NEPTUNE WELLNESS SOLUTIONS INC. You should read the following discussion and analysis together with our consolidated financial statements and related notes in Part I, Item 1. The following discussion contains forward-looking statements, which statements are subject to considerable risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption "Risk Factors" in Part II, Item 1A. Certain statements contained in this Quarterly Report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, and are subject to the "safe harbor" created by these sections. Future filings with theSEC , future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements can be found under the caption "Risk Factors" in Part II, Item 1A, and elsewhere in this Quarterly Report. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.
All amounts in the tables contained in this MD&A are in millions of dollars, except for basic and diluted income (loss) per share which are shown in dollars.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
GOING CONCERN The condensed consolidated interim financial statements have been prepared on a going concern basis, which presumes that the Company will continue realizing its assets and discharging its liabilities in the normal course of business for the foreseeable future. The Company has incurred significant operating losses and negative cash flows from operations since inception. To date, the Company has financed its operations primarily through the public offering and private placement of Common Share units, consisting of Common Shares and warrants, and convertible debt, the proceeds from research grants and research tax credits, and the exercises of warrants, rights and options. For the nine-month period endedDecember 31, 2022 , the Company incurred a net loss of$44.3 million and negative cash flows from operations of$20.7 million , and had an accumulated deficit of$357.1 million as ofDecember 31, 2022 . For the year endedMarch 31, 2022 , the Company incurred a net loss of$84.4 million and negative cash flows from operations of$54.3 million . Furthermore, as atDecember 31, 2022 , the Company's current liabilities and expected level of expenses for the next twelve months exceed cash on hand of$3.4 million and its total current liabilities exceed its total current assets. Accordingly, the Company is required to actively manage its liquidity and expenses and payments of payables are not being made as the amounts become due for certain suppliers. The Company currently has no committed sources of financing available other than from the transactions completed after period-end from the debt financing and the accounts receivable factoring facility (see note 18). As of the date these financial statements are authorized for issuance, the cash balance is expected to be sufficient to operate the business for the next one to two months under the current business plan. The Company requires funding in the very near term in order to continue its operations. If the Company is unable to obtain funding in the near-term, it may have to cease operations and liquidate its assets.
These conditions cast substantial doubt about the Company's ability to continue as a going concern.
Going forward, the Company will seek additional financing in various forms. To achieve the objectives of its business plan, Neptune plans to raise the necessary funds through additional securities offerings and the establishment of strategic alliances. The ability of the Company to complete the needed financing and ultimately achieve profitable operations is dependent on a number of factors outside of the Company's control. The Company's business plan is dependent upon, among other things, its ability to achieve and maintain profitability, continue to obtain adequate ongoing debt and/or equity financing to finance operations within and beyond the next twelve months. See note 18 regarding a new debt issuance inJanuary 2023 and related waiver.
While the Company has been successful in obtaining financing from public issuances and private placements, there is no certainty as to future financings.
These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the going concern basis not be valid. These adjustments could be material.
Recent financings:
OnJanuary 25, 2023 , Neptune announced that its organic baby food brand subsidiary, Sprout Organics, has entered into an accounts receivable factoring facility withAlterna Capital Solutions, LLC ("Alterna"). The maximum available is$5 million . The terms of the agreement include a Funds Usage Fee of prime plus 1% with a minimum interest rate of 8% per annum.Alterna was granted a security interest in Sprout's accounts receivable. The agreement will remain in effect for a 12-month period, effectiveJanuary 23, 2023 , and will be automatically renewed. Neptune provided a commercial guaranty in connection with this agreement. OnJanuary 13, 2023 , Neptune announced that it has closed on a senior secured notes financing (such notes, the "Notes") for gross proceeds of$4.0 million with CCUR Holdings, Inc. and Symbolic Logic, Inc. (collectively, the "Noteholders"). The Notes will mature 12 months from the initial closing and bear interest at a rate of 16.5% per annum. The notes are secured by the assets of Neptune excluding the assets of Sprout. Interest will be payable in kind on the first 6 monthly payment dates after the initial closing date and thereafter will be payable in cash. Pursuant to the terms of the Notes, the Company also issued to the Noteholders warrants to purchase an aggregate of 850,000 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of$0.53 per common share. OnMarch 9, 2023 , the Company entered into a Waiver and First Amendment to the Notes (the "Waiver Agreement"). The Waiver Agreement waives certain administrative, regulatory and financial statement related covenants as further described in the Waiver Agreement as required by the terms of the Notes. The lender has the right to demand immediate repayment in the event of default. Furthermore, in connection with the Waiver Agreement, the Notes were amended to provide that the Purchasers shall be paid an exit fee in the aggregate amount of$0.2 million , payable as follows: (i) on or prior toMay 15, 2023 ,$0.1 million and (ii) on the Maturity Date (as defined in the Note Purchase Agreement),$0.1 million and the interest rate was increased to 24% for a period extending until the Company meets specified criteria in the Waiver Agreement. OnNovember 8, 2022 , Sprout entered into three agreements to issue an additional$550,000 of Secured Promissory Notes, on the same terms as the Secured Promissory Note entered into with MSEC discussed in note 9. In connection with this financing, Neptune issued, onFebruary 15, 2023 , 144,360 common shares to the holders of these Secured Promissory Notes for a value of$0.1 million . OnOctober 16, 2022 , Neptune entered into an asset sale and purchase agreement (the "ASPA") with a third-party, for its Canadian cannabis business including theSherbrooke facility, following the planned divestiture of this business announced onJune 8, 2022 . The purchase price of the assets sold, net of liabilities assumed, amounted to$3.8 million ($5.15 million CAD). The ASPA closed onNovember 9, 2022 . Some assets were excluded from the ASPA, and were written-down accordingly. The completion of the divestiture of our cannabis business is a critical milestone in executing upon our strategy to become a leading CPG company. The sale of the cannabis assets will allow us to realize significant cost savings and operational streamlining from redirected resources towards our simplified corporate structure, as we focus on Sprout as the key growth driver for Neptune going forward. OnOctober 11, 2022 , Neptune announced that it entered into definitive agreements with institutional investors for the purchase and sale of 3,208,557 common shares of the Company (the "Common Shares") pursuant to a registered direct offering priced at-the-market under Nasdaq rules (the "Offering"), and warrants to purchase up to 6,417,114 Common Shares (the "Warrants") in a concurrent private placement (the "Private Placement"). The combined purchase price for one Common Share and one Warrant is$1.87 . The Warrants will have an exercise price of$1.62 per Common Share, will be exercisable immediately following the date of issuance and will expire five years from the date of issuance. The aggregate gross proceeds from the Offering and the concurrent Private Placement were approximately$6.0 million , before deducting fees and other estimated expenses, for net proceeds of approximately$5.7 million . The Company expects to use the net proceeds from the Offering and the concurrent Private Placement for working capital and other general corporate purposes. The Offering and concurrent Private Placement closed onOctober 11, 2022 .
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Management's Discussion and Analysis of Financial Condition and Results of Operations
OnAugust 26, 2022 , Sprout entered into an additional$250,000 Secured Promissory Note, which is on the same terms as the Secured Promissory Note entered into with MSEC discussed above. Neptune issued 36,765 common shares for a value of$75,736 in connection with this Secured Promissory Note in connection with this commitment. OnJuly 13, 2022 , Sprout entered into an amendment of each of its existing Secured Promissory Notes. In connection with this amendment, investment funds managed byMorgan Stanley Expansion Capital ("Morgan Stanley" or "MSEC") agreed to immediately commit an additional$3.0 million in Secured Promissory Notes to Sprout. The maturity date of the note facility ofFebruary 1, 2024 is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The$13.0 million of amended Secured Promissory Notes have a 10% interest rate per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. The amended Secured Promissory Notes may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Company and MSEC, into common shares of the Company. MSEC was issued 372,670 common shares of Neptune, of a value of$570,185 , in connection with this commitment. OnJune 22, 2022 , Neptune announced that it entered into definitive agreements with several institutional investors for the purchase and sale of an aggregate of 1,945,526 common shares (including common share equivalents) of the Company, and accompanying two series of warrants to purchase up to an aggregate of 3,891,052 common shares per series of warrants, at an offering price of$2.57 per share and accompanying warrants in a registered direct offering priced at-the-market under Nasdaq rules. Each series of warrants have an exercise price of$2.32 per share and are immediately exercisable upon issuance. One series of warrants will expire two years following the date of issuance and one series of warrants will expire five years following the date of issuance. The gross proceeds from the offering are$5 million , prior to deducting placement agent's fees and other offering expenses payable by Neptune and assuming none of the warrants issued in the offering are exercised for cash. Neptune intends to use the net proceeds from the offering for working capital and other general corporate purposes. The offering closed onJune 23, 2022 . OnMarch 14, 2022 , Neptune announced that it had closed a registered direct offering with a single strategic consumer-focused institutional investor for the purchase and sale of (i) 528,572 common shares of the Company ("Common Shares") and (ii) 185,714 pre-funded warrants (the "Pre-Funded Warrants"), with each Pre-Funded Warrant exercisable for one Common Share. The Common Shares and the Pre-Funded Warrants were sold together with Series A Warrants (the "Series A Warrants") to purchase up to an aggregate of 714,286 Common Shares and Series B Warrants (the "Series B Warrants" and collectively with the Series A Warrants, the "Common Warrants") to purchase up to an aggregate of 714,286 Common Shares. Each Common Share and the accompanying Common Warrants were sold together at a combined offering price of$11.20 , and each Pre-funded Warrant and accompanying Common Warrants were sold together at a combined offering price of$11.20 , for aggregate gross proceeds of$8.0 million before deducting fees and other offering expenses. The Pre-Funded Warrants were funded in full at closing except for a nominal exercise price of$0.0035 and were exercisable commencing on the closing date. The Series A Warrants have an exercise price of$11.20 per share and are exercisable six months after the closing date, and will expire five and one-half years from the date of issuance. The Series B Warrants have an exercise price of$11.20 per share and are exercisable six months after the closing date, and expire 18 months from the closing date (collectively the "March Offering"). The Pre-Funded Warrants were exercised in full onMarch 29, 2022 for gross proceeds of$650 . 5
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Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW GENERALNeptune Wellness Solutions Inc. ("Neptune", the "Company", "we", "us" or "our") is a modern consumer packaged goods ("CPG") company driven by a singular purpose: to transform the everyday for a healthier tomorrow. Neptune is a diversified health and wellness company with multiple brand units. With a mission to redefine health and wellness, Neptune is focused on building a broad portfolio of high quality, affordable consumer products in response to long-term secular trends and market demand for natural, plant-based, sustainable and purpose-driven lifestyle brands. The Company utilizes a highly flexible, cost-efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation, Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods. Neptune has expanded its operations sinceJune 2020 into brand units in order to better address its markets. The main brand units areNutraceuticals andOrganic Foods & Beverages . All amounts in this Quarterly Report are in US dollars, unless otherwise noted.
