and amortization (increase of $3.7 million), the Sprout SG&A expenses ($2.8 million) and by multiple less significant increases and decreases, such as audit fees, legal fees, share based compensation and others.
Regarding the twelve-month period ended March 31, 2021 compared to the same period in 2020 SG&A expenses amounted to $88.2 million compared to
$64.7 million, an increase of $23.5 million or 36%, which is mainly due to the accelerated depreciation of the SugarLeaf assets ($15.2 million), bad debts (increase of $10.8 million), salaries and benefits (increase of $7.1 million), the Sprout SG&A expenses ($2.8 million) the Q2 cybersecurity incident (increase of $2.0 million), and the increase of depreciation and amortization ($2.1 million), partly offset by a decrease in marketing and advertising fees ($12.2 million), share based compensation ($3.4 million) and acquisition costs ($1.8 million), the rest of the increase coming from less significant increases in insurance, legal fees, audit fees and others. Increases in SG&A expenses were also offset by government wage subsidies related to the Canada Emergency Wage Subsidy (“CEWS”) of $1.0 million and $1.9 million respectively, for the three-month and twelve-month periods.
The largest increase for three-month and twelve-month periods ended March 31, 2021 is the accelerated depreciation of the SugarLeaf assets, namely the customer relationships and the farmer relationships intangible assets, as well as the property, plant and equipment, with a cumulative impact of $15.2 million. As a result of the COVID-19 pandemic and for other reasons, the Company was forced to furlough a number of SugarLeaf employees. During the quarter ended December 31, 2020, the downturn in oil prices for cannabis persisted (as was the case at the end of the previous fiscal year), and the commercial viability of the SugarLeaf CGU was reviewed. Management noted that the customers for which a customer relationship intangible asset was acquired with the SugarLeaf CGU had ceased placing orders and there were minimal active business relationships with these customers. As the CGU is no longer viable given declining pricing and demand, the Corporation will not benefit from these relationships and thus decided to take accelerated amortization for this intangible asset, in the amount of $7.7 million during the quarter ended December 31, 2020. Also, Neptune is not currently producing or selling any products resulting from the farmer relationships acquired with the SugarLeaf CGU. Furthermore, SugarLeaf does not currently have any contracts with customers and there is no commercial viability to these supplier relationships with the farmers. Neptune will not realize future economic benefits from these relationships and thus, Management decided to take accelerated amortization for this intangible asset, in the amount of $6.3 million during the quarter ended December 31, 2020. Finally, Neptune continued the write-down during the quarter ended March 31, 2021, by accelerating the depreciation of the SugarLeaf fixed assets, in the amount of $1.3 million.
The largest decrease for both the three-month and twelve-month periods ended March 31, 2021 was on marketing and advertising fees, decreases of $17.7 million and $12.2 million respectively, as most of the services provided in exchange for the warrants issued to AMI and IFF were rendered in the previous fiscal year; these advertising efforts were not renewed in the fiscal year ended on March 31, 2021.
Impairment losses on assets
The impairment loss on goodwill, on property, plant and equipment, and on right-of-use assets for the year ended March 31, 2021 totaled $49.9 million compared to the non-cash impairment loss on intangible assets and goodwill of $85.5 million for the previous year, a decrease of $35.6 million or 42%. For the quarter ended March 31, 2021, the impairment losses on assets were $12.5 million, compared to $41.5 million for the same period the previous year, a decrease of $28.9 million or 70%.
These impairment losses are mostly due to the SugarLeaf cash generating unit (“CGU”); considering the reasons mentioned previously under SG&A for the accelerated amortization of intangible assets and accelerated depreciation of the fixed assets, and considering that the recoverable amount of the SugarLeaf CGU could no longer sustain the value of its assets, Management impaired the remaining goodwill related to the SugarLeaf CGU as at December 31, 2020 (as $41.5 million of goodwill had been written-off the year before) of $35.6 million during the three-month period ended December 31, 2020. The remaining excess of carrying value of the SugarLeaf CGU over its fair value less cost of disposal was allocated on a pro-rata basis to the other assets of the CGU resulting in impairment charges of $2.0 million and $0.1 million for property, plant and equipment and right-of-use assets respectively for the three-month ended December 31, 2020, totalling impairment charges of $37.7 million compared to $44.1 million the previous year for the SugarLeaf CGU.
In addition, an impairment loss related to property, plant and equipment located at the Sherbrooke facility in the amount of $12.5 million was recognized during the quarter ended on March 31, 2021, as a result of Neptune’s transition into a CPG company (as further described in note 7 of the audited consolidated financial statements); no such impairment was recognized in the previous year for the Sherbrooke facility.
16
management discussion and analysis
Net finance costs, revaluations, changes in fair values and foreign exchange losses
This portion of the consolidated statement of income (loss) amounted to $2.8 million and $3.3 million respectively for the three-month and twelve-month periods ended March 31, 2021 compared to $38.3 million and $98.7 million for the three-month and twelve-month periods ended March 31, 2020, a decrease of $35.5 million or 93% for the quarter, and a decrease of $95.4 million or 97% for the twelve-month period ended March 31, 2021. The decrease for the three-month period ended March 31, 2021 is mainly attributable to the changes in fair values, as there was a $4.6 million revaluation of derivatives in fiscal year 2021, compared to a $36.8 million change in fair value of the contingent consideration related to the SugarLeaf acquisition in fiscal year 2020; the impact of foreign exchange accounts for most ($3.2 million) of the rest of the difference compared to the same period the previous year. As for the twelve-month period ended March 31, 2021, the decrease is again mainly attributable the changes in fair values mentioned above (net $87.2 million) and the impact of foreign exchange ($7.2 million).
The net loss for the three-month period ended March 31, 2021 includes an income tax expense of $0.1 million compared to an expense of $4.7 million for the three-month period ended March 31, 2020; the increase of $4.6 million or 98% in the income tax expense is mainly attributable to the reversal of a deferred tax liability previously recorded related to the Biodroga CGU. As for the twelve-month period ended March 31, 2021, the net loss of that period includes an income tax recovery of $4.6 million compared to an expense of $4.6 million for the same period the previous year; the increase of $9.2 million or 200% in the income tax recovery provision is mainly attributable to the reversal of a deferred tax liability previously recorded related to the SugarLeaf CGU intangible assets for which amortization was accelerated, as well as the reversal of the deferred tax liability related to the Biodroga CGU previously mentioned.
Adjusted EBITDA1
Adjusted EBITDA loss increased by $18.9 million or 327% for the quarter ended March 31, 2021 to an Adjusted EBITDA loss of ($24.7) million compared to ($5.8) million for the quarter ended March 31, 2020; for the twelve-month period ended March 31, 2021, Adjusted EBITDA loss increased by $32.7 million or 164%, to ($52.7) million, compared to ($19.9) million the previous year.
The increase in Adjusted EBITDA loss for the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020 is mainly attributable to the change in net loss (increase of $21.1 million) and by the following changes in adjustments to EBITDA: impairment loss on long-term assets (decrease of $29.2 million), non-employees compensation related to warrants (decrease of $17.3 million), income tax expense (decrease of $4.6 million), revaluation of derivatives (decrease of $4.6 million), partly offset by the change in fair value of contingent consideration (increase of $36.8 million), the write-down of inventories and deposits (increase of $15.6 million) and net finance costs (increase of $3.4 million).
As for the twelve-month period ended March 31, 2021, the increase in Adjusted EBIDTA loss is again mainly caused by the change in net loss (increase of $107.7 million) and by the following changes in adjustments to EBITDA: impairment loss on long-term assets (decrease of $35.6 million), non-employees compensation related to warrants (decrease of $13.2 million), income tax expense (decrease of $9.2 million), revaluation of derivatives (decrease of $10.0 million), stock-based compensation (decrease of $3.5 million), partly offset by the change in fair value of contingent consideration (increase of $97.2 million), the write-down of inventories and deposits (increase of $23.0 million), depreciation and amortization (increase of $17.3 million, including $14.0 million in acceleration of amortization of long-lived non-financial assets) and by net finance costs (increase of $8.2 million).
Net loss
The Corporation realized a net loss for the three-month period ended March 31, 2021 of $60.3 million compared to a net loss of $39.2 million for the three-month period ended March 31, 2020, an increase of $21.1 million or 54%. The decrease in the net income for the three-month period ended March 31, 2021 is attributable mainly to the decrease in revenues ($2.8 million), the increase in cost of sales ($20.9 million), the increase in SG&A expenses ($4.0 million) and the decrease in revaluations and changes in fair values ($32.1 million), partly offset by the decrease in impairment losses on assets ($28.9 million), in R&D expenses ($0.2 million) and in income tax expenses ($4.6 million), as previously discussed.
The net loss for the twelve-month period ended March 31, 2021 totaled $168.6 million compared to $60.9 million for the twelve-month period ended March 31, 2020, an increase of $107.7 million or 177%. The increase in the net loss for the twelve-month period ended March 31, 2021 is attributable mainly to the decrease in gross profit ($34.4 million), the increase in SG&A expenses ($23.5 million) and the decrease in positive changes in fair values and revaluations ($87.2 million), partly offset by the decrease in impairment losses on assets ($35.6 million) and the decrease in R&D expenses ($0.7 million), as mentioned above.
|
1 The Adjusted EBITDA is not a standard measure endorsed by IFRS requirements. |
|
17
management discussion and analysis
As of April 1, 2020, the Corporation revised its management structure and performance is now measured based on a single segment, which is the consolidated level, as the previous segment income (loss) before corporate expenses is no longer used in internal management reports that are reviewed by the Corporation’s Chief Operating Decision Maker, management believing that such information is no longer relevant in evaluating the results of the Corporation.
In the prior year, the Corporation’s reportable segments were the nutraceutical and the cannabis segments.
As opposed to a change in reportable segments where the comparatives for the previous period would be restated to show the results of the comparative period according to the new reportable segments, there is no need to restate the comparatives, nor show the reportable segments, as the Corporation’s Chief Operating Decision Maker uses the consolidated statement of financial position and the consolidated statement of loss and comprehensive loss to evaluate the results of the Corporation.
Geographical information
Revenue is attributed to geographical locations based on the origin of customers’ location.
|
|
Quarter Ended |
|
|
Quarter Ended |
|
|
Year Ended |
|
|
Year Ended |
|
||||
|
|
March 31, 2021 |
|
|
March 31, 2020 |
|
|
March 31, 2021 |
|
|
March 31, 2020 |
|
||||
|
|
Total Revenues |
|
|
Total Revenues |
|
|
Total Revenues |
|
|
Total Revenues |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
$ |
1,310,039 |
|
|
$ |
4,547,368 |
|
|
$ |
17,763,182 |
|
|
$ |
14,525,570 |
|
United States |
|
|
4,034,998 |
|
|
|
4,982,738 |
|
|
|
27,579,333 |
|
|
|
14,936,088 |
|
Other countries |
|
|
1,422,534 |
|
|
|
— |
|
|
|
1,467,327 |
|
|
|
116,146 |
|
|
|
$ |
6,767,571 |
|
|
$ |
9,530,106 |
|
|
$ |
46,809,842 |
|
|
$ |
29,577,804 |
|
Revenues increased by $3.2 million or 22% in Canada, increased by $12.6 million or 85% in the United States and increased by $1.4 million or 1163% for other countries (all royalty revenues) for the twelve-month period ended March 31, 2021 compared to the twelve-month period ended March 31, 2020; Neptune recorded its first sales for the health and wellness innovations products (mainly in the United States), added a new source of revenues with the acquisition of Sprout (again mainly in the United States) and the B2B extraction revenues were up in Canada in the first half of the year.
For the three-month period ended March 31, 2021, revenues decreased by $3.2 million or 71% for Canada (mainly due to the decrease in B2B extraction revenues and as the Biodroga revenues decreased temporarily, due to timing of orders), decreased by $0.9 million or 19% in the US (due to the pause in operations at SugarLeaf, despite the increase related to the Sprout acquisition) and increased by $1.4 million or 100% for other countries compared to the same period the previous year. Neptune experienced production and transportation issues with third parties related to the pandemic situation, resulting in non-significant revenues from the health and wellness innovation product portfolio expansion in the second half of the year.
18
management discussion and analysis
FINANCIAL AND CAPITAL MANAGEMENT
USE OF PROCEEDS
The use of proceeds for the quarters and years ended March 31, 2021 and 2020 was as follows:
1The negative amounts under sources of proceeds for the quarter ended March 31, 2021 represent adjustments from the previous quarter.
Sources of Funds
For the three-month period ended March 31, 2021, funds coming from different sources amounted to $73.0 million representing an increase of $64.2 million or 730% compared to $8.8 million for the three-month period ended March 31, 2020. The increase for the quarter ended March 31, 2021 was mainly attributable to the gross proceeds from the issuance of equity (increase of $64.7 million).
Sources of funds went up by $84.7 million or 110%, from $77.2 million for the twelve-month period ended March 31, 2020, to $161.9 million for the twelve-month period ended March 31, 2021. The increase for the twelve-month period ended March 31, 2021 was mainly attributable to more equity being issued (increase of $94.3 million), partly offset by the decrease in the proceeds from the sale of Acasti shares (decrease of $5.3 million) and no new loans and borrowings (decrease of $4.0 million).
19
management discussion and analysis
At-The-Market Offering
During the three-month period ended June 30, 2020, the Corporation sold a total of 5,411,649 shares through the At-The-Market offering (the “ATM Offering”) over the NASDAQ stock market, for gross proceeds of $19.0 million and net proceeds of $18.2 million. The shares were sold at the prevailing market prices which resulted in an average of approximately US$2.53 per share. Effective February 16, 2021, the ATM Offering was terminated and Neptune will make no further sales under the ATM Offering. As of that date, Neptune had sold 9,570,735 of its common shares under the ATM Offering, raising approximately US$18.6 million in gross proceeds.