HISTORY
Neptune was incorporated under Part IA of the Companies Act (Québec ) onOctober 9, 1998 , under the nameNeptune Technologies & Bioresources Inc. Since its incorporation, Neptune has amended its articles of incorporation on numerous occasions. The Company first amended its articles onMay 30, 2000 to convert its then issued and outstanding shares into newly created classes of shares. The Company's articles were also amended onMay 31, 2000 to create Series A Preferred Shares. OnAugust 29, 2000 , the Company converted all its issued and outstanding Class A shares into Class B subordinate shares. OnSeptember 25, 2000 , the Company further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. OnNovember 1, 2013 , the Company amended its articles of incorporation to reflect certain changes to items relating to board matters. The Company's Common Shares were listed and posted for trading on theToronto Stock Exchange ("TSX") and on theNASDAQ Stock Market LLC ("NASDAQ") under the symbol, "NEPT". OnJune 9, 2022 , we effected a one for thirty-five (1-for-35) reverse split of our common shares, which we refer to as the "Share Consolidation," as approved by our Board of Directors. Trading of our common shares on both the TSX and NASDAQ on a post-consolidated basis commenced as of the open of markets onJune 13, 2022 . Neptune's common shares were voluntarily delisted from the TSX at the close of trading onAugust 15, 2022 but are still listed on the NASDAQ.
OUR PROPERTIES AND OPERATIONS
Our headquarters is located in leased offices inLaval, Québec . We also lease laboratory space inLaval, Quebec where testing and development of many of our products takes place. OnDecember 5, 2022 , ourU.S. operations opened an office inJupiter, Florida which serves as theU.S. headquarters.
We owned a production facility in
We also have leased offices in
BUSINESS STRATEGY
Neptune's vision is to change consumer habits through the creation and
distribution of environmentally friendly, ethical and innovative consumer
product goods. Our mission is to redefine health and wellness and help humanity
thrive by providing sustainable consumer focused solutions. Neptune has taken
transformative actions to increase its sales, distribution and reach in both the
business-to-business ("B2B") and business-to-consumer ("B2C") models in the
consumer-packaged goods ("CPG") market. Neptune has a dual go-to market B2B and
B2C strategy focused on expanding its global distribution reach. The strategy
sets Neptune apart from its competition and has started to yield consistent,
long-term revenue opportunities for the Company.
The Company's long-term strategy is focused on the health and wellness sector
with an emphasis on select CPG verticals, including Nutraceuticals , Beauty &
Personal Care, and Organic Foods & Beverages . Neptune's current brand portfolio
across these verticals include Sprout®, Neptune Wellness™, Forest Remedies®, and
MaxSimil®. Neptune's future will be focused on brand creation, accelerating
organic growth with emphasis on increased efficiency and margin expansion. This
will be complimented by accretive acquisitions with a proven track record of
operational excellence.
On June 9, 2021 , Neptune announced a multi-year licensing agreement between
Sprout and CoComelon, the world's leading children's entertainment brand, owned
and operated by Moonbug Entertainment . In addition, on July 27, 2021 , an initial
launch was announced for Sprout products into Canada , in Metro grocery stores in
the province of Ontario . In September 2022 , Sprout launched its up-age meal
products.
On July 22, 2021 , the Company launched Forest Remedies' plant-based Omega 3-6-9
gummies and soft gels. Neptune is focused on expanding its exclusive Omega-3
delivery technology MaxSimil® while improving growth and profitability in its
Nutraceuticals vertical. The MaxSimil® product lineup will be expanded with the
launch of two new consumer products: MaxSimil® with CoQ10 and MaxSimil® with
Curcumin. Additionally, the Company launched a new consumer line of Vitamin
Sprays and Pumps for both children and adults with selected retail partners. To
support anticipated accelerated growth, the Nutraceuticals U.S. sales force has
been expanded to maximize awareness and distribution of the capabilities and
expertise in nutraceuticals, including prebiotics and probiotics, proteins and
other nutritional ingredients within this important vertical.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
PRODUCTS, PRINCIPAL MARKETS, METHODS OF DISTRIBUTION AND BRANDS
PRODUCTS
Our Nutraceutical, Beauty and Personal care products andOrganic Foods and Beverages are manufactured by third party manufacturers. In order to meet demand for our products, we have developed relationships with selected contract manufacturers. For Biodroga, we mainly buy all the raw materials we supply to our third party manufacturers. Our largest co-manufacturers for Biodroga makes approximately 35% of our annual production requirements. For Sprout, 90 % of raw materials are purchased by the third party manufacturers based on our specifications. The largest Sprout co-manufacturer makes about 40% of our annual requirements. We believe that we are not dependent on any single contract manufacturer and that, if necessary, our current selected contract manufacturers could be replaced with minimal disruption to our operations. Our quality control staff requires full disclosure on the part of our suppliers, and we periodically conduct on-site audits of their facilities. For strategic reasons, certain of our key raw materials are sourced from single suppliers. However, in the event that we were unable to source an ingredient from a current supplier, we believe that we could generally obtain the same ingredient or an equivalent from an alternative supplier, with minimal disruption to our operations.
Canadian Cannabis Products - Extracts and Formulations
OnOctober 16, 2022 , Neptune entered into an asset sale and purchase agreement (the "ASPA") with a third-party, for its Canadian cannabis business including theSherbrooke facility, following the planned divestiture of this business announced onJune 8, 2022 . The aggregate purchase price of the assets sold, net of liabilities assumed, amounted to$3.8 million ($5.15 million CAD). The ASPA closed onNovember 9, 2022 . Some assets were excluded from the ASPA and were written down accordingly. OnNovember 10, 2022 , the Company filed a notice of cessation of cannabis activities withHealth Canada and requested that its cannabis processing and research licenses be revoked. As ofNovember 11, 2022 , all cannabis was removed from theSherbrooke facility and the Company no longer possesses or conducts any activities with cannabis, other than certain products produced for third party customers containing CBD in our nutraceutical business. MARKETSNutraceuticals Neptune offers a variety of specialty ingredients, including our licensed specialty ingredient MaxSimil®, a technology that helps increase digestion and absorption of fat-soluble and nutritional ingredients. Additionally, the Company sources a variety of other marine oils, seed oils and specialty ingredients that are available for sale as raw material or transformed into finished products. The Company has recently launched a new line of Vitamin Sprays and Pumps for both children and adults. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in itsNutraceuticals vertical through its brand Biodroga. Neptune's core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays, roll-ons and CBD enhancements. All of Neptune's Nutraceutical products are available under distributors' private labels, primarily sold in the Canadian andU.S. nutraceutical markets. Neptune, through its nutraceuticals products business, also formulates, develops and provides customers with turnkey nutrition solutions. The Company sells wellness products to the Beauty & Personal Care market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free. Neptune announced, onMarch 10, 2022 , the launch of its Forest RemediesMulti Omega 3-6-9 line of supplements into more than 340 Sprouts Farmers Market stores across theU.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
InFebruary 2021 , Neptune acquired a controlling interest inSprout 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 theOrganic Foods and Beverages vertical. Since completing the Sprout acquisition, the Company has begun expansion efforts in Sprout's distribution across substantially all of Target'sU.S. retail stores. The Company also announced, onJuly 27, 2021 , the initial launch of Sprout products intoCanada , in Metro grocery stores in the province ofOntario . Neptune further expects to launch Sprout products inNorth America throughout the remainder of the fiscal year. The Company expects the Neptune/Sprout combination to result in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified within Neptune's existing relationships and current sales channels. As described above, Neptune also announced onJune 9, 2021 , an exclusive multi-year licensing agreement between Sprout and CoComelon, the #1 children's entertainment and educational show in the world with more than 110 million subscribers worldwide. This co-branded product line is now available onWalmart.com and in 900 Walmart stores and has been very well-received. With this launch, Sprout Organics now sells into the top organic baby food retailers in theU.S. , accounting for approximately 90 percent of the overall market. 7
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Management's Discussion and Analysis of Financial Condition and Results of Operations
SALES AND DISTRIBUTION Nutraceutical Products The Company sells its nutraceutical products mainly in bulk softgels or liquids to multiple distributors and customers, who commercialize these products under their private label. While the Company may have orders in place with approximately 100 different distributors and customers at any one time, the majority of the Company's sales are concentrated with a small group of distributors and customers. Agreements with these distribution partners may be terminated or altered by them unilaterally in certain circumstances.
Beauty & Personal Care
The Company sells its Beauty and Personal Care products through distributors and
directly to retail outlets in
The Company, though its Sprout subsidiary, sells its products to mass retailers, grocery stores and other retail outlets, as well as online through e-commerce sites and its own website sproutorganics.com.
OUR B2C BRAND PORTFOLIO STRATEGY
We are currently working on accelerating brand equity for our brand portfolio: [[Image Removed: img257039224_0.jpg]] Biodroga™. Neptune, through its Biodroga subsidiary, provides
product development and turnkey solutions (4PL) to its customers
throughout North America . Biodroga offers a full range of
services, whether it is leveraging our global network of
suppliers to find the bestingredients or developing unique
formulations that set our customers apart from their
competition. Biodroga's core products are MaxSimil, various
Omega-3 fish oils and other nutritional products, as well as
softgel solutions.