On July 13, 2020, Neptune entered into definitive agreements with certain healthcare-focused institutional investors for the sale of 4,773,584 common shares at an offering price of US$2.65 per share for gross proceeds of approximately US$12.65 million (CA$17.1 million) before deducting fees and other estimated offering expenses, pursuant to a registered direct offering (the “Offering”). The Offering closed on July 15, 2020 with one of its existing institutional investors and two new U.S. institutional investors. The net proceeds of the transaction amounted to $16.0 million.
On October 20, 2020, Neptune entered into definitive agreements with certain US healthcare focused institutional investors for a private placement of 16,203,700 common shares and 10,532,401 warrants to purchase 10,532,401 common shares for gross proceeds of approximately $46.0 million (US$35 million) before deducting fees and other estimated offering expenses (the "Private Placement"). Each warrant will entitle the holder thereof to acquire one common share at an exercise price of US$2.25 per share for a period beginning on April 22, 2021 through October 22, 2025. The Company expects to use the net proceeds from the Private Placement, which closed on October 22, 2020, for purchase order fulfilment, working capital and other general corporate purposes. The net proceeds of the Private Placement amounted to $43.4 million.
Registered Direct Offering Priced At-The-Market Under Nasdaq Rules and Concurrent Private Placement
On February 17, 2021, Neptune announced it had entered into definitive agreements with institutional investors for the purchase of 27,500,000 common shares. The Company also agreed to issue to the investors, in a concurrent private placement, unregistered common share purchase warrants (the "Warrants") to purchase an aggregate of 6,875,000 common shares. Each common share and accompanying quarter of a Warrant were sold together at a combined offering price of US$2.00, pursuant to a registered direct offering, priced at-the-market under Nasdaq rules, for aggregate gross proceeds of approximately US$55.0 million before deducting fees and other estimated offering expenses (the "Offering"). The Warrants will have an exercise price of US$2.25 per share, will be exercisable commencing on the six-month anniversary of the date of issuance, and will expire 5.5 years from the date of issuance. Proceeds were allocated amongst common shares and warrants by applying a relative fair value approach, resulting in an initial warrant liability of $8.2 million and $61.8 million recorded in the equity of the Corporation. Purchase warrants are recognized as liabilities, as the exercise price of the warrants is in USD, whereas the Corporation’s functional currency is the Canadian dollar. The Offering closed on February 19, 2021, following the satisfaction of customary closing conditions and the receipt of regulatory approvals, including the approval of the Toronto Stock Exchange.
Uses of Funds
For the quarter ended March 31, 2021, funds used for operating, investing and financing activities amounted to $30.0 million representing an increase of $17 million or 131% compared to $13.0 million for the quarter ended March 31, 2020. The change for the quarter ended March 31, 2021 was mainly attributable to the increase in cash flows used in operating activities (plus $6.4 million), the acquisition of a controlling interest in Sprout ($4.0 million), the repayment of a loan ($2.4 million), the increase in costs of issuance of shares and warrants (plus $2.5 million) and the impact of foreign exchange ($2.5 million), partly offset by less investment in property, plant and equipment and intangible assets (decrease of $1.4 million).
For the twelve-month period ended March 31, 2021, funds used for operating, investing and financing activities amounted to $103.3 million representing an increase of $32.9 million or 47% compared to $70.5 million for the twelve-month period ended March 31, 2020. The increase for the twelve-month period ended March 31, 2021 was mainly attributable to higher cash flows being used in operating activities (increase of $41.1 million), the increase in costs of issuance of shares and warrants (plus $4.6 million) and the impact of foreign exchange ($3.5 million), partly offset by reduction on cash payments related to business combinations (decrease of $11.8M) and by a reduction in investment in property, plant and equipment and intangible assets (decrease of $4.0 million) and in repayments of loans and borrowings combined with the variation of the bank credit line (decrease of $1.2 million).
Net cash inflows (outflows)
Consequent to the changes in sources and uses of funds for the three-month and twelve-month periods ended March 31, 2021 discussed above, net cash inflows amounted to $43.0 million and $58.6 million respectively for the three-month and twelve-month periods ended March 31, 2021, compared to net cash inflows (or outflows) of ($4.2) million and $6.8 million respectively for the three-month and twelve-month periods ended March 31, 2020.
This represents an increase of $47.2 million or 1121% for the fourth quarter of fiscal year 2021 compared to the fourth quarter of fiscal year 2020, and an increase of $51.8 million or 767% for the twelve-month period ended March 31, 2021 compared to the same period in the previous year, direct consequence of the changes in the sources and uses of funds described earlier.
20
management discussion and analysis
CAPITAL RESOURCES
Liquidity position
As at March 31, 2021, the Corporation’s liquidity position, consisting of cash and cash equivalents, was $75,167,100. The Corporation also has a short-term investment of $24,050.
Loans and borrowings
During the year ended March 31, 2020, a subsidiary of the Corporation closed a revolving line of credit with a large Canadian financial institution for an amount of $5,000,000 to support its operations. As at March 31, 2021, this loan had been repaid and is no longer available.
Neptune also closed a US$45 million letter of credit facility with Perceptive Advisors to support the Corporation’s inventory purchases. No fee was paid by Neptune for the establishment of this facility, but the Corporation will incur a fee of 2.5% on any funds actually drawn under the facility. No amounts were drawn from the letter of credit facility during the year ended March 31, 2021. As at March 31, 2021, the credit facility is considered expired.
On February 10, 2021, as part of the Sprout acquisition, Sprout issued a promissory note of US$10,000,000 guaranteed by the Corporation 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 simple interest at the rate of 10.0% per annum, payable quarterly in arrears on the last day of each fiscal quarter during the term, commencing March 31, 2021. The principal is payable on February 1, 2024
Equity
Equity consists of the following items:
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
Share capital |
$ |
|
379,643,670 |
|
$ |
|
213,876,454 |
|
Warrants |
|
|
23,947,111 |
|
|
|
18,597,776 |
|
Contributed surplus |
|
|
71,991,328 |
|
|
|
69,173,313 |
|
Accumulated other comprehensive income |
|
|
1,202,409 |
|
|
|
5,517,376 |
|
Deficit |
|
|
(330,681,375 |
) |
|
|
(163,534,626 |
) |
Total equity attributable to equity holders of the Corporation |
$ |
|
146,103,143 |
|
$ |
|
143,630,293 |
|
Total equity attributable to non-controlling interest |
|
|
28,080,004 |
|
|
|
— |
|
Total equity |
$ |
|
174,183,147 |
|
$ |
|
143,630,293 |
|
21
management discussion and analysis
Acquisition of a 50.1% interest in Sprout Foods, Inc.
On February 10, 2021, Neptune acquired a 50.1% interest in Sprout Foods, Inc. (“Sprout” or “Sprout Foods”). The transaction consideration includes a cash payment of $7.6 million (USD$6.0 million) and the issuance of 6,741,573 Neptune common shares having a value at issuance of $22.3 million (USD$17.6 million). Additionally, Neptune is guaranteeing a $12.6 million (USD$10.0 million) note issued by Sprout in favor of Morgan Stanley Expansion Capital (“MSEC”).
Furthermore, Sprout’s other owners of equity interests 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. The total consideration payable for the additional shares (“Call Shares”) upon the exercise of the Call Option and the closing of Neptune's acquisition of the Call Shares would be equal to the total equity value of the Call Shares, which would be based upon the applicable percentage acquired by Neptune of the total enterprise value for Sprout.
As at the close of the transaction, the value of the asset related to the Call Option was determined to be $7,035,730 (USD$5.5 million), representing the difference between the market price and the contract value of the Call Option, discounted at a rate of 8.9% and assuming the transaction would take place on January 1, 2023. To establish the market price, the multiples selected were 2.3x for revenues and 12.0x for EBITDA, based on analysis of average and median industry multiples, and were adjusted to consider a 20% discount; the multiples to be used as per the contract are 3.0x for revenues and 15.0x for EBITDA, weighted at 50%. As at March 31, 2021, the fair value of this asset was remeasured to $7,043,513 (USD$5.6 million), generating a gain on remeasurement of $105,296 accounted under revaluation of derivatives, and a foreign exchange loss of $72,849 for the year ended March 31, 2021.
Through Sprout Foods, Neptune enters a new market: the organic baby food market. Sprout is committed to offering products that contain whole foods, no preservatives, no concentrates, no added sugar, are USDA certified organic and are non-GMO. 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).
On February 4, 2021, the United States House of Representatives Subcommittee on Economic and Consumer Policy, Committee on Oversight and Reform (the “Subcommittee”), published a report, “Baby Foods Are Tainted with Dangerous Levels of Arsenic, Lead, Cadmium, and Mercury” (the “Report”), which stated that, with respect to Sprout, “Independent testing of Sprout Organic Foods” has confirmed that their baby foods contain concerning levels of toxic heavy metals.” The Report further stated that after receiving reports alleging high levels of toxic metals in baby foods, the Subcommittee requested information from Sprout but did not receive a response.
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.
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 produced documents to the NMAG on March 10, 2021. The pending inquiries and potential findings could result in material litigation and may have a material adverse effect on our business, financial condition, or results of operations.
The acquisition has been accounted for using the acquisition method with the results of the operations of Sprout being included in the consolidated financial statements since the date of acquisition.
The cash consideration of this transaction was funded with the proceeds of previous issuances of shares.
The following table summarizes the purchase price of the acquisition, the fair value of the identifiable assets acquired and liabilities assumed as of the acquisition date:
|
|
Fair value recognized on acquisition |
|
|
Assets acquired |
|
|
|
|
Cash and cash equivalents |
$ |
|
3,633,699 |
|
Trade receivables |
|
|
2,618,278 |
|
Inventories |
|
|
9,780,303 |
|
Prepaid expenses and other current assets |
|
|
226,226 |
|
Property and equipment |
|
|
178,488 |
|
Right-of-use asset |
|
|
1,132,815 |
|
Tradenames |
|
|
28,386,625 |
|
Other assets |
|
|
7,044,969 |
|
|
|
|
53,001,403 |
|
|
|
|
|
|
Liabilities assumed |
|
|
|
|
Trade and other payables |
$ |
|
6,554,426 |
|
Lease liability |
|
|
1,132,815 |
|
Promissory note |
|
|
14,528,860 |
|
|
|
|
22,216,101 |
|
|
|
|
|
|
Total identifiable net assets at fair value |
|
|
30,785,302 |
|
|
|
|
|
|
Non-controlling interest measured at fair value (49.9%) |
|
|
(29,825,623 |
) |
Goodwill arising on acquisition |
|
|
28,990,097 |
|
|
|
|
|
|
Purchase price |
$ |
|
29,949,776 |
|
|
|
|
|
|
Consist of: |
|
|
|
|
Cash |
$ |
|
7,615,800 |
|
Common shares issued, at fair value |
|
|
22,333,976 |
|
Total consideration |
$ |
|
29,949,776 |
|
Note: As part of the acquisition of Sprout, net deferred tax assets of $19,358,652 were acquired for which a full valuation allowance was recognized. |
|
|
|
|
|
|
|
|
|
As at March 31, 2021, the purchase price allocation is final.
The gross amount of the trade accounts receivable amount to $3,891,493 of which $1,273,215 was expected to be uncollectible at the acquisition date.
The goodwill recognized in connection with this acquisition is primarily attributable to synergies with existing business, and other intangibles that do not qualify for separate recognition including assembled workforce. Goodwill and intangible assets are deductible for income tax purposes.
The assets and liabilities of Sprout Foods were consolidated into the statement of financial position of Neptune at the end of the reporting period. As such, Neptune’s consolidated statement of financial position includes the following assets and liabilities from Sprout:
The operations of Sprout Foods were consolidated into the statement of loss and comprehensive loss of Neptune from the date of acquisition to the end of the reporting period. As such, Neptune’s consolidated statement of loss and comprehensive loss includes the following items from Sprout:
22
management discussion and analysis
|
(1) |
Excludes acquisition related costs incurred |
As the acquisition by Neptune of a controlling interest in Sprout occurred on a date that is not the date of the beginning of the fiscal year ended March 31, 2021, Management is providing the following pro forma financial information:
Neptune |
|
April 1, 2020 - |
|
|
Selected pro forma financial information from the statement of loss |
|
March 31, 2021 |
|
|
|
|
|
|
|
Total revenues |
|
$ |
71,171,327 |
|
Loss from operating activities (1) |
|
|
(198,698,993 |
) |
|
(1) |
Excludes acquisition related costs incurred |
The Corporation considers these pro-forma figures to represent an initial approximate measure of the performance of the combined Corporation and to provide an initial reference point of comparisons in future periods. In determining these amounts, management has assumed the fair value adjustments, and acquisition costs related to this business combination, would have been the same as if the acquisition would have occurred on April 1, 2020.
Acquisition of SugarLeaf Labs, Inc.
During the previous fiscal year, on July 24, 2019, Neptune completed the acquisition of the assets of SugarLeaf. Neptune paid an initial consideration for SugarLeaf of $23.7 million (US $18.1 million), a combination of $15.8 million (US $12.0 million) in cash and $8.0 million (US $6.1 million) for 1,587,301 common shares. Additionally, by achieving certain annual adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") and other performance targets, earnouts could reach $173.5 million (US $132.0 million). A portion of the earnout was to be paid by the issuance of a fixed number of shares upon the achievement of certain performance targets. The three additional earnout payments were to be paid over the next three years with a combination of cash or common shares, with at least 50% in cash.