[[Image Removed: img257039224_1.jpg]] MaxSimil. Neptune's has an exclusive license to use the patented
nutritional ingredient, MaxSimil, an omega-3 fatty acid delivery
technology that uses enzymes that mimic the natural human
digestive system to predigestomega-3 fatty acids. The Journal
of Nutrition by the Oxford University Press, recently released
the results of a clinical study that evidences MaxSimil's
superior absorption as compared with standard fish oil
supplements. MaxSimil was first introduced to the market in
2018, and is sold as a straightomega-3 supplement with standard
and unique concentration of EPA /DHA. MaxSimil is also starting
to be presented in combination with specialty ingredients such
as Curcumin and Vitamin K2.[[Image Removed: img257039224_2.jpg]] Forest Remedies®. Under our Forest Remedies® brand, we offer
first-of-their kind vegan multi-omega gummies and soft gels with
packaging that is 100% plastic-free. Launched on March 10, 2022 ,
our Forest Remedies Multi Omega 3-6-9 line of supplements is
available into more than 340 Sprouts Farmers Market stores
across the U.S. This distribution agreement marks another
important milestone in our efforts to transform Neptune into a
high-growth branded CPG company.[[Image Removed: img257039224_3.jpg]] Sprout®. Neptune entered a new market with the Neptune/Sprout
combination. Sprout has created a trusted organic baby food
brand with a comprehensive range of products that are always
USDA certified organic, non-GMO andcontain nothing artificial.
Sprout's products target four segments: Stage 2 (children 6
months and up), Stage 3 (children 8 months and up), Toddler
(children aged 12 months and up) and Snacks (children 8 months
and up). Since our acquisition of a controlling interest in
Sprout, the Company has begunexpansion efforts in Sprouts'
distribution substantially in all of
Target's
stores. The Company also announced
on
launch into the Canadian market through its partnership with
food retailer Metro Inc. Certain toddler snacks under this brand
label are now available in Metro grocery stores in the province
of Ontario .
COMPETITION
The nutraceutical, beauty & personal care and organic foods and beverages
industries are highly competitive. There are many companies, public and private
universities, and research organizations actively engaged in the research and
development of products that may be similar to our products. It is probable that
the number of companies seeking to develop products similar to our products will
increase. Many of these and other existing or potential competitors have
substantially greater financial, technical and human resources than we do and
may be better equipped to develop, manufacture and market products.
We seek to differentiate our products and marketing from our competitors based
on product quality, customer service, marketing support, pricing and innovation,
and believe that our strategy enables us to effectively compete in the
marketplace. For additional information regarding the competitive nature of our
businesses, see "Risks Related to Our Business" under the heading "Risk Factors"
of this Form 10-Q.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
REGULATORY Our Nutraceutical, Beauty, Personal Care and Organic Food and Beverage businesses are subject to varying degrees of regulation by a number of government authorities inCanada and theU.S. ,Health Canada , including the FDA, theFederal Trade Commission (FTC), theConsumer Product Safety Commission , theU.S. Department of Agriculture , and theEnvironmental Protection Agency . Various provincial, state and local agencies in areas where we operate and in which our products are sold also regulate our business. The areas of our business regulated by both these, and other authorities include, among others:
•
product claims and advertising.
• product labels. • product ingredients. •
how we manufacture, package, distribute, import, export, sell and store our products and
•
our classification as an essential business and our right to continue operations during government shutdowns.
Health Canada and the FDA, in particular, regulate the formulation, manufacturing, packaging, storage, labeling, promotion, distribution and sale of vitamins and other nutritional supplements inCanada and theU.S. , while other agencies regulate marketing and advertising claims. UnderHealth Canada and FDA rules, companies that manufacture, package, label, distribute or hold nutritional supplements are required to meet certain GMP's to ensure such products are of the quality specified and are properly packaged and labeled. We are committed to meeting or exceeding the standards set byHealth Canada and the FDA and believe we are currently operating within the mandated GMP.
•
the identification of dietary supplements or nutritional products and their nutrition and ingredient labeling.
•
requirements related to the wording used for claims about nutrients, health claims, and statements of nutritional support.
•
labeling requirements for dietary supplements or nutritional products for which "high potency" and "antioxidant" claims are made.
•
notification procedures for statements on dietary supplements or nutritional products; and
•
premarket notification procedures for new dietary ingredients in nutritional supplements.
We are also subject to a variety of other regulations inCanada and theU.S. , including those relating to health, safety, bioterrorism, taxes, labor, employment, import and export, the environment and intellectual property. All of these regulations require significant financial and operational resources to ensure compliance, and we cannot assure you we will always be in compliance despite our best efforts to do so or that being in compliance will not become prohibitively costly to our business. 9
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Management's Discussion and Analysis of Financial Condition and Results of Operations
INTELLECTUAL PROPERTY We constantly evaluate the importance of obtaining intellectual property protection for our technology brands, products, applications and processes and maintaining trade secrets. When applicable to our business and products, we seek to obtain, license and enforce patents, protect our proprietary information and maintain trade secret protection without infringing the proprietary rights of third parties. We also make use of trade secrets, proprietary unpatented information and trademarks to protect our technology and enhance our competitive position. Brand Names and Trademarks
Sprout®, NurturMe®, Nosh!®, Neptune Wellness™, MaxSimil®, Forest Remedies®, and Ocean Remedies® are trademarks of the Company.
Patent Applications
OnAugust 9, 2018 , Neptune filed two applications with the United States Patent and Trademark Office (USPTO) for patents related to the extraction of cannabis material. The extraction processes provide highly efficient methods to obtain cannabinoids and other desired compounds from the cannabis plant at a greater purity than conventional methods. Both processes are applicable to marijuana and hemp and have been incorporated into the Company's GMP-certified extraction facility inSherbrooke . 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. The patent applications were sold in connection with the sale of the Company's cannabis business pursuant to the ASPA, which closed onNovember 9, 2022 .
Licenses
OnNovember 27, 2017 , Neptune entered into an exclusive, worldwide, and royalty-bearing licensing agreement for the use of the MaxSimil® technology, in combination with cannabis-derived products. This new agreement allows Neptune to research, manufacture, formulate, distribute, and sell monoglyceride omega-3-rich ingredients in combination with cannabis and/or cannabinoid-rich or hemp derived ingredients for medical and adult use applications. The Company believes the MaxSimil® technology has the ability to enhance absorption of lipid based and lipid soluble ingredients such as cannabinoids, essential fatty acids includingEPA 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. OnJune 9, 2021 ,Sprout Foods entered into a multi-year licensing agreement with Moonbug, providing Sprout with an exclusive license to utilize certain properties relating to CoComelon®, the world's leading children's entertainment brand, owned and operated by Moonbug, with Sprout products.
EMPLOYEES
As ofDecember 31, 2022 , we had 73 employees working at our business offices inJupiter andLaval , or remotely, down from 161 employees atMarch 31, 2022 . Our employees possess specialized skills and knowledge, which we believe are valuable assets of the Company. As ofDecember 31, 2022 , 25 of our employees were inCanada while 48 were inthe United States . We also had 22 temporary personnel. None of our employees was represented by a union. We consider our relations with our employees to be good and our operations have never been interrupted as the result of a labor dispute.
SEASONALITY
In addition to general economic factors, we are impacted by seasonal factors and
trends such as major cultural events and other unpredictable matters. Although
we believe the impact or seasonality on our consolidated results of operations
is minimal, our quarterly results may vary significantly in the future due to
the timing of nutraceutical contract manufacturing orders as well promotions and
ordering patterns of our other customers. We cannot provide assurance future
revenues will follow historical patterns. The market price of our common shares
may be adversely affected by these factors.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS UPDATE Financial Positioning We are taking the steps necessary to shore up cash reserves in the immediate term and position our balance sheet properly to fund our growth initiatives as we push towards profitability. To this end, we have explored multiple options to balance the need for providing near-term financial stability while ensuring we continue to build long-term shareholder value. As a result, we have entered into three agreements for the purchase and sale of shares of our common stock and pre-funded warrants inOctober 2022 ,June 2022 andMarch 2022 . We also issued promissory notes inJuly 2022 ,November 2022 andJanuary 2023 , and entered into an accounts receivable factoring facility inJanuary 2023 . Taking into account all considerations, we believe these actions are in the best interest of the company and will benefit shareholders in the long-term. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Going Concern. Unless otherwise specified, all dollar amounts are in US dollars ("USD").
Closing of a
OnMarch 14, 2022 , Neptune announced that it had closed a registered direct offering with a single strategic consumer-focused institutional investor for the purchase and sale of (i) 528,572 common shares of the Company ("Common Shares") and (ii) 185,714 pre-funded warrants (the "Pre-Funded Warrants"), with each Pre-Funded Warrant exercisable for one Common Share. The Common Shares and the Pre-Funded Warrants were sold together with Series A Warrants (the "Series A Warrants") to purchase up to an aggregate of 714,286 Common Shares and Series B Warrants (the "Series B Warrants" and collectively with the Series A Warrants, the "Common Warrants") to purchase up to an aggregate of 714,286 Common Shares. Each Common Share and the accompanying Common Warrants were sold together at a combined offering price of$11.20 , and each Pre-funded Warrant and accompanying Common Warrants were sold together at a combined offering price of$11.20 , for aggregate gross proceeds of$8.0 million before deducting fees and other offering expenses. The Pre-Funded Warrants were funded in full at closing except for a nominal exercise price of$0.0035 and were exercisable commencing on the closing date. The Series A Warrants have an exercise price of$11.20 per share and are exercisable six months after the closing date, and will expire five and one-half years from the date of issuance. The Series B Warrants have an exercise price of$11.20 per share and are exercisable six months after the closing date, and expire 18 months from the closing date (collectively the "March Offering"). The Pre-Funded Warrants were exercised in full onMarch 29, 2022 for gross proceeds of$650 .
Closing of a
OnJune 23, 2022 , Neptune announced that it had closed a registered direct offering with certain institutional investors for the purchase and sale of an aggregate of 1,945,526 common shares (or common share equivalents) of the Company, and accompanying two series of warrants to purchase up to an aggregate of 3,891,052 common shares per series of warrants, at an offering price of$2.57 per share and accompanying warrants in a registered direct offering priced at-the-market under Nasdaq rules. Each series of warrants have an exercise price of$2.32 per share and are immediately exercisable upon issuance. One series of warrants will expire two years following the date of issuance and one series of warrants will expire five years following the date of issuance, for aggregate gross proceeds of$5 million before deducting fees and other offering expenses. The pre-funded warrants issued in the offering were fully exercised onJune 24, 2022 , for$65 . Additionally, onOctober 6, 2022 , 972,763 Series C common share purchase warrants were amended to provide for an extended expiration date ofJune 23, 2029 .
Expansion of the Existing Secured Promissory Notes
OnJuly 13, 2022 , Neptune announced thatSprout Foods Inc. ("Sprout"), the Company's organic plant-based baby food and toddler snack company, has entered into an amendment of each of its existing Secured Promissory Notes to expand from$22.5 million to a maximum of$37.5 million , allowing for up to$13 million of future lending. In connection with this amendment, investment funds managed byMorgan Stanley Expansion Capital ("Morgan Stanley" or "MSEC") have agreed to immediately commit an additional$3 million under the expanded Secured Promissory Notes to Sprout. This amount was receivedJuly 13, 2022 . The maturity date of the note facility ofFebruary 1, 2024 , is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The funds from the expanded facility are intended to be used for the general working capital needs of Sprout and the repayment of certain existing Sprout debt payable to Neptune. The existing and new Notes will bear interest at 10% per annum, increasing by 1.00% every three months during the term of the Secured Promissory Notes. MSEC was issued 372,670 common shares of Neptune, of an approximate value of$0.6 million in connection with this expansion.
On
Closing of a
OnOctober 6, 2022 , Neptune announced that it entered into definitive agreements with institutional investors for the purchase and sale of 3,208,557 common shares of the Company (the "Common Shares") pursuant to a registered direct offering priced at-the-market under Nasdaq rules (the "Offering") and warrants to purchase up to 6,417,114 Common Shares (the "Warrants") in a concurrent private placement (the "Private Placement"). The combined purchase price for one Common Share and one Warrant is$1.87 . The Warrants will have an exercise price of$1.62 per Common Share, will be exercisable immediately following the date of issuance and will expire five years from the date of issuance. The aggregate gross proceeds from the Offering and the concurrent Private Placement were approximately$6.0 million , before deducting fees and other estimated expenses, for net proceeds of approximately$5.7 million . The Offering and concurrent Private Placement closed onOctober 11, 2022 .
Closing of a Debt Financing
OnJanuary 13, 2023 , Neptune announced that it has closed on a senior secured notes financing (such notes, the "Notes") for gross proceeds of$4.0 million with CCUR Holdings, Inc. and Symbolic Logic, Inc. (collectively, the "Noteholders"). The Notes will mature 12 months from the initial closing and bear interest at a rate of 16.5% per annum. The notes are secured by the assets of Neptune excluding the assets of Sprout. Interest will be payable in kind on the first 6 monthly payment dates after the initial closing date and thereafter will be payable in cash. Pursuant to the terms of the Notes, the Company also issued to the Noteholders warrants to purchase an aggregate of 850,000 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of$0.53 per common share. OnMarch 9, 2023 , the Company entered into a Waiver and First Amendment to the Notes (the "Waiver Agreement"). The Waiver Agreement waives certain administrative, regulatory and financial statement related covenants as further described in the Waiver Agreement as required by the terms of the Notes. The lender has the right to demand immediate repayment in the event of default. Furthermore, in connection with the Waiver Agreement, the Notes were amended to provide that the Purchasers shall be paid an exit fee in the aggregate amount of$0.2 million , payable as follows: (i) on or prior toMay 15, 2023 ,$0.1 million and (ii) on the Maturity Date (as defined in the Note Purchase Agreement),$0.1 million and the interest rate was increased to 24% for a period extending until the Company meets specified criteria in the Waiver Agreement. 11
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Management's Discussion and Analysis of Financial Condition and Results of Operations
Accounts Receivable Factoring Facility
OnJanuary 25, 2023 , Neptune announced that its organic baby food brand subsidiary, Sprout Organics, has entered into an accounts receivable factoring facility withAlterna Capital Solutions, LLC ("Alterna"). The maximum available is$5 million . The terms of the agreement include a Funds Usage Fee of prime plus 1% with a minimum interest rate of 8% per annum.Alterna was granted a security interest in Sprout's accounts receivable. The agreement will remain in effect for a 12-month period, effectiveJanuary 23, 2023 , and will be automatically renewed. Neptune provided a commercial guaranty in connection with this agreement. Growth Drivers We remain enthusiastic about the growth prospects of our business, with opportunity across all three of our core verticals. We have successfully made the transition to a fully integrated consumer packaged goods company with a diverse suite of better-for-you brands, available in some of the country's largest retail chains. At the same time, we are driving consumer relevance by pursuing the right strategic partnerships for co-branded product lines and expanding our product offerings in key wellness categories.
Major Distribution Gains
Since acquiring a majority stake in Sprout Organics inFebruary 2021 , we have expanded Sprout baby foods and toddler snacks substantially, both online and in store at major retailers like Target andWal-Mart . Earlier inMarch 2022 , we announced the launch of our Forest RemediesMulti Omega 3-6-9 line of supplements into more than 340 Sprouts Farmers Market stores across theU.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Strategic Partnerships
InFebruary 2022 , we brought Walmart a first-of-its-kind collaboration between Sprout Organics and popular kids' entertainment platform CoComelon. This co-branded product line is now available onWalmart.com and in 900 Walmart stores and has been very well-received. With this launch, Sprout Organics now sells into the top organic baby food retailers in theU.S. , accounting for approximately 90 percent of the overall market.
Investing in Our Prospects
OnNovember 15, 2021 we initiated a strategic review and made some big changes to get on track to becoming a profitable diversified CPG company. These actions have taken effect, and we are starting to see the results. The third quarter of fiscal year 2022 was the first quarter where we posted a positive gross margin since transitioning to a CPG-focused model. The third quarter of fiscal year 2023, consolidated gross profit margin was 15.4% of net sales up from 11.3% for the same period last year. For the nine-month period endedDecember 31, 2022 the gross profit margin was 0.2% up from (4.9)% for the same period of the prior year. However, there can be no assurances that this margin growth will continue. While the global market can be unstable during turbulent times, we are taking steps to ensure we remain well-positioned to execute against our stated plan: controlling our costs while pursuing high-growth opportunities. To that effect, Neptune announced onJune 8, 2022 , the launch of a new Consumer Packaged Goods ("CPG") focused strategic plan to reduce costs, improve the Company's path to profitability and enhance current shareholder value. This plan focuses on two primary actions: (1) planned divestiture of the Canadian cannabis business and (2) a realignment of focus and operational resources toward increasing the value of Neptune's CPG business. With the divestiture of its cannabis business, Neptune has renewed its focus on its core brands - Sprout Organics and Biodroga Solutions - that align closely with future consumer trends and show a greater potential for future growth and profitability. OnOctober 16, 2022 , Neptune entered into an asset sale and purchase agreement (the "ASPA") with a third-party, for its Canadian cannabis business including theSherbrooke facility, following the divestiture of this business announced onJune 8, 2022 . The aggregate purchase price of the assets sold, net of liabilities assumed, amounted to approximately$3.8 million ($5.15 million CAD). The ASPA closed onNovember 9, 2022 . Some assets were excluded from the ASPA and were written down accordingly. The completion of the divestiture of our cannabis business is a critical milestone in executing upon our strategy to become a leading CPG company. The sale of the cannabis assets will allow us to realize significant cost savings and operational streamlining from redirected resources towards our simplified corporate structure, as we focus on Sprout as the key growth driver for Neptune going forward. 12
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Management's Discussion and Analysis of Financial Condition and Results of Operations
RECENT CORPORATE DEVELOPMENTS
Neptune's Presence in
During the year ended onMarch 31, 2022 , Neptune supplied the market with premium cannabis extracts and dried flower, under its Mood Ring™ and PanHash™ brands, and completed its launch of all significant regulated product categories. All cannabis products were manufactured and packaged at the Company's purpose-built facility inSherbrooke, Quebec . OnJune 8, 2022 , the Company announced a planned divestiture of the Canadian cannabis business and that the Company would focus on winding up its cannabis operations pending one or more sales transactions. Following this announcement, all assets and liabilities related to the Canadian cannabis business were respectively shown under assets held for sale and liabilities directly associated with assets held for sale on Neptune's balance sheet. Further information on those assets and liabilities can be found in note 2(d) of the condensed consolidated interim financial statements for the nine-month period endedDecember 31, 2022 . OnOctober 16, 2022 , Neptune entered into an asset sale and purchase agreement (the "ASPA") with a third-party, for its Canadian cannabis business including theSherbrooke facility, following the planned divestiture of this business announced onJune 8, 2022 . The aggregate purchase price of the assets sold, net of liabilities assumed, amounted to approximately$3.8 million ($5.15 million CAD). The ASPA closed onNovember 9, 2022 . Some assets were excluded from the ASPA, and were written-down accordingly.
Launch of a New CPG Focused Strategic Plan
OnJune 8, 2022 , Neptune announced the launch of a new Consumer Packaged Goods ("CPG") focused strategic plan to reduce costs, improve the Company's path to profitability and enhance current shareholder value. This plan builds on the Company's initial strategic review that took place in fall of 2021 and focuses on two primary actions: (1) planned divestiture of the Canadian cannabis business and (2) a realignment of focus and operational resources toward increasing the value of Neptune's consumer products business. With the divestiture of its cannabis business, Neptune has renewed its focus on its core brands - Sprout Organics and Biodroga Solutions - that align closely with future consumer trends and show a greater potential for future growth and profitability. The strategic plan is expected to lower costs and reduce global headcount by approximately 50%.
Neptune Announces New Line of CoComelon® Co-Branded Products
Neptune announced onMay 26, 2022 a new line up of CoComelon co-branded organic snack bars for toddlers. The snack bars are the latest innovation in the Sprout Organics x CoComelon product line launched earlier this year, which features a range of organic baby and toddler food pouches and toddler snacks. New snack bars will be available online and at select retailers nationwide. Sprout Organics CoComelon Snack Bars are available in two flavor combinations: Banana and Banana with Peas and Carrots. Each snack bar contains a blend of unsweetened fruits, veggies and gluten-free oats and packs an impressive 4g of plant-based protein and 2g of dietary fiber to help fuel growing bodies.