As of the acquisition date, the Corporation recorded $115.0 million as contingent consideration, which represented its fair value at the date of acquisition, net of the initial consideration paid. Of the total contingent consideration, an amount of $20.6 million was classified as contributed surplus, representing the fair value at the date of acquisition of the fixed number of shares that are required to be issued upon the achievement of certain performance targets.
The contingent consideration classified as contributed surplus will not be remeasured and settlement is accounted for in equity. Contingent consideration of $94.4 million was classified as a liability representing the present value of the expected payout in cash or a variable number of common shares for the earnouts of the next three years. The contingent consideration classified as a liability is required to be remeasured at fair value at each reporting date. The fair value of the contingent liability was remeasured as at March 31, 2021 to nil (2020 – nil).
Through SugarLeaf, Neptune established a U.S.-based hemp extract supply chain, gaining a 24,000 square foot facility located in North Carolina. SugarLeaf's cold ethanol processing facility uses hemp cultivated by licensed American growers to yield high-quality full and broad-spectrum hemp extracts.
During the third quarter of fiscal year 2020, Management determined there was an impairment indicator due to a decline in hemp derived CBD refined oil pricing as well as a decrease in forecasted sales volumes for the SugarLeaf CGU. The recoverable amount of the SugarLeaf CGU was determined using the value-in-use basis and was determined to be lower than the carrying value, resulting in a goodwill impairment loss of $44.1 million. During the fourth quarter of 2020, the hemp derived CBD refined oil pricing continued to face a decline and the forecasted sales volume continued to decrease. As a result, during the fourth quarter of 2020, the Corporation recorded an additional goodwill impairment loss of $38.0 million as it concluded that the recoverable amount based on the value in use was less than the carrying value of the CGU.
During the 2021 fiscal year, as a result of the COVID-19 pandemic and other reasons, the Company was forced to furlough a number of SugarLeaf employees. During the quarter ended December 31, 2020, the downturn in oil prices for cannabis persisted (as was the case for March 2020), and the commercial viability of the SugarLeaf CGU was reviewed because of this and other reasons.
Management noted that the customers for which a customer relationship intangible asset was acquired with the SugarLeaf CGU had ceased placing orders and there were minimal active business relationships with these customers. As the CGU is no longer viable given declining pricing and demand, the Corporation will not benefit from these relationships and thus decided to take accelerated amortization for this intangible asset, in the amount of $7.7 million during the year ended March 31, 2021.
Also, Neptune is not currently producing or selling any products resulting from the farmer relationships acquired with the SugarLeaf CGU. Furthermore, SugarLeaf does not currently have any contracts with customers and there is no commercial viability to these supplier relationships with the farmers. Neptune will not realize future economic benefits from these relationships and thus, Management decided to take accelerated amortization for this intangible asset, in the amount of $6.3 million and recorded a $35.6 million loss on impairment of goodwill during the year ended March 31, 2021.
23
management discussion and analysis
CONSOLIDATED CONTRACTUAL OBLIGATIONS
The following are the contractual maturities of financial liabilities and other contracts as at March 31, 2021, in thousands of dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
|
Required payments per year |
|
Carrying amount |
|
|
Contractual Cash flows |
|
|
Less than 1 year |
|
|
1 to 3 years |
|
|
4 to 5 years |
|
|
More than 5 years |
|
||||||
Trade and other payables and long-term payables |
|
$ |
24,976 |
|
|
$ |
24,976 |
|
|
$ |
24,976 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Lease liabilities1 |
|
|
3,916 |
|
|
|
2,527 |
|
|
|
557 |
|
|
|
767 |
|
|
|
1,203 |
|
|
|
— |
|
Loans and borrowings2 |
|
|
14,211 |
|
|
|
12,841 |
|
|
|
1,000 |
|
|
|
11,841 |
|
|
|
— |
|
|
|
— |
|
Other Liability3 |
|
|
2,258 |
|
|
|
18,843 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,843 |
|
Research and development contracts |
|
|
— |
|
|
|
728 |
|
|
|
428 |
|
|
|
300 |
|
|
|
— |
|
|
|
— |
|
Purchase obligation |
|
|
— |
|
|
|
283 |
|
|
|
283 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other agreements |
|
|
— |
|
|
|
1,312 |
|
|
|
423 |
|
|
|
846 |
|
|
|
43 |
|
|
|
— |
|
|
|
$ |
45,361 |
|
|
$ |
61,510 |
|
|
$ |
27,667 |
|
|
$ |
13,754 |
|
|
$ |
1,246 |
|
|
$ |
18,843 |
|
(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 Corporation reaches a level of market capitalization. |
Under the terms of its financing agreements, the Corporation is not required to meet financial covenants.
The Corporation has no significant off-balance sheet arrangements as at March 31, 2021, other than those mentioned above and the commitments mentioned under note 22 (a) of the consolidated financial statements for the year ended March 31, 2021.
24
management discussion and analysis
In the normal course of operations, the Corporation is involved in various claims and legal proceedings. The most significant of which are as follows:
(i) |
Under the terms of an agreement entered into with a corporation controlled by a Former CEO of the Corporation, the Corporation is required to pay royalties of 1% of its revenues in semi-annual instalments, for an unlimited period. Based on currently available information, a provision of $1.9 million has been recognized for this claim as of March 31, 2021 (refer to ”Provisions” in this MD&A). |
(ii) |
In September 2020, Neptune submitted a claim and demand for arbitration against Peter M. Galloway and PMGSL Holdings, LLC (collectively “PMGSL”) in accordance with the Asset Purchase Agreement (“APA”) dated May 9, 2019 between, among others, Neptune and PMGSL. Separately, PMGSL submitted a claim and demand for arbitration against Neptune. The Neptune claims and PMGSL claims have been consolidated into a single arbitration and each are related to the purchase by Neptune of substantially all of the assets of the predecessor entities of PMGSL Holdings, LLC. Neptune is claiming, among other things, breach of contract and negligent misrepresentation by PMGSL in connection with the APA and is seeking, among other things, equitable restitution and any and all damages recoverable under law. PMGSL is claiming, among other things, breach of contract by Neptune and is seeking, among other things, payment of certain compensation contemplated by the APA. While Neptune believes there is no merit to the claims brought by PMGSL, a judgment in favor of PMGSL may have a material adverse effect on our business and Neptune intends to continue vigorously defending itself. Based on currently available information, a provision of $0.8 million has been recognized for this case as at March 31, 2021. |
(v) |
On March 16, 2021, a purported shareholder class action was filed in US District Court for the Eastern District of New York against the Company and certain of its current and former officers alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The Company believes these claims are without merit and intends to vigorously defend itself. |
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.
25
management discussion and analysis
During the year ended March 31, 2019, the Corporation received a judgment from the Superior Court of Québec in respect of certain royalty payments alleged to be owed and owing to a former chief executive officer of the Corporation (the “Former CEO”) pursuant to the terms of an agreement entered into on February 23, 2001, between Neptune and the Former CEO (the “Royalty Agreement”). The Corporation appealed the judgment which was dismissed by the Court of Appeal of Québec in February 2021. Under the terms of the Royalty Agreement and as maintained by the court, annual royalties of 1% of the sales and other revenue made by the Corporation on a consolidated basis are to be payable by the Corporation to the Former CEO biannually, but only to the extent that the cost of the royalty would not cause the Corporation to have negative earnings before interest, taxes and amortization (in which case, the payments would be deferred to the following fiscal year).
A litigation provision of $2.1 million was recorded in the consolidated statement of financial position in the year ended March 31, 2019 to cover the estimated cost of the judgement in accordance with the ruling above, including legal and administrative proceedings. During the three-month and twelve-month periods ended March 31, 2020, the Corporation paid nil and $1.2 million respectively related to the portion of the judgment not contested by Neptune and also paid legal fees for the appeal. During the three-month and twelve-month periods ended March 31, 2021 an additional amount of $0.2 million and $0.8 million (2020 - $0.1 million and $0.3 million) respectively has been recorded as provision for royalties payments on sales for this period consolidated revenues and as expenses related to the litigation. As at March 31, 2021, the provision recorded for this litigation totals $1.9 million ($1.1 million as at March 31, 2020). Subsequent to the year ended March 31, 2021, the Corporation made payments totalling $1.7 million to the Former CEO in relation with this provision.
In addition to the above, the Former CEO of the Corporation was claiming the payment of approximately $8.5 million and the issuance of equity instruments for severance entitlements under his employment contract terminated in April 2014. On May 10, 2019, Neptune announced a settlement regarding these claims. Pursuant to the agreement entered, Neptune agreed to issue 600,000 common shares from treasury (in accordance with securities regulation) and transfer 2,100,000 shares of Acasti held by the Corporation to the Former CEO. As at March 31, 2019, the common shares of Acasti transferable to the Former CEO of $2.8 million were presented as current other assets in the statement of financial position. In addition, Neptune agreed to reimburse nominal legal fees. As at March 31, 2019, a provision of $5.8 million was recorded in the consolidated statement of financial position relating to this settlement. During the twelve-month period ended March 31, 2020, the 2,100,000 shares in Acasti held by the Corporation were transferred and the 600,000 common shares from treasury were issued to the Former CEO. Neptune received a full and final release on all claims in connection with this case.
In September 2020, Neptune submitted a claim and demand for arbitration against Peter M. Galloway and PMGSL Holdings, LLC (collectively “PMGSL”) in accordance with the Asset Purchase Agreement (“APA”) dated May 9, 2019 between, among others, Neptune and PMGSL. Separately, PMGSL submitted a claim and demand for arbitration against Neptune. The Neptune claims and PMGSL claims have been consolidated into a single arbitration and each are related to the purchase by Neptune of substantially all of the assets of the predecessor entities of PMGSL Holdings, LLC. Neptune is claiming, among other things, breach of contract and negligent misrepresentation by PMGSL in connection with the APA and is seeking, among other things, equitable restitution and any and all damages recoverable under law. PMGSL is claiming, among other things, breach of contract by Neptune and is seeking, among other things, payment of certain compensation contemplated by the APA. While Neptune believes there is no merit to the claims brought by PMGSL, a judgment in favor of PMGSL may have a material adverse effect on our business and Neptune intends to continue vigorously defending itself. Based on currently available information, a provision of $0.8 million has been recognized for this case as at March 31, 2021.
During the year ended March 31, 2021, the Corporation recorded $195,000 of other provisions for other legal obligations.
26
management discussion and analysis
FINANCIAL MEASURES AND ACCOUNTING POLICIES
This section discusses key estimates and assumptions that management has made and how they affect the amounts reported in the financial statements and notes. It also describes key changes in accounting standards and our accounting policies, and how they affect our financial statements. We have prepared our consolidated financial statements using IFRS. Other significant accounting policies, not involving the same level of measurement uncertainty as those discussed in this section, are nevertheless important to an understanding of our financial statements. See Note 3, Significant accounting policies in Neptune’s 2021 consolidated financial statements for more information about the accounting principles we used to prepare our consolidated financial statements.
MATERIALITY OF INFORMATION FOR DISCLOSURE PURPOSES
Management determines whether or not information is "material" by judging if a reasonable investor’s decision whether or not to buy, sell or hold securities of the Company would likely be influenced or changed if the information in question were omitted or misstated.
NON-IFRS FINANCIAL PERFORMANCE MEASURES
The Corporation uses one adjusted financial measure, Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) to assess its operating performance. This non-IFRS financial measure is mainly derived from the Corporation’s financial statements and is presented in a consistent manner, other than for those changes previously disclosed. The Corporation uses this measure for the purposes of evaluating its historical and prospective financial performance, as well as its performance relative to competitors. These measures also help the Corporation to plan and forecast for future periods as well as to make operational and strategic decisions. The Corporation believes that providing this information to investors, in addition to IFRS measures, allows them to see the Corporation’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.
Neptune obtains its Adjusted EBITDA measurement by adding to net income (loss), net finance costs and depreciation and amortization and by subtracting income tax recovery. Other items such as stock-based compensation, non-employee compensation related to warrants, litigation provisions, acquisition costs, signing bonuses, severances and related costs, impairment losses, write-downs, revaluations and changes in fair values of the Corporation are also added back as they may vary significantly from one period to another. Adjusting for these items does not imply they are non-recurring.
A reconciliation of net loss to Adjusted EBITDA is presented on page 8 of this document. Please note that non-employee compensation related to warrants and signing bonuses were new additions to the Company’s calculation methodology starting with the quarter ended September 30, 2020. Signing bonuses did not occur previously, so no restatement of the previous periods was needed, but there were non-employee compensation expenses related to warrants in previous quarters; consequently, the amounts for the years ended March 31, 2021 and 2020 reflect the sum of those expenses for all quarters of respective fiscal years.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements are prepared in accordance with IFRS. In preparing the consolidated financial statements for the years ended March 31, 2021 and 2020, 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 judgement 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. The following sections describe the Corporation’s most significant accounting policies and the items for which critical estimates were made in the consolidated financial statements and should be read in conjunction with the notes to the consolidated financial statements for the years ended March 31, 2021 and 2020.
Use of estimates and judgments
The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
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.
Critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements include the following:
|
• |
Assessing if the Corporation has control of Sprout: upon the acquisition of 50.1% of the outstanding equity of Sprout, Neptune assessed whether it controls Sprout through its exposure and rights to variable returns from its involvement with Sprout and has the ability to affect those returns through its power over Sprout. The former controlling shareholder retained a participation of 39.7% and will be the minority representative through the execution of their voting power as long as it holds more than half of its current investment. Based on the contractual terms of the acquisition agreement, the Corporation assessed that the voting rights in Sprout Foods, in combination with its majority representation on the Board of Directors, are the dominant factors in deciding who controls Sprout. . Therefore, Sprout Foods Inc. is consolidated in the Corporation’s consolidated financial statements; |
|
• |
Assessing the recognition of contingent liabilities, which requires judgment in evaluating whether there is a probable outflow of economic benefits that will be required to settle matters subject to litigation; |
27
management discussion and analysis
|
• |
Assessing if performance criteria on options and DSU will be achieved in measuring the stock-based compensation expense; |
|
• |
Assessing the fair value of services rendered in exchange of warrants; |
|
• |
Assessing the recognition period to be used in recording stock-based compensation that is based on market and non-market conditions, as well as bonuses that are based on achievement of market capitalization targets; and |
|
• |
The Corporation recognizes revenue from the sale of goods in the course of ordinary activities at a point in time when control of the assets is transferred to the customer. The Corporation must assess whether promises made to customers represent distinct performance obligations, the appropriate measure of the transfer of control and when the transfer of control has occurred. In addition, the Corporation may also 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, and in these instances, must determine whether it is a principal in these transactions. The assessment of terms and conditions in contracts which may impact revenue recognition can require significant judgment, particularly when contracts include non-standard terms. |
Assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year include the following:
|
• |
Estimating the recoverable amount of non-financial assets; |
|
• |
Estimating the lease term of contracts with extension options and termination options; |
|
• |
Estimating the revenue from contracts with customer subject to variable consideration; |
|
• |
Estimating the fair value of bonus and options that are based on market and non-market conditions |
|
• |
Estimating the fair value of the identifiable assets acquired, liabilities assumed and consideration transferred of the acquired business, including the related contingent consideration and Call Option; and |
|
• |
Estimating the litigation provision as it depends upon the outcome of proceedings. |
Non-financial assets
The carrying amounts of the Corporation’s non-financial assets, and other than inventories, tax credits receivable and recoverable and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same date.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the ''cash-generating unit'', or ''CGU'').
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
Goodwill
Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. The Corporation defines its CGUs based on the way it internally monitors and derives economic benefits from the acquired goodwill. Impairment losses for a CGU is first allocated to reduce goodwill. An impairment loss in respect of goodwill is not reversed in future periods.
Provisions
A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are usually determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost.
Income tax
The Corporation is required to make an assessment of whether deferred tax asset or liability has to be recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Also refer to notes 2(d), 3, 4, 9, 12, 15(f), 18, 19 and 25 of the consolidated annual financial statements.
28
management discussion and analysis
CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING CHANGES
The accounting policies and basis of measurement applied in the consolidated financial statements for the years ended March 31, 2021 are the same as those applied by the Corporation in its consolidated financial statements for the year ended March 31, 2020 other than as disclosed in note 3 (h) to the consolidated financial statements regarding revenue. For new standards and interpretations adopted during the previous year, see note 3 (p) to the audited consolidated financial statements of the Corporation.
Sale of products
Revenue from the sale of goods in the course of ordinary activities is recognized at a point in time when control of the assets is transferred to the customer. The Corporation transfers control generally on shipment of the goods or in some cases, upon reception by the customer. Revenue is measured based on the consideration the Corporation expects to be entitled to receive in exchange of assets as specified in contracts with customers. Revenue is presented net of returns. If the consideration in a contract includes a variable amount, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring the goods to the customer. Where the Corporation cannot reasonably estimate the future returns, revenue is deferred and recognized when the right to return the product is no longer available to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur when the associated uncertainty with the variable consideration is subsequently resolved.
Processing services
The Corporation is involved in the extraction, purification and formulation of health and wellness products. Revenue earned on processing services is recognized as the services are rendered in accordance with contractual terms, recovery of the consideration is probable, and the amount of revenue can be measured reliably. The Corporation recognizes revenue from processing services in proportion to the stage of completion of the service at the reporting date. The stage of completion is assessed based on surveys of work performed. For some arrangements in which the Corporation is entitled to non-cash consideration, revenue is measured at the fair value of exchanged assets as specified in contracts with customers. All related production costs are expenses as incurred.
Royalty revenues
Royalties are earned under the terms of the applicable agreement and are recognized when it is probable that the economic benefits associated with the transaction will be received and the amount can be measured reliably.
Principal versus agent arrangements
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, therefore, 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 that it retains for its services when it does not meet the criteria to be considered a principal for accounting purposes
New standards and interpretations not yet adopted
A number of new standards, and amendments to standards and interpretations, are not yet effective for the years ended March 31, 2021 and 2020, and have not been applied in preparing these consolidated financial statements. Management does not expect that any of the new standards and amendments to existing standards issued but not yet effective would have a material impact on the Corporation’s consolidated financial statements.
Classification of Liabilities as Current or Non-current (Amendments to IAS 1)
For the purposes of non-current classification, the amendments removed the requirement for a right to defer settlement or roll over of a liability for at least twelve months to be unconditional. Instead, such a right must have substance and exist at the end of the reporting period.
The amendments also clarify how a company classifies a liability that includes a counterparty conversion option. The amendments state that:
|
• |
settlement of a liability includes transferring a company’s own equity instruments to the counterparty, and |
|
• |
when classifying liabilities as current or non-current, a company can ignore only those conversion options that are recognized as equity. |
The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted.
Covid-19-Related Rent Concessions (Amendment to IFRS 16)
On May 28, 2020, the IASB issued Covid-19-Related Rent Concessions (Amendment to IFRS 16). Subsequently, on March 31, 2021, the IASB extended the practical expedient by 12 months – i.e. permitting lessees to apply it to rent concessions that reduce lease payments originally due on or before June 30, 2022.
The new 2021 amendments are effective for annual periods beginning on or after April 1, 2021. Early adoption is permitted.
29
management discussion and analysis
The original version of the practical expedient under the 2020 amendment was (and remains) optional. However, the new amendment is, in effect, not optional because a lessee that chose to apply the practical expedient introduced by the 2020 amendment needs to consistently apply the extension to similar rent concessions. This means that lessees may need to reverse previous lease modification accounting if a rent concession was ineligible for the original version of the practical expedient under the 2020 amendment (i.e. because the concession extended beyond June 30, 2021) but becomes eligible as a result of the new amendment.
The Corporation does not intend to adopt any of the above amendment by anticipation. The extent of the impact of adoption of the standard has not yet been determined
30
management discussion and analysis
The Company views risk as an integral part of its development and the diversification of its activities and advocates a risk management approach consistent with its business expansion strategy. The purpose of sound risk management is to provide reasonable assurance that incurred risks do not exceed acceptable thresholds and that risk-taking contributes to the creation of shareholder value. For the Company, this means striking a healthy balance between return and risk.
The Company is affected by risk in two ways. First, it exposes itself voluntarily to certain categories of risk, especially credit and market risk, in order to generate revenue. Second, it must assume the risks inherent to its activities to which it does not choose to expose itself and that do not generate revenue, i.e., operational risk. These risks may result in losses that could adversely affect expected earnings from value-creating activities.
In the normal course of business, the Company is primarily exposed to the following risks:
OPERATIONAL RISKS
COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition.
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. The COVID-19 pandemic continues to result in extended government-ordered closures affecting significant portions of the global economy, including in the United States and Canada. The public health crisis caused by COVID-19 and the measures taken and continuing to be taken by governments, businesses and the public have, and we expect will continue to have, certain negative impacts on our business operations, and could have a material adverse effect on our business, results of operations and financial condition.
The full extent to which COVID-19 may impact our business, including our operations and the market for our securities and our financial condition, will depend on future developments, which are highly uncertain and cannot be predicted at this time. These include the duration, severity and scope of the outbreak, and further action taken by the government and other third parties in response to the pandemic. In particular, COVID-19 and government efforts to curtail COVID-19 could impede our production facilities, increase operating expenses, result in loss of sales, affect our supply chains, impact performance of contractual obligations and require additional expenditures to be incurred.
In connection with COVID-19 and to comply with mandates and guidance from governmental authorities, we have and continue to update our operational procedures and safety protocols at our facilities. If such measures are not effective or governmental authorities implement further restrictions, we may be required to take more extreme action, which could include a short or long-term closure of our facilities or reduction in workforce. These measures may impair our production levels or cause us to close or severely limit production at one or more facilities. Further, our operations could be adversely impacted if suppliers, contractors, customers and/or transportation carriers are restricted or prevented from conducting business activities.
Consumer demand for our products may also be impacted by COVID-19 as a result of reductions in consumers’ disposable income associated with layoffs, and work or pay limitations due to mandatory social distancing and lockdown measures implemented by government authorities. As demand for our products decreases, we may be required to record additional asset impairments, including an impairment of the carrying value of our goodwill, along with other accounting charges.
Given the ongoing and dynamic nature and significance of COVID-19 and its impact globally, we are not able to enumerate all potential risks to our business. Any of the negative impacts of COVID-19, including those described above, alone or in combination with others, may have a material adverse effect on our business, results of operations or financial condition. Further, any of these negative impacts, alone or in combination with others, could exacerbate many of the other risk factors outlined in this MD&A and the AIF.
Catastrophic events outside of our control, including pandemics, may harm our results of operations or damage our facilities.
A catastrophic event where we have our operations, offices or manufacturing facilities, such as an earthquake, tsunami, flood, typhoon, fire, power disruption or other natural or manmade disaster, computer virus, cyber attack, terrorist attack, war, riot, civil unrest or other conflict, or an outbreak of a public health crisis including epidemics, pandemics or outbreaks of new infectious diseases or viruses, as well as related events that can result in volatility and disruption to global supply chains, operations, mobility of people, patterns of consumption and service, and the financial markets. A catastrophic event where Neptune has important operations could disrupt the Company’s operations or those of its contractors and impair production or distribution of its products, damage inventory, interrupt critical functions or otherwise negatively affect its business, harming Neptune’s results of operations.
If our risk management methods are not effective, our business, reputation and financial results may be adversely affected.
We have methods to identify, monitor, and manage our risks; however, these methods may not be fully effective. Some of our risk management methods may depend upon evaluation of information regarding markets, customers or other matters that are publicly available or otherwise accessible by us. That information may not in all cases be accurate, complete, up-to-date, or properly evaluated. If our methods are not fully effective or we are not successful in monitoring or evaluating the risks to which we are or may be exposed, our business, reputation, financial condition and operating results could be materially and adversely affected. In addition, our insurance policies may not provide adequate coverage.
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management discussion and analysis
We are currently, and may in the future be, subject to substantial litigation, investigations and proceedings that could cause us to incur significant legal expenses and result in harm to our business.
We are subject to federal, state, local, foreign, and provincial laws, rules, and regulations concerning advertising and marketing, including but not limited to those prohibiting unfair, deceptive, and/or abusive trade practices. Violations of advertising and marketing requirements can result in fines, penalties, injunctions, disgorgement of profits, full restitution for injury suffered by consumers, rescission of contracts, enforcement actions, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions.
Accordingly, we are exposed to potential liabilities and reputational risk associated with litigation, regulatory proceedings and government investigations and enforcement actions for the failure of us to comply with applicable health, safety, and labeling requirements and advertising and marketing requirements. Any adverse judgment in or settlement of any pending or any future litigation or investigation could result in payments, fines and penalties that could adversely affect our business, results of operations and financial condition. Regardless of the merits of the claims and the outcome, legal proceedings have resulted in, and may continue to result in, significant legal fees and expenses, diversion of management and employee time and other resources, and adverse publicity. Such proceedings could also adversely affect our business, results of operations and financial condition. For more information on our pending legal proceedings, see “Legal Proceedings and Regulatory Actions.”
Increasing awareness of health and wellness are driving changes in the consumer products industry, and if we are unable to react in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
We must continually anticipate and react, in a timely and cost-effective manner, to changes in consumer preferences and demands, including changes in demand driven by increasing awareness of health and wellness and demands for transparency or cleaner labels with respect to product ingredients by consumers and regulators. Consumers, especially in developed economies such as the U.S. and Canada, are rapidly shifting away from products containing artificial ingredients to all-natural, healthier alternatives. In addition, there has been a growing demand by consumers, non-governmental organizations and, to a lesser extent, governmental agencies to provide more transparency in product labeling and our customers have been taking steps to address this demand, including by voluntarily providing product-specific ingredients disclosure. These two trends could affect the types and volumes of our ingredients and compounds that our customers include in their consumer product offerings and, therefore, affect the demand for our products. If we are unable to react to or anticipate these trends in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
Markets for our products and services are highly competitive, and we may be unable to compete effectively.
Our products and services, including our consumer products, are offered in highly competitive markets that may be characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short product life cycles, evolving industry standards, continual improvement in product price/performance characteristics, rapid adoption of technological advancements by competitors and price sensitivity on the part of consumers and businesses.
Additionally, our consumer products may compete on the basis of product performance, brand recognition and price. Advertising, promotion, merchandising and packaging also have significant impacts on consumer purchasing decisions. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it typically requires continued advertising, promotional support and product innovations to maintain its relative market position. If our advertising, marketing and promotional programs are not effective or adequate, our net sales may be negatively impacted.
Some of our competitors are larger than us and have greater financial resources. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly and respond more effectively to changing business and economic conditions than we can. Competitive activity may require the Company to increase its spending on advertising and promotions and/or reduce prices, which could lead to reduced sales, margins and net earnings.
Our commercial success depends, in part, on our intellectual property rights and a failure by us to protect our intellectual property may have a material adverse effect on our ability to develop and commercialize our products.