Changes to Management
As part of the Company's renewed focus on its CPG brands and Sprout Organics in particular, Neptune announced onJune 8, 2022 thatSarah Tynan , Sprout's Chief Customer Officer, was promoted to CEO of Sprout.Ms. Tynan has been instrumental in garnering big distribution gains for Sprout, including Walmart and Target, and leading the highly successful CoComelon partnership. She brings deep sales experience and business acumen, including previous roles at Newell Brands and Unilever, and will continue to drive the Sprout business forward. OnJune 14, 2022 , Neptune announced the appointment ofRaymond Silcock as Chief Financial Officer, effectiveJuly 25, 2022 .Mr. Silcock , who is based out of Neptune'sJupiter, Florida office, previously served as Executive Vice President and Chief Financial Officer atPerrigo Plc , as well as CFO atDiamond Foods ,The Great Atlantic and Pacific Tea Company ,UST Inc. , and Cott Corporation. In addition, he has previously served as Chair of both Audit and Strategy Committees on several Boards includingPinnacle Foods Inc ,American Italian Pasta Company , Prestige Brands andBacardi Limited .Mr. Silcock replacesRandy Weaver who was Interim CFO up toJuly 22, 2022 .
Receipt of NASDAQ Notifications
The Company has received a written notification (the "Notification Letter") from theNasdaq Stock Market LLC ("Nasdaq") onDecember 29, 2022 , notifying the Company that it is not in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2), which requires that the closing bid price for the Company's common shares listed on Nasdaq be maintained at a minimum ofUS$1.00 . Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. Based on the closing bid price of the Company's common shares for the 30 consecutive business days fromNovember 15, 2022 toDecember 28, 2022 , the Company no longer met the minimum bid price requirement. The Notification Letter has no immediate effect on the listing of the Company's common shares on Nasdaq. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided 180 calendar days, or untilJune 27, 2023 , to regain compliance with the minimum bid price requirement, during which time the Company's common shares will continue to trade on the Nasdaq Capital Market. To regain compliance, the Company's common shares must have a closing bid price of at leastUS$1.00 for a minimum of 10 consecutive trading days. In the event the Company does not regain compliance byJune 27, 2023 , the Company may be eligible for additional time to regain compliance or may face delisting. The Company's business operations are not affected by the receipt of the Notification Letter. The Company intends to monitor the closing bid price of its common shares and may, if appropriate, consider implementing available options, including, but not limited to, implementing a reverse share split of its outstanding common shares, to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules. OnFebruary 24, 2023 , the Company has received written notification from theListing Qualification Department of the Nasdaq , notifying the Company that it is no longer in compliance with Nasdaq Listing Rule 5250(c)(1), as a result of Neptune not having timely filed its Quarterly Report on Form 10-Q for the fiscal quarter endedDecember 31, 2022 with theU.S. Securities and Exchange Commission . The Nasdaq notice had no immediate impact on the listing or trading of the Company's common stock on the Nasdaq Capital Market. The notice provided that the Company had untilApril 24, 2023 (that is, 60 calendar days from the date of the Nasdaq notice) to submit to Nasdaq a plan (the "Compliance Plan") to regain compliance with the Nasdaq Listing Rules. As Neptune filed its Form 10-Q onMarch 30, 2023 , this eliminated the need for the Company to submit a formal plan to regain compliance. 13
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Management's Discussion and Analysis of Financial Condition and Results of Operations
SELECTED CONSOLIDATED ANNUAL AND QUARTERLY INFORMATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION (in millions, except per share data)
The following table sets out selected consolidated financial information.
Three-month periods ended Nine-month periods ended
December 31, December 31, December 31, December 31,
2022 2021 2022 2021
$ $ $ $
Total revenues 12.209 14.668 40.468 37.265
Adjusted EBITDA1 (5.057) (14.188) (30.087) (40.483)
Net loss (0.497) (16.805) (44.290) (47.763)
Net loss attributable to equity
holders of the
Company 1.288 (15.009) (33.894) (43.030)
Net income (loss) attributable
to non-controlling interest (1.786) (1.796) (10.396) (4.733)
Basic and diluted income (loss)
per share attributable
to common shareholders of the
Company 0.06 (3.14) (4.01) (9.03)
As at
December As at As at
31, 2022 March 31, 2022 March 31, 2021
$ $ $
Total assets 63.968 104.955 186.948
Working capital2 (1.633) 7.071 54.718
Non-current financial liabilities 18.189 13.800 14.593
Equity attributable to equity holders of the Company 13.598 48.116
115.368
Equity attributable to non-controlling interest 2.326 12.722
22.178
1 The Adjusted EBITDA is a non-GAAP measure. It is not a standard measure endorsed by US GAAP requirements. A reconciliation to the Company's net loss is presented below. 2 Working capital is calculated by subtracting current liabilities from current assets. Because there is no standard method endorsed by US GAAP, the results may not be comparable to similar measurements presented by other public companies. Current assets as atDecember 31, 2022 ,March 31, 2022 andMarch 31, 2021 were$28.222 ,$37.388 and$89.528 respectively, and current liabilities as atDecember 31, 2022 ,March 31, 2022 andMarch 31, 2021 were$29.855 ,$30.317 and$34.809 respectively. 14
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Management's Discussion and Analysis of Financial Condition and Results of Operations
CONSOLIDATED FINANCIAL ANALYSIS
NON-GAAP FINANCIAL PERFORMANCE MEASURES
The Company uses one adjusted financial measure, Adjusted Earnings Before
Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") to assess its
operating performance. This non-GAAP financial measure is presented in a
consistent manner, unless otherwise disclosed. The Company uses this measure for
the purposes of evaluating its historical and prospective financial performance,
as well as its performance relative to competitors. The measure also helps the
Company to plan and forecast for future periods as well as to make operational
and strategic decisions. The Company believes that providing this information to
investors, in addition to its GAAP financial statements, allows them to see the
Company's results through the eyes of Management, and to better understand its
historical and future financial performance. Neptune's method for calculating
Adjusted EBITDA may differ from that used by other corporations.
A reconciliation of net loss to Adjusted EBITDA is presented below.
ADJUSTED EBITDA
Although the concept of Adjusted EBITDA is not a financial or accounting measure defined under US GAAP and it may not be comparable to other issuers, it is widely used by companies. Neptune obtains its Adjusted EBITDA measurement by excluding from its net loss the following items: net finance costs (income), depreciation and amortization, and income tax expense (recovery). Other items such as equity classified stock-based compensation, non-employee compensation related to warrants, impairment losses on non-financial assets, revaluations of derivatives, costs related to conversion from IFRS to US GAAP and other changes in fair values are also added back to Neptune's net loss. The exclusion of net finance costs (income) eliminates the impact on earnings derived from non-operational activities. The exclusion of depreciation and amortization, stock-based compensation, non-employee compensation related to warrants, impairment losses, revaluations of derivatives and other changes in fair values eliminates the non-cash impact of such items, and the exclusion of costs related to conversion from IFRS to US GAAP, together with the other exclusions discussed above, present the results of the on-going business. From time to time, the Company may exclude additional items if it believes doing so would result in a more effective analysis of underlying operating performance. Adjusting for these items does not imply they are non-recurring. For purposes of this analysis, the Net finance costs (income) caption in the reconciliation below includes the impact of the revaluation of foreign exchange rates.
In Q4 2022, the Company added the costs related to the conversion from IFRS to US GAAP as an adjustment to the definition of Adjusted EBITDA.
In the quarter endedSeptember 30, 2022 , the Company recast comparative Adjusted EBITDA to conform to the current definition. As a result, the following adjustments were removed in the current and comparative quarters: litigation provisions, business acquisition and integration costs, signing bonus, severance and related costs, D&O insurance and write-down of inventories and deposits.
Adjusted EBITDA1 reconciliation, in millions of dollars
Three-month periods ended Nine-month periods ended
December 31, December 31, December 31, December 31,
2022 2021 2022 2021
Recast Recast
Net loss for the period $(0.497) $(16.805) $(44.290) $(47.763)
Add (deduct):
Depreciation and amortization 0.662 1.515 2.391 5.136
Revaluation of derivatives (8.368) (1.245) (16.084) (8.707)
Net finance costs (income) 1.868 0.962 (0.732) 1.557
Equity classified stock-based
compensation 1.005 1.014 2.832 6.252
Non-employee compensation related to
warrants - 0.025 - 0.179
System migration, conversion,
implementation - 0.328 - 0.328
Impairment loss on long-lived assets 0.271 - 25.781 2.415
Change in revaluation of marketable
securities - 0.018 - 0.108
Income tax expense 0.002 - 0.015 0.012
Adjusted EBITDA1 $(5.057) $(14.188) $(30.087) $(40.483) 1 The Adjusted EBITDA is not a standard measure endorsed by US GAAP requirements.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
OPERATING SEGMENTS The Company's management structure and performance is measured based on a single segment, which is the consolidated level, as this is the level of information used in internal management reports that are reviewed by the Company's Chief Operating Decision Maker. Geographical information
Revenue is attributed to geographical locations based on the origin of customers' location.
Three-month periods ended Nine-month periods ended
December 31, December 31, December 31, December 31,
2022 2021 2022 2021
Total Total Total Total
Revenues Revenues Revenues Revenues
Canada $1.348 $4.560 $7.075 $8.920
United States 10.597 9.832 32.626 27.644
Other countries 0.264 0.276 0.767 0.701
$12.209 $14.668 $40.468 $37.265 The Company's property plant and equipment, intangible assets, goodwill and assets held for sale are attributed to geographical locations based on the location of the assets.
As at
December 31, 2022
Property, plant and equipment Goodwill Intangible assets
Canada $0.537 $2.424 $1.688
United States 1.326 11.972 15.655
Total $1.863 $14.396 $17.343
As at
March 31, 2022
Property, plant and equipment Goodwill Intangible assets
Canada $20.725 $2.626 $2.353
United States 0.723 19.542 19.302
Total $21.448 $22.168 $21.655
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Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS ANALYSIS
Summary of Changes to the Condensed Consolidated Interim Statements of Loss
three-month period ended
For the three-month
period ended Changes
December December
31, 2022 31, 2021 Changes in $ Changes in %
Total revenues $12.209 $14.668 (2.459) -16.8%
Total cost of sales (10.328) (13.014) 2.686 20.6%
Gross profit 1.881 1.654 0.227 13.7%
Gross profit margin 15.4% 11.3% 4.1% 36.6%
Research and development expenses, net
of tax credits and grants (0.029) (0.302) 0.273 90.4%
Selling, general and administrative expenses (8.727) (18.429) 9.702
52.6%
Impairment losses (0.271) - (0.271)
100.0%
Other elements of the operating loss 0.085 0.006 0.079
1316.7%
Loss from operating activities (7.061) (17.071) 10.010 58.6% Net finance costs (1.363) (0.361) (1.002) -277.6% Foreign exchange gain (loss) 0.525 (0.601) 1.126 187.4% Loss on issuance and change in fair value of derivatives 7.338 1.246 6.092
488.9%
Other changes in revaluation and fair value - (0.018) 0.018
100.0%
Other elements of the loss before
income taxes 0.066 - 0.066 100.0%
6.566 0.266 6.300 2368.4%
Loss before income taxes (0.495) (16.805) 16.310 97.1%
Income tax recovery (expense) (0.002) - (0.002) 100.0%
Net loss (0.497) (16.805) 16.308 97.0%
Adjusted EBIDTA (5.057) (14.188) 9.131 64.4%
Revenues
Total consolidated revenues for the three-month period ended December 31, 2022
amounted to $12.2 million representing a decrease of $2.5 million or 17%
compared to $14.7 million for the three-month period ended December 31, 2021 .
This decrease was primarily due to the Corporation having exited the cannabis
business ahead of selling all cannabis assets on November 9, 2022 . Cannabis
sales were nil, down $3.5 million versus prior year quarter. Partially
offsetting this decline, Organic Foods and Beverages revenues in Q3 FY 2023 were
up $1.5 million in comparison to the quarter ended December 31, 2021 . The
principal reason for this increase is higher sales to Walmart, as well as the
introduction of the CoComelon license products in additional stores.
Geographic Revenues
Revenues for the current quarter decreased by$3.2 million or 70.0% inCanada , increased by$0.8 million or 8% inthe United States and decreased by$0.01 million or 4% for other countries (royalty revenues) as compared to the quarter endedDecember 31, 2021 . 17
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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 gross profit improvement was mainly attributable to improved product mix and a Sprout price increase, as well as continued cost control measures.
Gross Margin Percentage
For the three-month periods endedDecember 31, 2022 and 2021, the consolidated gross margin went from 11.3% in 2021 to 15.4% in 2022. Changes in gross margins resulted from price increases together with cost reductions.
Research and Development ("R&D") Expenses
For the quarter endedDecember 31, 2022 , the consolidated R&D expenses amounted to$0.03 million , compared to$0.30 million for the quarter endedDecember 31, 2021 .
Selling, General and Administrative ("SG&A") Expenses
Consolidated SG&A expenses for the quarter endedDecember 31, 2022 , amounted to$8.7 million compared to$18.4 million for the same period prior year, a reduction of$9.7 million or 52.6% primarily from headcount reductions at Sprout and Neptune Wellness (corporate and cannabis.)
Finance costs
Net finance costs, foreign exchange and derivatives revaluations amounted to a gain of$6.6 million for the quarter endedDecember 31, 2022 , compared to a gain of$0.3 million for the three-month period endedDecember 31, 2021 , an increase of$6.3 million . The variation for this period is mainly attributable to the impact of the drop in the Company's share price on the revaluation of derivatives.
Income taxes
Income tax expense (recovery) was nominal. As entities are in carry forward loss positions, there is a nominal impact to income taxes for the three-month period endedDecember 31, 2022 . Net profit/loss For the quarter endedDecember 31, 2022 , the net loss amounted to$0.5 million compared to a$16.8 million loss for the same quarter last year. This$16.3 million improvement is primarily due to a combination of SG&A reductions($9.7) million and the gain on the reevaluation of the derivatives, net of the day-one loss on issuance($7.3) million .
Adjusted EBITDA
Consolidated Adjusted EBITDA loss improved by$9.1 million for the quarter endedDecember 31, 2022 to an Adjusted EBITDA loss of($5.1) million compared to a($14.2) million loss for the same quarter last year mainly as a result of SG&A reductions as compared to prior year, as discussed above. 18
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Management's Discussion and Analysis of Financial Condition and Results of Operations
Nine-month period ended
For the nine-month
period ended Changes
December December
31, 2022 31, 2021 Changes in $ Changes in %
Total revenues $40.468 $37.265 3.203 8.6%
Total cost of sales (40.374) (39.106) (1.268) -3.2%
Gross profit 0.094 (1.841) 1.935 105.1%
Gross profit margin 0.2% -4.9% 5.2% -104.7%
Research and development expenses, net
of tax credits and grants (0.451) (0.652) 0.201 30.8%
Selling, general and administrative expenses (35.188) (49.902) 14.714
29.5%
Impairment losses (25.781) (2.404) (23.377)
-972.4%
Other elements of the operating loss 0.170 0.006 0.164
2733.3%
Loss from operating activities (61.156) (54.793) (6.363) -11.6% Net finance costs (2.657) (1.170) (1.487) -127.1% Foreign exchange gain (loss) 6.545 (0.387) 6.932 1791.2% Loss on issuance and change in fair value of derivatives 12.927 8.707 4.220
48.5%
Other changes in revaluation and fair value - (0.108) 0.108
100.0%
Other elements of the loss before
income taxes 0.066 - 0.066 100.0%
16.881 7.042 9.839 139.7%
Loss before income taxes (44.275) (47.751) 3.476 7.3%
Income tax recovery (expense) (0.015) (0.012) (0.003) -25.0%
Net loss (44.290) (47.763) 3.473 7.3%
Adjusted EBIDTA (30.087) (40.483) 10.396 25.7%
Adoption of US GAAP - Comparative Period Amounts
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles inthe United States of America ("US GAAP"). Comparative figures, which were previously presented in accordance with International Financial Reporting Standards ("IFRS") as issued by theInternational Accounting Standards Board , have been adjusted as required to be compliant with the Company's accounting policies under US GAAP.
Revenues
For the nine-month period endedDecember 31, 2022 , consolidated revenues totaled$40.5 million , an increase of$3.2 million or 8.6% compared to$37.3 million for the nine-month period endedDecember 31, 2021 . Cannabis sales of$2.7 million were down$3.0 million or 52%, Nutraceutical Products sales increased$0.8 million to$11.8 million whileOrganic Foods and Beverages sales were up$5.5 million to$25.1 million an increase of 28%. This latter increase was mainly attributable to the expansion ofOrganic Foods and Beverages Sprout product at Walmart, as well as the introduction of the CoComelon license products in additional stores, and as a result of distribution gains in all markets.
Geographic Revenues
For the nine-month period endedDecember 31, 2022 compared toDecember 31, 2021 , revenues decreased by$1.8 million or (21)% inCanada to$7.1 million from$8.9 million , Inthe United States revenues increased by$5 million or 18% from$27.6 million in 2021 to$32.6 million in 2022 and increased by$0.1 million or 9% from$0.7 million in 2021 to$0.8 million in 2022 for other countries (royalty revenues). The decrease of revenue inCanada for the current quarter is mainly due to exiting our cannabis business as previously discussed. Increased first half year revenue inthe United States is from sales growth of bothNutraceutical Products and Organic Foods and Beverages.
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.
For the nine-month period endedDecember 31, 2022 , the consolidated gross profit amounted to$0.09 million compared to$(1.8) million loss for the nine-month period endedDecember 31, 2021 , an improvement of$1.9 million , mainly attributable to increased sales volumes and a price increase on Sprout, together with costs reductions. Gross Margin Percentage For the nine-month periods endedDecember 31, 2022 and 2021, the consolidated gross margin was 0.2% in 2022 from (4.9)% in 2021. A change of 5.2% resulting from increased sales volumes and price increases together with cost reductions. 19
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Management's Discussion and Analysis of Financial Condition and Results of Operations
Research and Development ("R&D") Expenses
Consolidated R&D expenses amounted to
Selling, General and Administrative ("SG&A") Expenses
For the nine-month period endedDecember 31, 2022 , consolidated SG&A expenses amounted to$35.2 million , compared to$49.9 in the same period in 2021, a decrease of$14.7 million or 29.5%, primarily due to cost reductions from the restructuring and continued cost controls, partly offset by severance and other expenses. Impairment losses For the nine-month period endedDecember 31, 2022 , aggregate impairment losses amounted to$25.8 million compared to$2.4 million for the same period last year, an increase of$23.4 million . This increase is primarily due to the divesture from the Cannabis business and the impairment of the goodwill related to Sprout. Finance costs For the nine-month period endedDecember 31, 2022 , the net finance costs, foreign exchange and derivatives revaluations amounted to a gain of$16.9 million , compared to a gain of$7.0 million for the same period the previous year, an increase of$9.9 million . The variation for this period is mainly attributable to the effect of the decline in the share price on the revaluation of derivatives. Income taxes For the nine-month period endedDecember 31, 2022 , income tax expense (recovery) was nominal. As entities are in carry forward loss positions, there is nominal impact to income taxes for the nine-month period endedDecember 31, 2022 .
Net Profit/ loss
The net loss for the nine-month period endedDecember 31, 2022 totaled($44.3) million compared to($47.8) million for the nine-month period endedDecember 31, 2021 , an improvement of$3.4 million or 7.2%. The improvement is primarily due to reduced SG&A($14.7) million , foreign exchange gains($6.9) million , gain on the revaluation of the derivatives, net of the day-one loss on issuance($12.9) million , mostly offset by impairment losses of($23.4) million .