Our success depends in part on our ability to develop products, obtain patents, protect our trade secrets and operate without infringing third-party exclusive rights or without others infringing our exclusive rights or those granted to us under license. The patent position of a corporation is generally uncertain and involves complex legal, factual and scientific issues, several of which remain unresolved. We do not know whether we will be able to develop other patentable proprietary technology and/or products. Furthermore, we cannot be completely certain that our future patents, if any, will provide a definitive and competitive advantage or afford protection against competitors with similar technology. Furthermore, we cannot give any assurance that such patents will not be challenged or circumvented by others using alternative technology or whether existing third-party patents will prevent us from marketing our products. In addition, competitors or potential competitors may independently develop, or have independently developed products as effective as ours or invent or have invented other products based on our patented products.
If third-party licenses are required, we may not be able to obtain them, or if obtainable, they may not be available on reasonable terms. Furthermore, we could develop or obtain alternative technologies related to third-party patents that may inadvertently cover its products. Inability to obtain such licenses or alternative technologies could delay the market launch of certain of our products, or even prevent us from developing, manufacturing or selling certain products. In addition, we could incur significant costs in defending ourselves in patent infringement proceedings initiated against us or in bringing infringement proceedings against others.
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management discussion and analysis
We may be unable to manage our growth effectively.
Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to continue to improve our operational and financial systems, managerial controls and procedures and we will need to continue to expand, train and manage our technology and workforce. We must also maintain close coordination among our technology, compliance, accounting, finance, marketing and sales functions. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business could be materially harmed.
To support our growth, we may have to further increase our investment in technology, facilities, personnel and financial and management systems and controls. We may also have to further expand our procedures for monitoring and assuring our compliance with applicable regulations, and may need to integrate, train and manage a growing employee base. The expansion of our existing businesses, and expansion into new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes that are more extensive and broader in scope than those we have historically required. We may not be successful in identifying or implementing all of the processes that are necessary. Further, unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our operating margins and profitability will be adversely affected.
We depend on significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly.
For the year ended March 31, 2021, one customer accounted for 14.9% of revenue; no customer accounted for more than 10% of revenue for the year ended March 31, 2020.
We believe that our operating results for the foreseeable future will continue to depend on sales to a small number of customers. These customers have no purchase commitments and may cancel, change or delay purchases with little or no notice or penalty. As a result of this customer concentration, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of these customers or any other significant customer. In the future, these customers may decide to purchase less product from us than they have in the past, may alter purchasing patterns at any time with limited notice, or may decide not to continue to purchase our products at all, any of which could cause our revenue to decline materially and materially harm our financial condition and results of operations. If we are unable to diversify our customer base, we will continue to be susceptible to risks associated with customer concentration.
In addition, the Company is subject to credit risk of its customers, and its profitability and cash flow are dependent on receipt of timely payments from clients. Any delay in payment by the Company’s customers may have an adverse effect on the Company’s profitability, working capital and cash flow. There is no assurance that the Company will be able to collect all or any of its trade receivables in a timely matter. If any of the Company’s clients face unexpected situations such as financial difficulties, the Company may not be able to receive full or any payment of the uncollected sums or enforce any judgment debts against such clients, and the Company’s business, results of operations and financial condition could be materially and adversely affected.
We have recorded significant goodwill impairment charges and may be required to record additional charges to future earnings if our goodwill or intangible assets become impaired.
As of March 31, 2021, our goodwill balance was $32.0 million which represented 13.6% of total consolidated assets. We are required to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets and/or goodwill may not be recoverable include a decline in stock price and market capitalization, slower growth rates in our industry or our own operations, and/or other materially adverse events that have implications on the profitability of our business or business segments. We may be required to record additional charges during the period in which any impairment of our goodwill or other intangible assets is determined which could have a material adverse impact on our results of operations. Even though these charges may be non-cash items and may not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities.
In some cases, we cannot determine with any certainty whether we have priority of invention in relation to any new product or new process covered by a patent application or if we were the first to file a patent application for any such new invention. Furthermore, in the event of patent litigation there can be no assurance that our patents would be held valid or enforceable by a court of competent jurisdiction or that a court would rule that the competitor’s products or technologies constitute patent infringement.
Moreover, part of our technological know-how constitutes trade secrets. We require that our employees, consultants, advisers and collaborators sign confidentiality agreements. However, these agreements may not provide adequate protection in the event of unauthorized use or disclosure of our trade secrets, know-how or other proprietary information.
Claims that our technology or products infringe on intellectual property rights of others could be costly to defend or settle, could cause reputational injury and would divert the attention of our management and key personnel, which in turn could have a material adverse effect on our business, results of operations, financial condition and cash flows. Any adverse outcome of such litigation or settlement of such a dispute could subject us to significant liabilities, could put one or more of our patents at risk of being invalidated or interpreted narrowly, could put one or more of our pending patent applications at risk of not issuing, or could facilitate the entry of generic products. Any such litigation could also divert our research, technical and management personnel from their normal responsibilities.
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management discussion and analysis
Significant interruptions in our access to certain supply chains, for key inputs such as raw materials, electricity, water, and other utilities may impair our operations.
Our business is dependent on a number of key inputs and their related costs (certain of which are sourced in other countries and on different continents), including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. We operate a manufacturing facility and have dispersed suppliers and customers. Governments may regulate or restrict the flow of our labor or our products, and the Company's operations, suppliers, customers, and distribution channels could be severely impacted. Any significant future governmental-mandated or market-related interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, rising or volatile energy costs could curtail or preclude our ability to continue production. In addition, our operations would be significantly affected by a prolonged power outage.
No assurances can be given that we will be successful in maintaining our required supply of materials, labor, equipment, parts, and components. See also
“COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition”.
Our activities rely on certain third-party suppliers, contract manufacturers and distributors, and such reliance may adversely affect us if the third parties are unable or unwilling to fulfill their obligations.
We purchase certain important ingredients and raw materials from third-party suppliers and, in certain cases, we engage contract manufacturers to supply us with finished products. For certain of our products, we enter into arrangements with third parties related to the development, testing, production, packaging, and commercialization of our products to our customers which are then responsible for the marketing and distribution of the products. Our revenues are therefore dependent on the successful efforts of these third parties.
Real or perceived quality control problems with raw materials or finished products manufactured by contract manufacturers could negatively impact consumer confidence in our products or expose us to liability. In addition, disruption in the operations of any such supplier or manufacturer or material increases in the price of raw materials, for any reason, such as changes in economic and political conditions, tariffs, trade disputes, regulatory requirements, import restrictions, loss of certifications, power interruptions, fires, hurricanes, drought or other climate-related events, war, or other events, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The Company’s third-party manufacturers are subject to laws and regulations, including current Good Manufacturing Practices regulations (“cGMP”), which are enforced by the FDA and other regulatory authorities. The Company’s third-party manufacturers may be unable to comply with cGMP or other regulatory requirements. A failure to comply with these requirements may result in fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, warning or untitled letters, import or export bans or restrictions and criminal prosecution and penalties. Any of these penalties could delay or prevent the promotion, marketing, or sale of the Company’s products. If the safety of any products supplied to the Company is compromised due to a third-party manufacturer’s failure to adhere to applicable laws or for other reasons, the Company may not be able to successfully sell its products and our business, financial condition and operations may be adversely affected.
Some of our current and future partners may decide to compete with us, refuse or be unable to fulfill or honour their contractual obligations to us, or change their plans to reduce their commitment to, or even abandon, their relationships with us. There can be no assurance that our partners will market our products successfully or that any such third-party collaboration will be on favourable terms. We may not be able to control the amount and timing of resources our partners devote to our products. In addition, we may incur liabilities relating to the distribution and commercialization of our products. While the agreements with such customers generally include customary indemnification provisions indemnifying us for liabilities relating to third-party manufacturing or packaging of our products, there can be no assurance that these indemnification rights will be sufficient in amount, scope or duration to fully offset the potential liabilities associated with our products. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations.
Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, adulteration, unintended harmful side effects, or interactions with other substances, packaging safety, and inadequate or inaccurate labeling disclosure. If any of the products produced by or for us are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. As a result of any such recall, our sales may be significantly affected and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention or damage our reputation and goodwill or that of our products or brands.
Additionally, product recalls may lead to increased scrutiny of our operations by regulatory agencies and authorities, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses. Any product recall affecting the cannabis or hemp industry more broadly, whether or not involving us, could also lead consumers to lose confidence in the safety and security of the products sold by us generally.
Product contamination or tampering or issues or concerns with respect to product quality, safety and integrity could adversely affect our business, reputation, financial condition or results of operations.
Product contamination or tampering, or allegations of product contamination or tampering or product quality issues (whether or not valid) with respect to products in our portfolio may reduce demand for such products, and cause production and delivery disruptions or increase costs, which could adversely affect our business, reputation, financial condition or results of operations. Moreover, even if allegations of product contamination or tampering or suggestions that our products were not fit for consumption or use are meritless, the negative publicity surrounding assertions against us or products in our portfolio or processes could adversely affect our reputation or brands. Our business could also be adversely affected if consumers lose confidence in product quality, safety and integrity generally, even if such loss of confidence is unrelated to products in our portfolio.
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management discussion and analysis
Any of the foregoing could adversely affect our business, reputation, financial condition or results of operations. In addition, if we do not have adequate insurance, if we do not have enforceable indemnification from suppliers, manufacturers, distributors, joint venture partners or other third parties or if indemnification is not available, the liability relating to such product claims or disruption as a result of recall efforts could materially adversely affect our business, financial condition or results of operations.
We identified material weaknesses in our internal control over financial reporting. This may adversely affect the accuracy and reliability of our financial statements and, if we fail to maintain effective ICFR it could impact our reputation, business, and the price of our common shares, as well as lead to a loss of investor confidence in us.
The Corporation has and may continue to fail to maintain the adequacy of its internal controls over financial reporting as such standards are modified, supplemented or amended from time to time, and the Corporation cannot ensure that it will conclude on an ongoing basis that it has effective internal controls over financial reporting. The Corporation’s failure to satisfy the requirements of Canadian and United States legislation on an ongoing, timely basis could result in the loss of investor confidence in the reliability of its financial statements or in a cease trade order, which in turn could harm the Corporation’s business and negatively impact the trading price and market value of its shares or other securities. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Corporation’s operating results or cause it to fail to meet its reporting obligations.
The Corporation has and may continue to fail to maintain the adequacy of its disclosure controls. Disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Corporation in reports filed with securities regulatory agencies is recorded, processed, summarized and reported on a timely basis and is accumulated and communicated to the Corporation’s management, as appropriate, to allow timely decisions regarding required disclosure.
No evaluation can provide complete assurance that the Corporation’s financial and disclosure controls will detect or uncover all failures of persons within the Corporation to disclose material information otherwise required to be reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation. The effectiveness of the Corporation’s controls and procedures could also be limited by simple errors or faulty judgements.
As described on page 38, a material weakness in the Corporation’s internal control over financial reporting was determined to exist at March 31, 2021 and this weakness has not been remediated to date. The Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was not effective as of March 31, 2021 due to the presence of this material weakness. While new and revised controls are being adopted to remediate this weakness, if these and other controls fail to adequately remediate this material weakness, it could result loss of investor confidence, which could lead to a decline in our stock price. In addition, if we do not maintain adequate financial and management personnel, processes, and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our share price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also jeopardize our continued listing on the TSX or NASDAQ or any other exchange on which our common shares may be listed.
We may be unable to attract or retain key personnel, and we may be unable to attract, develop and retain additional employees required for our development and future success.
Our success is largely dependent on the performance of our management team and certain employees and our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The loss of the services of any key personnel, or an inability to attract other suitably qualified persons when needed, could prevent us from executing on our business plan and strategy, and we may be unable to find adequate replacements on a timely basis, or at all. We do not currently maintain key-person insurance on the lives of any of our key personnel.
Further, officers, directors, and certain key personnel at our facility that is licensed by Health Canada are subject to the requirement to obtain and maintain a security clearance from Health Canada. Moreover, an individual with security clearance must be physically present on site when other individuals are conducting activities with cannabis. A security clearance is valid for a limited time and must be renewed before the expiry of a current security clearance. There is no assurance that any of our existing personnel who presently or may in the future require a security clearance will be able to obtain or renew such clearances or that new personnel who require a security clearance will be able to obtain one. A failure by an individual in a key operational position to maintain or renew his or her security clearance could result in a reduction or complete suspension of our operations. In addition, if an individual in a key operational position leaves us, and we are unable to find a suitable replacement who is able to obtain a security clearance in a timely manner, or at all, we may not be able to conduct our operations at planned production volume levels or at all.
Insurance coverage, even where available, may not be sufficient to cover losses we may incur.
Our current and expected business activities expose us to the risk of liabilities arising from our operations. For example, we may be liable for claims brought by users of our products or by employees, customers or other third parties for personal injury or property damage occurring in the course of our operations. We seek to minimize these risks through various insurance contracts from third-party insurance carriers. However, our insurance coverage is subject to large individual claim deductibles, individual claim and aggregate policy limits, and other terms and conditions. We retain an insurance risk for the deductible portion of each claim and for any gaps in insurance coverage. We do not view insurance, by itself, as a material mitigant to these business risks.
We cannot assure that our insurance will be sufficient to cover our losses. Any losses that insurance does not substantially cover could have a material adverse effect on our business, results of operations, financial condition and cash flows. The insurance industry has become more selective in offering some types of insurance, such as product liability, product recall, property and directors’ and officers’ liability insurance. Our current insurance program is consistent with both our past level of coverage and our risk management policies. However, we cannot assure that we will be able to obtain comparable insurance coverage on favorable terms, or at all, in the future.
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management discussion and analysis
We must successfully maintain and/or upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition or results of operations.
We rely on various information technology systems to manage our operations. Over the last several years, we have implemented, and we continue to implement, modifications and upgrades to such systems, including changes to legacy systems, replacing legacy systems with successor systems with new functionality, and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications, and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have a material adverse effect on our business, financial condition, or results of operations.