Adjusted EBITDA
Consolidated Adjusted EBITDA loss improved by$10.4 million for the nine-month period endedDecember 31, 2022 to($30.1) million compared to a($40.5) million loss for the same period last year. The decrease in Adjusted EBITDA loss for the nine-month period is due to a reduction in gross loss and SG&A. 20
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Management's Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL AND CAPITAL MANAGEMENT
USE OF PROCEEDS
The use of proceeds for the nine-month periods ended
Nine-month periods ended
December 31 , December 31,
2022 2021
Sources:
Proceeds from the issuance of shares and warrants
through a Direct Offering $5.000 $-
Proceeds from the issuance of shares and warrants through a
Direct Offering Priced At-The-Market and Concurrent Private Placement
6.000 -
Proceeds from sale of Cannabis assets 3.122
-
Proceeds from sale of assets 0.170
-
Proceeds from sale of Acasti shares1 -
0.045
Increase in loans and borrowings 3.800 -
18.092 0.045
Uses:
Acquisition of property, plant and equipment 0.602 1.035
Acquisition of intangible assets -
0.434
Costs of issuance of shares 1.330
-
Withholding taxes paid pursuant to the settlement of non-treasury RSUs
0.574 0.979
Foreign exchange loss on cash and cash equivalents held in foreign
currencies 0.238
0.454
Cash flows used in operating activities 20.670 43.821
23.414 46.723
Net cash (outflows) $(5.322) $(46.678)
Sources and Uses of Funds
Nine-month period ended
For the nine-month period endedDecember 31, 2022 , the increase in loans and borrowings was$3.8 million and direct offerings of$11.0 million ; in addition, the Company received$3.3 million for the sale of assets. The proceeds were used for operating activities, primarily inventory procurement, salaries and professional fees.
For the nine-month period ended
Direct Offering
OnJune 23, 2022 , Neptune closed agreements with several institutional investors for the purchase and sale of an aggregate of 1,300,000 common shares of the Company, 645,526 pre-funded warrants and accompanying series of warrants to purchase up to an aggregate of 2,591,052 common shares warrants, at an offering price of$2.57 per share and accompanying warrants in a registered direct offering priced at-the-market under Nasdaq rules. Each series of warrants have an exercise price of$2.32 per share and are immediately exercisable upon issuance. One series of warrants will expire two years following the date of issuance and one series of warrants will expire five years following the date of issuance. The gross proceeds from the offering were$5.0 million , prior to deducting placement agent's fees and other offering expenses payable by Neptune. The pre-funded warrants were fully exercised onJune 24, 2022 for$65 . OnOctober 11, 2022 , the Company closed a registered direct offering of 3,208,557 of its Common Shares and warrants ("Series E Warrants") to purchase up to 6,417,114 Common Shares in the concurrent Private Placement. The combined purchase price for one Common Share and one warrant was$1.87 . The Series E Warrants have an exercise price of$1.62 per Common Share, are exercisable immediately following the date of issuance and will expire five years from the date of issuance. The Company received gross proceeds of$6.0 million and net proceeds of$5.1 million after deducting the placement agent fees and expenses, and the Company's offering expenses.
Secured Promissory Notes
OnJuly 13, 2022 , Neptune announced thatSprout Foods Inc. ("Sprout"), the Company's organic plant-based baby food and toddler snack company, entered into an amendment of each of its existing Secured Promissory Notes. In connection with this amendment, investment funds managed byMorgan Stanley Expansion Capital ("Morgan Stanley" or "MSEC") have agreed to immediately commit an additional$3 million in Secured Promissory Notes to Sprout. The maturity date of the note facility ofFebruary 1, 2024 is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The$13.0 million of amended Secured Promissory Notes have a 10% interest rate per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. The amended Secured Promissory Notes may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Company and MSEC, into common shares of the Company. MSEC was issued 372,670 common shares of Neptune, having a value of$0.6 million in connection with this commitment, for the payment of borrowing costs. 21
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Management's Discussion and Analysis of Financial Condition and Results of Operations
OnSeptember 9, 2022 , Neptune's Sprout subsidiary entered in a new$0.25 million Secured Promissory Note agreement. The maturity date of the new note facility isFebruary 1, 2024 . The$0.25 million Secured Promissory Note has a 10% interest rate per annum, increasing by 1% per annum every three months during the term of this Secured Promissory Note. The interest will be compounded and added to the principal amount on a quarterly basis. This Secured Promissory Note may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Company and the holder, into common shares of the Company. Neptune issued 36,765 common shares having a value of$0.1 million in connection with this Secured Promissory Note, for the payment of borrowing costs. OnNovember 8, 2022 , Sprout entered into two agreements to issue an additional$0.55 million of Secured Promissory Notes, on the same terms as the previous Secured Promissory Note discussed above. In connection with these financings, Neptune issued 146,330 common shares for a value of$0.1 million to the holders of these Secured Promissory Notes onFebruary 15, 2023 , for the payment of borrowing costs.
Sale of assets
OnJune 8, 2022 , the Company announced a planned divestiture of the Canadian cannabis business and that the Company would focus on winding up its cannabis operations pending one or more sales transactions. The net proceeds from the asset sale and purchase agreement (the "ASPA") signed with a third-party onOctober 16, 2022 were$3.1 million . The transaction closed onNovember 9, 2022 . In addition, Neptune received$0.2 million for the sale of assets unrelated to the cannabis business. CAPITAL RESOURCES Liquidity position As atDecember 31, 2022 , the Company's liquidity position, consisting of cash and cash equivalents, was$3.4 million . Furthermore, as atDecember 31, 2022 , the Company's current liabilities and expected level of expenses for the next twelve months exceed cash on hand of$3.4 million and its total current liabilities exceed its total current assets. Accordingly, the Company is required to actively manage its liquidity and expenses and payments of payables are not being made as the amounts become due for certain suppliers. As of the date the financial statements are authorized for issuance, the cash balance is expected to be sufficient to operate the business for only the next one to two months under the current business plan. The Company requires funding in the very near term in order to continue its operations. If the Company is unable to obtain funding in the near-term, it may have to cease operations and liquidate its assets
Liquidity and Capital Resources
Cash flows and financial condition for the three and nine-month periods ended
Summary
As of
Operating activities
For the quarter endedDecember 31, 2022 , increase in loans and borrowings was$0.55 million and the proceeds from a direct offering of$6.0 million were used for operating activities, primarily inventory procurement, salaries and professional fees. For the quarter endedDecember 31, 2021 , there were no significant sources of funds. In the same period, funds were used for operating activities, primarily inventory procurement. For the nine-month period endedDecember 31, 2022 , the increase in loans and borrowings was$3.8 million and direct offerings of$11.0 million . The proceeds were for operating activities, primarily inventory procurement, salaries and professional fees.
For the nine-month period ended
Investing activities
The Company's business models require low capital expenditures ("CAPEX") future
investments. For the quarter ended December 31, 2022 , $3.1 million was provided
by investing activities, mainly coming from the proceeds from the sale of the
Cannabis assets. In the same period the prior year, $0.5 million was used for
investing activities. As for the nine-month period ended December 31, 2022 , $2.7
million was provided by investing activities, compared to $1.4 million used by
investing activities for the same period the prior year.
Financing activities
The Company has been successful in obtaining financing from public issuances and private placements. The Company also previously had a term facility for one of its subsidiaries, which was repaid in its entirety during the last quarter of fiscal year 2021. Since then, the Company entered into Registered Direct Offerings closed onMarch 14, 2022 ($8.0 million ),June 23, 2022 ($5.0 million ) andOctober 11, 2022 ($6.0 million ). Secured promissory notes totaling$3.8 million were also issued during the nine-month period endedDecember 31, 2022 by Sprout (including$0.55 million during the last quarter). Subsequently to the quarter endedDecember 31, 2022 , Sprout entered into an accounts receivable factoring facility, for which the maximum available is$5 million , and issued secured senior notes for gross proceeds of$4 million . The Company's current cash position will be sufficient to support its financial needs for only one to two months. Should the Company's various financing initiatives such as potential public issuances, private placements, preferred shares issuances, or debt financings not materialize, further actions such as further cost reduction initiatives and Company spinoffs of subsidiaries remain as viable options. See the Going Concern section of this Management's Discussion and Analysis of Financial Condition and Results of Operations. Furthermore, certain liabilities, such as the warrant liabilities, are dependent on Neptune's share price and would only become payable if they are in the money. The warrants, if exercised, settle in common shares of the Company and therefore do impact on the Company's cash. Unless exercised on a cashless basis (where permitted), warrant holders are required to pay the cash strike price to exercise the warrant and thus the exercise of warrants could result in a cash infusion to the Company. 22
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Management's Discussion and Analysis of Financial Condition and Results of Operations
Loans and borrowings OnFebruary 10, 2021 , as part of the Sprout acquisition, Sprout issued a promissory note of$10.0 million guaranteed by the Company and secured by a first-ranking mortgage on all movable assets of Sprout current and future, corporeal and incorporeal, and tangible and intangible. The outstanding principal balance bears interest at the rate of 10% per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. The principal is payable onFebruary 1, 2024 . OnSeptember 9, 2022 , Sprout entered in a new$0.25 million Secured Promissory Note agreement. The maturity date of the new note facility isFebruary 1, 2024 . The$250,000 Secured Promissory Note has a 10% interest rate per annum, increasing by 1% per annum every three months during the term of this Secured Promissory Note. The interest will be compounded and added to the principal amount on a quarterly basis. This Secured Promissory Note may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Company and the holder, into common shares of the Company. Neptune issued 36,765 common shares for a value of$0.1 million in connection with this Secured Promissory Note, for the payment of borrowing costs. OnNovember 8, 2022 , Sprout entered into an agreement to issue an additional$0.55 million of Secured Promissory Notes, on the same terms as the Secured Promissory Note entered into with MSEC. OnFebruary 15, 2023 , in connection with this financing, Neptune issued 146,330 common shares to the holders of these Secured Promissory Notes for a value of$0.1 million . OnJanuary 13, 2023 , Neptune announced that it has closed on a senior secured notes financing (such notes, the "Notes") for gross proceeds of$4.0 million with CCUR Holdings, Inc. and Symbolic Logic, Inc. (collectively, the "Noteholders"). The Notes will mature 12 months from the initial closing and bear interest at a rate of 16.5% per annum. The notes are secured by the assets of Neptune excluding the assets of Sprout. Interest will be payable in kind on the first 6 monthly payment dates after the initial closing date and thereafter will be payable in cash. Pursuant to the terms of the Notes, the Company also issued to the Noteholders warrants to purchase an aggregate of 850,000 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of$0.53 per common share. OnMarch 9, 2023 , the Company entered into a Waiver and First Amendment to the Notes (the "Waiver Agreement"). The Waiver Agreement waives certain administrative, regulatory and financial statement related covenants as further described in the Waiver Agreement as required by the terms of the Notes. The lender has the right to demand immediate repayment in the event of default. Furthermore, in connection with the Waiver Agreement, the Notes were amended to provide that the Purchasers shall be paid an exit fee in the aggregate amount of$0.2 million , payable as follows: (i) on or prior toMay 15, 2023 ,$0.1 million and (ii) on the Maturity Date (as defined in the Note Purchase Agreement),$0.1 million and the interest rate was increased to 24% for a period extending until the Company meets specified criteria in the Waiver Agreement. OnJanuary 25, 2023 , Neptune announced that its organic baby food brand subsidiary, Sprout Organics, has entered into an accounts receivable factoring facility withAlterna Capital Solutions, LLC ("Alterna"). The maximum available is$5 million . The terms of the agreement include a Funds Usage Fee of prime plus 1% with a minimum interest rate of 8% per annum.Alterna was granted a security interest in Sprout's accounts receivable. The agreement will remain in effect for a 12-month period, effectiveJanuary 23, 2023 , and will be automatically renewed. Neptune provided a commercial guaranty in connection with this agreement. Form S-3 Limitations As a result of our inability to timely file the Quarterly Report for the three and six-months periods endedSeptember 30, 2022 and the three and nine-months periods endedDecember 31, 2022 under the Securities Exchange Act of 1934, as amended, we will not be eligible to use a registration statement on Form S-3 to conduct public offerings of our securities until we have timely filed all periodic reports with theSEC for a period of twelve months. Our inability to use Form S-3 during this time period may have a negative impact on our ability to access the public capital markets in a timely fashion because we would be required to file a long-form registration statement on Form S-1 and have it reviewed and declared effective by theSEC . This may limit our ability to access the public markets to raise debt or equity.