Conflicts of interest may arise between the Company and its officers and directors, which could adversely affect our operations.
The Company may be subject to various potential conflicts of interest because of the fact that some of its officers and directors may potentially be engaged in a range of business activities. In addition, its executive officers and directors may potentially devote time to their outside business interests, so long as such activities do not materially or adversely interfere with their duties to the Company. In some cases, the Company’s executive officers and directors may have fiduciary obligations associated with these business interests that interfere with their ability to devote time to the Company’s business and affairs and that could adversely affect the Company’s operations.
In addition, we may also become involved in other transactions which conflict with the interests of its directors and officers who may from time to time deal with persons, firms, institutions or corporations with which the Company may be dealing, or which may be seeking investments similar to those the Company desires. The interests of these persons could conflict with the Company’s interests. In addition, from time to time, these persons may be competing with the Company for available investment opportunities. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular, in the event that such a conflict of interest arises at a meeting of the Company’s directors, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the Company’s directors are required to act honestly, in good faith and in the Company’s best interests.
CANNABIS INDUSTRY RISKS
The adult use cannabis market in Canada and the regulations governing the industry are still developing.
Cannabis for adult use only became legal in Canada in late 2018. As a result, the industry and the regulations governing the industry are rapidly developing. If they develop in ways that differ from the Company’s expectations, the business and results of operations may be adversely impacted.
United States Food and Drug Administration’s (“FDA”) regulation relating to hemp-derived CBD products remain subject to FDA’s enforcement discretion, albeit, FDA’s official position regarding ingestible CBD products precluded under the Federal Food, Drug, and Cosmetic Act (“FDCA”). Thus, the regulatory status of these products remain unclear and rapidly evolving, and changes may not develop in the timeframe or manner most favorable to our business objectives.
Our participation in the market for hemp-derived CBD products in the United States and elsewhere may require us to employ novel approaches to existing regulatory pathways. The passage of the Farm Bill in December 2018 legalized the cultivation of hemp in the United States to produce products containing CBD and other non-THC cannabinoids. On May 31, 2019, the FDA held a public hearing to obtain scientific data and information about the safety, manufacturing, product quality, marketing, labeling, and sale of products containing cannabis or cannabis-derived compounds, including CBD. The FDA has also formed an internal working group to evaluate the potential pathways to market for CBD products. FDA’s present position is that dietary supplement and food products containing CBD are precluded from addition to food and dietary supplements. The FDA further takes the position that CBD is not permitted for use in food as the ingredient is not Generally Recognized as Safe (“GRAS”). FDA’s position on preclusion and safety is disputed by industry that CBD is precluded from addition to dietary supplements and foods. In regard to other cannabinoids, FDA has not taken a regulatory position other than to reiterate that addition of other cannabinoids may be considered new dietary ingredients and subject to notification and that other cannabinoids cannot be added to food if they are not GRAS. It is important to note that company’s may take a self-determined GRAS position regarding its products and there is no requirement to submit GRAS ingredients to FDA for its review and concurrence, albeit, FDA does have a mechanism to do so. With that said, FDA is exercising enforcement discretion over ingestible CBD products absent express disease claims until such time it has concluded its review of available regulatory pathways.
In addition, such products may be subject to regulation at the state or local levels. While the Farm Bill created a pathway under which hemp and its derivatives are exempted from the definition of marijuana and protected from state’s interfering with the transportation of hemp and its derivatives in interstate commerce, state and local authorities are permitted under the Farm Bill to issue their own restrictions on the cultivation or sale of hemp or hemp-derived products, including laws that ban the cultivation or possession of hemp or any other plant of the cannabis genus and derivatives thereof, such as CBD. State regulators may take enforcement action against food and dietary supplement products that contain CBD, or enact new laws or regulations that prohibit or limit the sale of such products. Unforeseen regulatory obstacles or compliance costs may hinder our ability to successfully compete in the market for such products.
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management discussion and analysis
Unfavorable publicity or consumer perception regarding the cannabis industry could decrease demand for our products and adversely impact our operating results.
We believe the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of cannabis and related products distributed to such consumers. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favourable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for our products and the business, results of operations, financial condition and cash flows of the Company. Our dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on the Company, the demand for our products, and the business, results of operations, financial condition and cash flows of the Company.
Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis and related products in general, or our products specifically, or associating the consumption of cannabis or related products with illness or other negative effects or events, could have such a material adverse effect. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views in regard to the Company and our activities, whether true or not. Although we believe that we operate in a manner that is respectful to all stakeholders and that we take care in protecting our image and reputation, we do not ultimately have direct control over how it is perceived by others. Reputational loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to our overall ability to advance our projects, thereby having a material adverse impact on our financial performance, financial condition, cash flows and growth prospects.
We must comply with requirements for licenses and permits in Canada and the failure to maintain these could adversely affect our operations.
As a holder of a license for standard processing, we will be subject to ongoing inspections by Health Canada to monitor our compliance with its licensing requirements. Our license(s) that we obtained, or may in the future obtain, in Canada may be revoked or restricted at any time in the event that we are found not to be in compliance. Should we fail to comply with the applicable regulatory requirements or with conditions set out under our license(s), should our license(s) not be renewed when required, or be renewed on different terms, or should our license(s) be revoked, we may not be able to produce, process or distribute cannabis products.
We operate in Canada out of our existing facility located in Sherbrooke, Québec, which is required to comply with Health Canada requirements. Our facility is therefore subject to the adherence of ongoing standards and thresholds in order to maintain the appropriate certificate. Although the Company believes it will continue to meet such ongoing requirements, there is no guarantee that the required certification will be maintained. Any loss in certification would have a material adverse effect on the business, financial condition, and results of the operations of the Company.
Our current license with Health Canada expires on January 4, 2022. Prior to the expiration, we must submit to Health Canada an application for renewal of such license. There can be no assurance that we will be able to renew our existing license and any failure to renew such license would have a material adverse impact on our business, financial condition, and operating results.
In addition, we and other licensed producers in Canada may produce more cannabis than is needed to satisfy the collective demand of the Canadian adult-use markets, and we may be unable to export that oversupply into other legal markets. As a result, the available supply of cannabis could exceed demand, resulting in a significant decline in the market price for cannabis. If this were to occur, there is no assurance that we would be able to generate sufficient revenue from the sale of adult-use cannabis to result in profitability and sufficient liquidity. Regulatory restrictions or over supply conditions could result in inventory adjustments.
The tax burden related to our expected cannabis and hemp-related activities is still uncertain.
Tax regimes, including excise taxes and sales taxes, can disproportionately affect the price of our products, or disproportionately affect the relative price of our products versus other cannabis and hemp-based products. Because our expected products are targeted at the premium cannabis market, tax regimes based on sales price can place us at a competitive disadvantage in certain price-sensitive markets. As a result, our volume and profitability may be adversely affected in these markets.
Additionally, the Company may incur significant tax liabilities if the U.S. Internal Revenue Service (“IRS”) continues to determine that certain expenses of businesses working with the cannabis plant are not permitted tax deductions under section 280E of the U.S. Internal Revenue Code of 1986, as amended (“Code”). Section 280E of the Code prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked section 280E of the Code in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly, and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of section 280E of the Code favorable to cannabis businesses.
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Laws in the United States may make it difficult for us to open bank accounts for our business.
Since the production and possession of cannabis is currently illegal under U.S. federal law, it is possible that banks may refuse to open bank accounts for the deposit of funds from businesses involved with the cannabis industry. Similarly, because the 2018 Farm Bill has not yet been fully implemented; the Company relies on exemptions promulgated pursuant to the 2014 Farm Bill; and the FDA continues to assert that CBD cannot be added to food or dietary supplements, it is possible that banks may refuse to open bank accounts for the deposit of funds related to the Company’s hemp operations. The inability to open bank accounts with certain institutions could materially and adversely affect the business of the Company.
The development of the adult-use cannabis industry and regulations governing this industry may impact our ability to successfully compete.
The Cannabis Act and the accompanying regulations (“CR”), became effective in October 2018 and allow individuals over the age of 18 to legally purchase, process and cultivate limited amounts of cannabis for adult use recreational purposes in Canada. Further, each province and territory of Canada has the ability to separately regulate the distribution of cannabis within such province or territory, and the rules (including associated regulations) adopted by these provinces or territories vary significantly. There is no assurance that the adult-use cannabis industry, and the regulations governing this industry, will continue to develop as anticipated.
There are and will be significant restrictions on the marketing, branding, product formats, product composition, packaging, and distribution channels allowed under the CR, which may reduce the value of certain of our products and brands or negatively impact our ability to compete with other companies in the adult-use cannabis market in Canada. For instance, the CR includes a requirement for health warnings on product packaging, the limited ability to use logos and branding (only one brand name and one brand element per package), restrictions on packaging itself, and restrictions on types and avenues of marketing. Further, Cannabis 2.0 regulations (which came into force on October 17, 2019, allowing new cannabis form factors) govern the production and sale of new classes or forms of cannabis products (including vapes and edibles), and impose considerable restrictions on product composition, labeling, and packaging in addition to being subject to similar marketing restrictions as existing form factors. Additional marketing and product composition restrictions have been imposed by some provinces and territories. Such federal and provincial restrictions may impair our ability to develop our adult-use brands and additional product or marketing restrictions imposed under future regulations may make it uneconomic or unfeasible for us to introduce brands and products into the Canadian market.
Some provinces and territories also impose significant restrictions on our ability to merchandise products; for example, some provinces impose restrictions on investment in retailers or distributors and their employees as well as in our ability to negotiate for preferential retail space or in-store marketing. Such variance may make participation in the adult-use cannabis market uneconomic or of limited economic benefit for us in those provinces or territories and could result in significant additional compliance or other costs and limitations on our ability to compete successfully in each such market.
Market consolidation in the cannabis industry may reduce our ability to compete, due to scale, cost and pricing disadvantages.
The Canadian cannabis industry has and may continue to experience consolidation, and some of the resulting companies that will be our competitors will have market presence, growth operations, technical and marketing capabilities, personnel, financial and other resources substantially greater than our own. In addition, some of these competitors will be able to raise capital at a lower cost than we will be able to. Consequently, some of these competitors may be able to develop and expand their growth, distribution and retail infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily and devote greater resources to the marketing and sale of their products and services than we will be able to. Additionally, the greater brand name recognition of some of our current and future competitors or competitive price pressure may require us to lower prices in order to retain or acquire customers. Finally, the cost advantages of some of these competitors may give them the ability to reduce their prices for an extended period of time or achieve a greater return.
In addition to competition from licensed producers, we face competition from illegal dispensaries and black market suppliers.
In addition to competition from licensed producers and those able to produce cannabis legally without a license, the Company also faces competition from unlicensed and unregulated market participants, including illegal dispensaries and black-market suppliers selling cannabis and cannabis-based products in Canada.
Despite the legalization of medical and adult recreational-use cannabis in Canada, black market operations remain and are a substantial competitor to our business. In addition, illegal dispensaries and black market participants may be able to (i) offer products with higher concentrations of active ingredients that are either expressly prohibited or impracticable to produce under current Canadian regulations, and (ii) use delivery methods that the Company is currently prohibited from offering to individuals in Canada, (iii) use marketing and branding strategies that are restricted under the Cannabis Act and Cannabis Regulations, and (iv) make claims not permissible under the Cannabis Act and other regulatory regimes. As these illicit market participants do not comply with the regulations governing the medical and adult-use cannabis industry in Canada, their operations may also have significantly lower costs.
As a result of the competition presented by the black market for cannabis, any unwillingness by consumers currently utilizing these unlicensed distribution channels to begin purchasing from licensed producers for any reason or any inability or unwillingness of law enforcement authorities to enforce laws prohibiting the unlicensed cultivation and sale of cannabis and cannabis-based products could (i) result in the perpetuation of the black market for cannabis, (ii) adversely affect our market share and (iii) adversely impact the public perception of cannabis use and licensed cannabis producers and dealers, all of which would have a materially adverse effect on our business, operations and financial condition.
We are subject to risks inherent to suppliers in an agricultural business, including the risk of crop failure.
Cannabis is an agricultural product. As such, its supply is subject to the risks inherent in the agricultural business, including risks of crop failure presented by weather, insects, plant diseases, and similar agricultural risks. There can be no assurance that natural elements, such as insects and plant diseases, will not interrupt production activities with our suppliers and partners and have an adverse effect on our business.
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We rely on third parties for our supply of cannabis.
We do not cultivate cannabis to supply ourselves with cannabis leaves, flowers and trim to operate our extraction business. We currently obtain cannabis from third parties in amounts sufficient to operate our extraction business. However, there can be no assurance that there will continue to be a supply of cannabis available for us to process or purchase a sufficient amount of cannabis to operate our business. Additionally, the price of cannabis may rise which would increase our cost of goods. If we are unable to acquire the cannabis required to operate our extraction business or if the price of cannabis increases, it could have a material adverse impact on our business, our financial condition and results from operations. If any of our key suppliers fails to provide inputs meeting our quality standards, we may need to source cannabis, equipment or other inputs from other suppliers, which may result in additional costs and delay in the delivery of our products and services to our clients. There is no assurance that our suppliers will be able to supply and deliver the required materials to us in a timely manner or that the materials they will not be defective or substandard. Any delay in the delivery of materials, or any defect in the materials, supplied to the Company may materially and adversely affect or delay its production schedule and affect its product quality. If we cannot secure materials of similar quality and at reasonable prices from alternative suppliers in a timely manner, or at all, we may not be able to deliver its products to our clients on time with required quality. The Company’s suppliers, service providers and distributors may elect, at any time, to breach or otherwise cease to participate in supply, service or distribution agreements, or other relationships, upon which our operations rely. Loss of its suppliers, service providers or distributors would have a material adverse effect on the Company’s business and operational results.
Our activities and resources in the Canadian cannabis industry rely on a single facility.
To date, our activities and resources in the Canadian cannabis industry have been primarily focused on our facility located in Sherbrooke, Québec, and we will continue to focus on such facility for the foreseeable future. Adverse changes or developments affecting this facility could have a material and adverse effect on our business and financial condition.
We may not be able to transport our cannabis products to customers in a safe and efficient manner.
We will depend on fast and efficient third-party transportation services to distribute our cannabis products. Any prolonged disruption of third-party transportation services could have a material adverse effect on our sales volumes or our end users’ satisfaction with our services. Rising costs associated with third-party transportation services used by us to ship our products may also adversely impact our profitability, and more generally our business, financial condition and results of operations.
The security of products during transportation will be of the utmost concern. A breach of security during transport or delivery could result in the loss of high-value product. A failure to take steps necessary to ensure the safekeeping of cannabis could also have an impact on our ability to operate under our license(s), to renew or receive amendments to such licenses, or to receive required new licenses.
Access to certain markets in Canada is dependent on compliance with supplier standards established by provincial or territorial distributors.
Government-run provincial and territorial distributors in Canada require suppliers to meet certain service and business standards, and routinely assess for compliance with such standards. Any failure by us to comply with such standards could result in our being downgraded or disqualified as a supplier and would severely impede or eliminate our ability to access certain markets within Canada.
REGULATORY COMPLIANCE RISKS
Our Status as a Foreign Private Issuer
As a foreign private issuer, we are subject to different reporting and disclosure requirement under U.S. securities laws and regulations than a domestic U.S. issuer, which may limit the information publicly available to our U.S. shareholders.
We are a foreign private issuer under applicable U.S. federal securities laws. As a result, we do not file the same reports that a U.S. domestic issuer would file with the SEC, although we are required to file with or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws. In addition, our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions of Section 16 of the U.S. Exchange Act. Therefore, our shareholders may not know on as timely a basis when our officers, directors and principal shareholders purchase or sell Common Shares as the reporting periods under the corresponding Canadian insider reporting requirements are longer. In addition, as a foreign private issuer, we are exempt from the proxy rules under the U.S. Exchange Act.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses to us.
We may in the future lose our foreign private issuer status if a majority of our Common Shares are held in the United States and we fail to meet the additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under U.S. federal securities laws as a U.S. domestic issuer may be significantly more than the costs we incur as a Canadian foreign private issuer.
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management discussion and analysis
U.S. investors may be unable to enforce certain judgments against us in Canada.
Neptune is a corporation existing under the Business Corporations Act (Québec). A number of our directors and officers are residents of Canada or other jurisdictions outside of the United States, and substantially all of our assets are located outside the United States. As a result, it may be difficult to effect service within the United States upon the Company or upon its directors and officers. Execution by United States courts of any judgment obtained against the Company or any of the Company’s directors or officers in United States courts may be limited to the assets of such companies or such persons, as the case may be, located in the United States. It may also be difficult for holders of securities who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon civil liability and the civil liability of the Company’s directors and executive officers under the United States federal securities laws. The Company has been advised that a judgment of a U.S. court predicated solely upon civil liability under U.S. federal securities laws or the securities or “blue sky” laws of any state within the United States, would likely be enforceable in Canada if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that would be recognized by a Canadian court for the same purposes. However, there may be doubt as to the enforceability in Canada against these non-U.S. entities or their controlling persons, directors and officers who are not residents of the United States, in original actions or in actions for enforcement of judgments of courts of the United States, of liabilities predicated solely upon U.S. federal or state securities laws.
Ownership of our Securities
The market price of Neptune’s Common Shares may be highly volatile.
The stock market, from time-to-time, experiences significant price and volume fluctuations unrelated to the operating performance of particular companies. Future announcements concerning Neptune, its competitors, including those pertaining to financing arrangements, government regulations, developments concerning regulatory actions affecting Neptune, litigation, additions or departures of key personnel, cash flow, and economic conditions and political factors in Canada and the United States may have a significant impact on the market price of Neptune’s Common Shares. In addition, there can be no assurance that the Neptune’s Common Shares will continue to be listed on the TSX or Nasdaq.
The market price of the Neptune’s Common Shares could fluctuate significantly for many other reasons, including for reasons unrelated to Neptune’s specific performance, such as reports by industry analysts, investor perceptions, or negative announcements by its subscribers, competitors or suppliers regarding their own performance, as well as general economic and industry conditions.
For example, to the extent that other large companies within its industry experience declines in their stock price, the share price of the Neptune’s Common Shares may decline as well. In addition, when the market price of a company’s shares drops significantly, shareholders often institute securities class action lawsuits against the company.
Litigation resulting from these claims could be costly and time-consuming and could divert the attention of management and other key personnel from the Company’s business and operations. The complexity of any such claims and the inherent uncertainty of commercial or class action, litigation increases these risks. In recognition of these considerations, the Company could suffer significant litigation expenses in defending any of these claims and enter into settlement agreements. If the Company is unsuccessful in its defense of material litigation claims or is unable to settle the claims, the Company may be faced with significant monetary damage awards or other remedies against it including injunctive relief that could have a material adverse effect on the Company’s business, financial condition and results of operations. Administrative or regulatory actions against the Company or its employees could also have a material adverse effect on the Company’s business, financial condition and results of operations.
We do not currently intend to pay any cash dividends on our Common Shares in the foreseeable future.
We have never paid any cash dividends on our Common Shares. We do not anticipate paying any cash dividends on our Common Shares in the foreseeable future because, among other reasons, we currently intend to retain any future earnings to finance our business. The future payment of cash dividends will be dependent on factors such as cash on hand and achieving profitability, the financial requirements to fund growth, our general financial condition and other factors our board of directors may consider appropriate in the circumstances. Until we pay cash dividends, which we may never do, our shareholders will not be able to receive a return on their Common Shares unless they sell them.
If there is insufficient liquidity in our Common Shares, it could adversely affect your ability to sell your shares.
Shareholders of the Company may be unable to sell significant quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common Shares, or at all. There can be no assurance that there will be sufficient liquidity of the Common Shares on the trading market, and that the Company will continue to meet the listing requirements of the TSX and NASDAQ or achieve listing on any other public stock exchange. There can be no assurance that an active and liquid market for the Common Shares will be maintained and an investor may find it difficult to resell Common Shares.
Certain Canadian laws could delay or deter a change of control.
The Investment Canada Act (Canada) subjects an acquisition of control of a Corporation by a non-Canadian to government review if the value of the assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be a net benefit to Canada.
Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities for our shareholders to sell their shares.
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Our stockholders may be subject to dilution resulting from future offerings of common stock by us.
We may raise additional funds in the future by issuing common shares or equity-linked securities. Holders of our securities have no pre-emptive rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of our capital stock is warranted, the price at which such issuance is to be affected and the other terms of any future issuance of capital stock. In addition, additional common stock will be issued by us in connection with the exercise of options or grant of other equity awards granted by us. Such additional equity issuances could, depending on the price at which such securities are issued, substantially dilute the interests of the holders of our existing securities.
Other regulatory compliance risks
We are subject to laws and regulations and guidelines, changes in which could increase our costs and individually or in the aggregate adversely affect our business.
We are subject to laws and regulations affecting our operations in a number of areas. These laws and regulations affect the Company’s activities in areas including, but not limited to, the cannabis industry in Canada, the hemp business in the United States, food, beverage and nutritional products, consumer protection, labor, intellectual property ownership and infringement, import and export requirements, and environmental, health and safety.
The successful execution of our business objectives is contingent upon compliance with all applicable laws and regulatory requirements and obtaining all other required regulatory approvals, which may be onerous and expensive. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation and the expansion of the Company’s business, could individually or in the aggregate make the Company’s products and services less attractive to our customers, delay the introduction of new products, or cause the Company to implement policies and procedures designed to ensure compliance with applicable laws and regulations. There can be no assurance that the Company’s employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.
We are subject to risks inherent to the nutraceutical industry.
Distribution of our products outside Canada and the United States is also subject to comprehensive government regulation. Regulations, specifically requirements in respect of product releases on the market and the time involved in respect of regulatory assessment and the sanctions imposed in the event of infringement vary from country to country. No assurance can be given that we will obtain the requisite approvals in the relevant countries or that we will not incur significant expense in obtaining regulatory approvals or maintaining them in effect. In addition, on February 11, 2019, the FDA announced that it intends to modernize its laws and regulations governing dietary supplements. Any such changes may have a material effect on the Company.
We are heavily dependent on the export of products to the United States. The U.S. FDA is able to block the import entry of any product that “appears” to violate U.S. law, which represents a low evidentiary standard for the U.S. FDA. Future changes in U.S. requirements and interpretations of those requirements, coupled with the “appears” to violate the law standard for refusing entry of imported products, increases the possibility that our products may not have full access to the U.S. market and poses additional risks to our business.
We are subject to taxation in multiple jurisdictions, and changes in taxation may impact our earnings.
The Company will operate and will be subject to income tax and other forms of taxation (which are not based upon income) in multiple tax jurisdictions. Taxation laws and rates which determine taxation expenses may vary significantly in different jurisdictions, and legislation governing taxation laws and rates is also subject to change. Therefore, the Company’s earnings may be impacted by changes in the proportion of earnings taxed in different jurisdictions, changes in taxation rates, changes in estimates of liabilities and changes in the amount of other forms of taxation. The Company may have exposure to greater than anticipated tax liabilities or expenses. The Company will be subject to income taxes and non- income taxes in a variety of jurisdictions and its tax structure is subject to review by both domestic and foreign taxation authorities and the determination of the Company’s provision for income taxes and other tax liabilities will require significant judgment.
We are subject to anti-money laundering laws and regulations in multiple jurisdictions.
The Company will be subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), the Criminal Code (Canada), as amended and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
If any of the Company’s investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States or Canada were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
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management discussion and analysis
Our inability to maintain our regulatory approvals and permits could adversely affect our business and financial results.
The Company is required to obtain and maintain certain federal and state permits, licenses and approvals in the jurisdictions where its products are manufactured and/or sold. There can be no assurance that the Company will be able to obtain or maintain necessary licenses, permits or approvals. Any material delay or inability to receive these items is likely to delay and/or inhibit the Company’s ability to conduct its business, and would have an adverse effect on its business, financial condition and results of operations.
CREDIT AND COUNTERPARTY RISK
Credit risk is the risk of a loss if a customer or counterparty to a financial asset fails to meet its contractual obligations and arises primarily from the Corporation’s trade receivables. The Corporation may also have credit risk relating to cash and cash equivalents and short-term investments, which are managed by dealing only with highly rated Canadian and US institutions. The carrying amount of these financial assets, as disclosed in the consolidated statements of financial position, represents the Corporation’s credit exposure at the reporting date. The Corporation’s trade receivables and credit exposure fluctuate throughout the year. The Corporation’s average trade receivables and credit exposure during the year may be higher than the balance at the end of that reporting period.
Most of the Corporation's customers are distributors for a given territory and are privately-held and publicly-held 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.
Customers do not provide collateral in exchange for credit, except in unusual circumstances. Receivables from selected customers are covered by credit insurance, with coverage amount usually of 90% of the invoicing, with the exception of some customers under specific terms. The information available through the insurers is the main element in the decision process to determine the credit limits assigned to customers. The Corporation’s extension of credit to customers involves considerable judgment and is based on an evaluation of each customer’s financial condition and payment history. The Corporation has established various internal controls designed to mitigate credit risk, including a credit analysis by the insurer which recommends customers' credit limits and payment terms that are reviewed and approved by the Corporation. The Corporation reviews periodically the insurer's maximum credit quotation for each of its clients. New clients are subject to the same process as regular clients. The Corporation has also established procedures to obtain approval by senior management to release goods for shipment when customers have fully-utilized approved insurers credit limits. From time to time, the Corporation will temporarily transact with customers on a prepayment basis where circumstances warrant. The Corporation’s credit controls and processes cannot eliminate credit risk.
LIQUIDITY AND FUNDING RISK
Liquidity and funding risk is the risk that the Corporation will not be able to meet its financial obligations as they fall due. The Corporation manages liquidity risk through the management of its capital structure and financial leverage, as outlined in the Consolidated Liquidity and Capital Resources section. It also manages liquidity risk by continuously monitoring actual and projected cash flows. The Board of Directors reviews and approves the most important material transactions outside the normal course of business.
Any acquisitions, strategic investments, divestures, mergers, or joint ventures we make may require the issuance of a significant amount of equity or debt securities and may not be successful.
As part of our business strategy, we expect to selectively pursue strategic acquisitions, as well as additional strategic and other investments such as joint ventures or partnerships, to obtain additional businesses, products and/or technologies, capabilities, and personnel. Acquisitions and other investments present challenges, including geographical coordination, personnel integration and retention of key management personnel, systems integration, the potential disruption of each company’s respective ongoing businesses, possible inconsistencies in standards, controls, procedures, and policies, unanticipated costs of terminating or relocating facilities and operations, unanticipated expenses relating to such integration, contingent obligations, and the reconciliation of corporate cultures. Those operations could divert management’s attention from the business, cause a temporary interruption of or loss of momentum in the business, and adversely affect our results of operations and financial condition. The inability to consummate and integrate new acquisitions on advantageous terms, or the failure to achieve a favorable return on our strategic and other investments, could adversely affect our ability to grow and compete effectively. Additionally, if we make one or more acquisitions in which the consideration includes the Company’s securities, we may be required to issue a substantial amount of equity, debt, warrants, convertible instruments, or other similar securities. Such an issuance could result in dilution to shareholders or increase our interest expense and other expenses.
We have reported negative cash flows from operating activities and may do so in future periods.
The Company reported negative cash flow from operating activities of $73.6 million and $31.4 million for the fiscal years 2021 and 2020. The Company has historically and may also continue to have negative cash flow from operating activities until sufficient levels of sales are achieved. The Company cannot guarantee that future positive cash flow from operating activities will be obtained. In addition, negative cash flows may continue longer than the Company has planned for which could cause liquidity issues.
The Company may also be unable to obtain borrowings in an amount sufficient to enable them to pay debt or to fund other liquidity needs. If sufficient liquidity is not obtained, the Company may need to refinance or restructure all or a portion of its debt on or before maturity, sell assets or borrow money or issue equity, which may not be possible on terms satisfactory to the Company, or at all. If the Company continues to report negative cash flows from operating activities, or any failure to obtain any required additional financing on favourable terms, or at all, such events could have a material adverse effect on the business, financial condition, and results of operation of the Company.
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management discussion and analysis
FOREIGN CURRENCY RISK
We are subject to foreign currency fluctuations, which could adversely affect our financial results.
We are exposed to the financial risk related to the fluctuation of foreign exchange rates and the degrees of volatility of those rates. Currency risk relates to the portion of our business transactions denominated in currencies other than the Canadian dollar.
For the twelve-month period ended March 31, 2021, approximately 61% of our revenues were in U.S. dollars, and a significant portion of our expenses, including the purchase of raw materials, were in U.S. dollars. If the value of the United States dollar fluctuates significantly more than expected in the foreign exchange markets, our operating results and financial condition may be adversely affected.
INTEREST RATE RISK
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market rates. The risk that the Corporation will realize a loss as a result of the decline in the fair value of its short-term investments is limited because these short-term investments have short-term maturities and are generally held to maturity. The capacity of the Corporation to reinvest the short-term amounts with equivalent returns will be impacted by variations in short-term fixed interest rates available in the market. The fixed rate borrowings expose the Corporation to a fair value risk but not cash flow interest rate risk.
INFORMATION SECURITY AND CYBER-ATTACK RISKS
We may be exposed to risks and costs associated with security breaches, data loss, credit card fraud and identity theft that could cause us to incur unexpected expenses and loss of revenue as well as other risks.
Neptune’s operations are increasingly dependent on IT systems and the management of information; thus, the protection of customers, employees, suppliers and other business data is critical. A portion of our sales require the collection of certain customer data, such as credit card information. In order for our sales channel to function, we and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information, securely over public networks. The use of credit payment systems makes us more susceptible to a risk of loss, particularly with respect to an external security breach of customer information controlled by us, or by third parties under arrangements with us (including those with whom we have strategic alliances).
Despite of all efforts, Neptune experienced a cyber attack in July of the current fiscal year as consequence of increased digital interactions with customers, suppliers and consumers, and changes in ways of working of our employees and these external stakeholders due to the Covid-19 outbreak. Also, we are particularly reliant on service providers and thus the impact of Covid-19 on their operations also imposed a risk for us. Cyber-attacks will continue to impose threats to our operations.
In addition, federal, state, provincial and international laws and regulations govern the collection, retention, sharing, and security of data that we manage. The regulatory environment surrounding information security and privacy has been increasingly demanding in recent years and may see the imposition of new and additional requirements by provincial, state, and federal governments as well as foreign jurisdictions in which we do business. Compliance with these requirements may result in cost increases due to necessary systems changes and the development of new processes to meet these requirements by us.
In the event of a security breach, theft, leakage, accidental release or other illegal activity with respect to employees, customers, suppliers or other company data, we could become subject to various claims, including those arising out of thefts and fraudulent transactions, and may also result in the suspension of credit card services. This could cause consumers to lose confidence in our security measures, harm our reputation as well as divert management attention, and expose us to potentially unreserved claims and litigation. Any loss in connection with these types of claims could be substantial. If our electronic payment systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, we are reliant on these systems, not only to protect the security of the information stored, but also to appropriately track and record data. Any failures or inadequacies in these systems could expose us to significant unreserved losses, which could materially and adversely affect our earnings and the market price of securities. Our brand reputation would likely be damaged as well.
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management discussion and analysis
Disclosure controls and procedures ("DC&P")
In accordance with the National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings and as required by applicable rules of the SEC, our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2021.
The Disclosure controls and procedures include, and are not limited to, controls and procedures designed to ensure that information required to be disclosed and submitted under applicable Canadian and United States securities laws is accumulated and communicated to the Corporation’s management as appropriate to allow timely decisions regarding the required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based upon that evaluation and as discussed below under “Management’s Report on Internal Control over Financial Reporting”, our CEO and CFO have concluded that, as at March 31, 2021, our disclosure controls and procedures were not effective because of material weaknesses in internal control over financial reporting which are described below.
Internal controls over financial reporting ("ICFR")
Management is responsible for establishing and maintaining adequate control over financial reporting as defined in the National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings and as required by applicable rules of the SEC. 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 IFRS.
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 assessed the effectiveness of the Corporation’s internal control over financial reporting as of March 31, 2021 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework 2013. Based on its assessment, management concluded that our internal control over financial reporting was not effective as of March 31, 2021 due to material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Managements’ assessment of internal control over financial reporting do not include the business acquired during 2021, Sprout Foods, which total assets and revenues represent approximately 33.7% and 6.8%, respectively, of the consolidated financial statement as of and for the year ended March 31, 2021.
The Corporation experienced significant and rapid changes during the fiscal year 2021 as a result of our business plan, new business lines and products, and COVID-19 pandemic. The Corporation did not effectively design, implement and operate effective process-level control activities related to various processes, account level assertions and disclosures including entity level controls and information technology general controls (“ITGCs”).
Further, there were inadequate controls over user and privileged access to information technology (IT) systems for multiple components to adequately restrict access to appropriate finance and IT personnel and enforce appropriate segregation of duties. As a result, process-level automated control activities and manual control activities that are dependent upon information derived from IT systems were also ineffective. .The pervasive nature of these deficiencies contributed to the other material weaknesses below:
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Inadequate oversight processes and procedures to guide individuals in applying internal control over financial reporting to prevent or timely detect material accounting errors and ensuring adherence to applicable accounting standards. |
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Ineffective risk assessment process, including (i) potential for fraud and (ii) identification and assessment of changes in the business that could impact our system of internal controls. |
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Ineffective design and implementation of control activities, general controls over technology and deployment of policies and procedures. |
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Relevant and quality information to support the functioning of internal controls was not consistently generated, used, or reviewed by the Corporation. |
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The Corporation did not sufficiently select, develop, and perform ongoing evaluations to determine that components of internal control are present and functioning. |
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The evaluation and communication process of internal control deficiencies was not timely. |
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, 2021.
Notwithstanding the material weaknesses identified in the internal control over financial reporting, our management, including our CEO and CFO, has concluded that our consolidated financial statements, as of and for the year ended March 31, 2021, present fairly, in all material respects, our financial position, results of our operations and cash flows for the periods presented in this report, in conformity with IFRS.
44
management discussion and analysis
The Corporation's independent registered public accounting firm, Ernst and Young LLP, has audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States – PCAOB), the Corporation’s internal control over financial reporting as of March 31, 2021, based on the criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and their report dated July 15, 2021 expressed an adverse opinion thereon.
Remediation Plan
We have identified and begun to implement several steps, as further described below, to remediate the identified material weaknesses and to enhance our overall control environment, risk assessment, control activities, monitoring and information and communication. We are committed to ensure that our internal controls over financial reporting will be designed and operating effectively by:
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Developing a detailed remediation plan to address the material weaknesses related to the control environment, risk assessment, information and communication, and monitoring activities. |
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Instituting policies and processes to identify and maintain the information required to support the functioning of internal controls over financial reporting. |
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Designing and implementing a comprehensive and continuous risk assessment process to identify and assess risks of material misstatement (including fraud risks). |
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Enhancing the design of existing controls and IT general controls, implementing additional process-level control activities and ensuring they are operating effectively to support automated and manual control activities. |
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Establishing an adequate reporting structure to ensure authority guidelines and reinforcing communications protocols, including required information and expectations, to enable personnel to carry out their responsibilities and producing accurate financial reports. |
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Reinforcing internal control expertise across the organisation. |
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Hiring individuals with appropriate skills and experience, assigning responsibilities and holding individuals accountable for their role related to internal control and provide continuous training. |
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Designing and implementing additional monitoring controls to assess the consistent operation of controls and to remediate deficiencies in a timely manner. |
Although we intend to complete the remediation process as promptly as possible, we cannot at this time estimate how long it will take to remediate these material weaknesses. In addition, we may discover additional material weaknesses that require additional time and resources to remediate and we may decide to take additional measures to address the material weaknesses or modify the remediation steps described above. Until these weaknesses are remediated, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with IFRS. Weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in internal control over financial reporting
Other than the material weaknesses described above, there were no changes in the Company’s internal control over financial reporting during the three-month and twelve-month periods ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Limitation on scope of design
The Corporation has limited the scope of its DC&P and ICFR to exclude controls, policies and procedures of a business acquired not more than 365 days before the last day of the period covered by the annual filing. The Corporation elected to exclude the Sprout Foods business acquired, as allowed by National Instrument
52-109.
The table below presents the summary financial information included in the Corporation’s consolidated annual financial statements for the excluded controls related to the acquired business:
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(1) |
Excludes acquisition related costs incurred |
As the impairment loss on goodwill was tested as part of the Corporation’s testing of DC&P and ICFR, it has been excluded from the table above.
As the goodwill and intangible assets were tested as part of the Corporation’s testing of DC&P and ICFR, it has been excluded from the table above.
During the previous fiscal year, and only for that period, the Corporation has limited the scope of its DC&P and ICFR to exclude controls, policies and procedures of SugarLeaf, another business acquired not more than 365 days before the last day of the period covered by the filing. The Corporation elected to exclude the SugarLeaf business acquired as allowed by National Instrument 52-109. As at March 31, 2021, the Corporation has completed its analysis and assessment of internal controls of SugarLeaf which is no longer excluded from Management’s assessment of DC&P and ICFR.
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 meeting Neptune ’s objectives in providing reliable financial reporting information in accordance with IFRS. 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.
ISSUED AND OUTSTANDING SECURITIES
The following table details the number of issued and outstanding securities as at the date of this MD&A:
The Corporation’s common shares are being traded on the TSX and on NASDAQ Capital Market under the symbol ‟NEPT”. 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 Corporation.
This MD&A is dated July 15, 2021. Updated and additional Corporation information is available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov/edgar.shtml.
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management discussion and analysis
THANK YOU
46
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our Firm under the caption “Experts” in Exhibit 99.1, and to the incorporation by reference in the Registration Statements on Form S-8 nos. 333-182617 and 333-189884 of Neptune Wellness Solutions Inc. (the “Corporation”) and the use herein of our reports dated July 15, 2021 with respect to the consolidated statement of financial position as of March 31, 2021 and the consolidated statements of loss and comprehensive loss, changes in equity and cash flows for the year ended March 31, 2021 and the effectiveness of internal control over financial reporting of the Corporation as of March 31, 2021, included in this Annual Report on Form 40-F.
/s/ Ernst & Young LLP
Montreal, Canada
July 15, 2021
KPMG LLP
600 de Maisonneuve Blvd West
Suite 1500, Tour KPMG
Montréal (Québec) H3A 0A3
Tel. 514-840-2100
Fax. 514-840-2187
www.kpmg.ca
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of Neptune Wellness Solutions Inc.
We consent to the incorporation by reference in the Registration Statements (No. 333-182617 and 333-189884) on Form S-8 of Neptune Wellness Solutions Inc. of our report dated June 10, 2020 with respect to the consolidated statement of financial position as at March 31, 2020, the related consolidated statements of loss and comprehensive loss, changes in equity and cash flows for the year ended March 31, 2020, and the related notes, which report appears in the annual report on Form 40-F of Neptune Wellness Solutions Inc. for the fiscal year ended March 31, 2021, and further consent to the use of such report in such annual report on Form 40-F.
July 15, 2021
Montréal, Canada
EXHIBIT 99.6
RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
I, Michael Cammarata, Principal Executive Officer of Neptune Wellness Solutions Inc., certify that:
1. I have reviewed this annual report on Form 40-F of Neptune Wellness Solutions Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and
5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.
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/s/ Michael Cammarata |
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Michael Cammarata Principal Executive Officer July 15, 2021 |
RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
I, Toni Rinow, Principal Financial Officer of Neptune Wellness Solutions Inc., certify that:
1. I have reviewed this annual report on Form 40-F of Neptune Wellness Solutions Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and
5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.
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/s/ Toni Rinow |
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Toni Rinow Principal Financial Officer July 15, 2021 |
EXHIBIT 99.7
SECTION 1350 CERTIFICATIONS
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350 of chapter 63 of title 18 of the United States Code), the undersigned officer of Neptune Wellness Solutions Inc. (the “Company”), hereby certifies, to such officer’s knowledge, that:
This annual report on Form 40-F for the fiscal year ended March 31, 2021 (the “Report”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Michael Cammarata |
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Michael Cammarata Principal Executive Officer July 15, 2021 |
SECTION 1350 CERTIFICATIONS
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350 of chapter 63 of title 18 of the United States Code), the undersigned officer of Neptune Wellness Solutions Inc. (the “Company”), hereby certifies, to such officer’s knowledge, that:
This annual report on Form 40-F for the fiscal year ended March 31, 2021 (the “Report”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Toni Rinow |
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Toni Rinow Principal Financial Officer July 15, 2021 |