Equity
Equity consists of the following items (in millions):
December 31, March 31,
2022 2022
Share capital $ 321.792 $ 317.051
Warrants 6.118 6.080
Additional paid-in capital 57.303 55.981
Accumulated other comprehensive loss (14.540) (7.814)
Deficit (357.075)
(323.182)
Total equity attributable to equity holders of the Company
48.116
Total equity attributable to non-controlling interest 2.326 12.722 Total equity$ 15.924 $ 60.838 23
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Management's Discussion and Analysis of Financial Condition and Results of Operations
CONTRACTUAL OBLIGATIONS
The following are the contractual obligations as at
December 31,
2022
Carrying Contractual Less than 1 to 4 to More than
Required payments per year amount Cash flows 1 year 3 years 5 years 5 years
Trade and other payables and
provisions $21.984 $21.984 $21.984 $- $- $-
Lease liabilities1 2.719 2.719 0.490 1.054 0.272 -
Loans and borrowings2 15.937 16.477 - 16.477 - -
Other liability3 0.023 15.000 - - - -
$40.663 $56.180 $22.474 $17.531 $0.272 $-
(1) Includes interest payments to be made on lease liabilities corresponding to
discounted effect.
(2) Includes interest payments to be made on loans and borrowings.
(3) According to the employment agreement with the CEO, a long-term incentive is
payable if the Company reaches a level of market capitalization.
Liabilities related to warrants are excluded from the table above, as they are to settle in shares.
Under the terms of its financing agreements, the Company is not required to meet financial ratio covenants.
OnNovember 14, 2021 , the Company and its CEO entered into an agreement pursuant to which the CEO's existing employment agreement was amended to waive the Company's obligation to procure directors and officers insurance coverage of up to$15 million for the period coveringJuly 1, 2021 toJuly 31, 2022 . The parties agreed that if the Company had successfully completed a strategic partnership prior toDecember 31, 2021 , the CEO would have been entitled to approximately$6.9 million in cash and would have been granted fully vested options to purchase 8.5 million shares of the Company's common stock. As the strategic partnership was not consummated byDecember 31, 2021 , the CEO is entitled to a grant of vested RSUs with a value of approximately$0.0 million . The balance of the liability accrual to the CEO is$0.0 million as atDecember 31, 2022 , in trade and other payables. The revaluation of the liability amounted to gain (loss) of$0.1 million and$3.3 million for the three and nine-month periods endedDecember 31, 2022 and were recorded into SG&A (2021 - losses of$6.9 million and$6.9 million , respectively). During the three and nine-month periods endedDecember 31, 2022 , settlements in RSUs were of$0.1 million and$1.6 million respectively. The compensation is to be settled in RSUs or if the Company is unable to grant such RSUs, then a combination of cash and vested RSUs with equivalent value, is not reflected in the number of RSUs outstanding above. The Company is required to pay royalties of 1% of its revenues in semi-annual installments, for an unlimited period to the former CEO. A provision of$0.6 million for royalty payments is included in the table above for amounts currently due but such obligation is not otherwise included in table above. The Company has no significant off-balance sheet arrangements as atDecember 31, 2022 , other than those mentioned above and the commitments disclosed in note 15 of the condensed consolidated interim financial statements for the three and nine-month periods endedDecember 31, 2022 and 2021. Please refer also to provisions disclosed in note 7, commitments disclosed in note 15(a) and legal proceedings in note 15(b) of the condensed consolidated interim financial statements for the three and nine-month periods endedDecember 31, 2022 and 2021. 24
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Management's Discussion and Analysis of Financial Condition and Results of Operations
ACCOUNTING POLICIES
OUR ACCOUNTING POLICIES
Please refer to Note 3 of the annual consolidated financial statements as atMarch 31, 2022 for more information about significant accounting policies used to prepare the financial statements. When preparing the financial statements in accordance with US GAAP, the management of Neptune must make estimates and judgements that affect the amounts reported in the financial statements and the notes thereto. Such estimates are based on Management's knowledge of current events and actions that the Company may take in the future.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The condensed consolidated interim financial statements are prepared in accordance with US GAAP. In preparing the condensed consolidated interim financial statements for the three and nine-month periods endedDecember 31, 2022 and 2021, Management made estimates in determining transaction amounts and statement of financial position balances. Certain policies have more importance than others. We consider them critical if their application entails a substantial degree of judgment or if they result from a choice between numerous accounting alternatives and the choice has a material impact on reported results of operation or financial position. Please refer to the annual consolidated financial statements as atMarch 31, 2022 for more information about the Company's most significant accounting policies and the items for which critical estimates were made in the financial statements and should be read in conjunction with the notes to the consolidated financial statements for the years endedMarch 31, 2022 and 2021. Estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Critical accounting estimates are:
•
Estimating the write down of inventories
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. As necessary, the Company records write-downs for excess, slow moving and obsolete inventory. To determine these amounts, the Company regularly reviews inventory quantities on hand and compares them to estimates of historical utilization, future product demand, and production requirements. Write-downs of inventories to net realizable value are recorded in cost of sales in the consolidated financial statements.
In the nine-months ended
The write-off of inventory in the nine-month period ended
Net realizable value is subject to measurement uncertainty because it can be difficult to predict market demands and timing of supply due to logistics.
•
Estimating the expected credit losses for trade receivables
An allowance for current expected credit losses is maintained to reflect credit risk for trade accounts receivable based on a current expected credit loss model which factors in changes in credit quality since the initial recognition of trade accounts receivable based on customer risk categories. Current expected credit losses also consider collection history and specific risks identified on a customer-by-customer basis. Trade accounts receivable are presented net of allowances for current expected credit losses. Most of the Company's customers are distributors for a given territory and are privately-held, provincially owned or publicly owned companies. The profile and credit quality of the Company's customers vary significantly. Adverse changes in a customer's financial position could cause the Company to limit or discontinue conducting business with that customer, require the Company to assume more credit risk relating to that customer's future purchases or result in uncollectible accounts receivable from that customer. Such changes could have a material adverse effect on business, consolidated results of operations, financial condition and cash flows. The Company's extension of credit to customers involves judgment and is based on an evaluation of each customer's financial condition and payment history. From time to time, the Company will temporarily transact with customers on a prepayment basis where circumstances warrant. The Company's credit controls and processes cannot eliminate credit risk. The expected credit losses for the quarters endedDecember 31, 2022 and 2021 were$2.9 million and$1.0 million , respectively. As for the nine-month periods endedDecember 31, 2022 and 2021, the expected credit losses were$3.1 million and$3.0 million , respectively. Expected credit loss is subject to estimation risk and measurement uncertainty because the financial health of certain customers is difficult to predict. 25
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Management's Discussion and Analysis of Financial Condition and Results of Operations
•
Estimating the recoverable amount of non-financial assets, to determine and measure impairment losses on goodwill, intangibles, and property, plant and equipment.
The Company assesses at each reporting date whether there is an indication that an asset group or a reporting unit may be impaired.
In the third quarter of 2022 due to the Company's sustained decrease in share price, the Company concluded a triggering event occurred and performed a quantitative impairment test for the Sprout reporting unit. As part of the impairment testing process, the Company considered a number of factors including, but not limited to, current macroeconomic conditions such as inflation, economic growth, and interest rate movements, industry and market considerations, stock price performance (including performance relative to peers) and overall financial performance of the Sprout reporting unit. Although management used its best estimate to assess the potential impact of the changes in the general economic conditions on the Company's business, management exercised significant judgment to estimate forecasted cash flows and discount rate, using assumptions which are subject to significant uncertainties. Based on the results of the Company's third quarter 2022 impairment analysis, the estimated fair value of the Sprout reporting unit exceeded its carrying value, and no impairment was recognized. During the second quarter of 2022, there were changes in the general economic and financial conditions of the markets the Company serves. The Company's Sprout reporting unit was adversely impacted during the second quarter of 2022 by these conditions, which impacted the operating results. Accordingly, management concluded that these factors were indicators of impairment. As a result, management performed an impairment test for the Sprout reporting unit, for which it revised its assumptions on projected earnings and cash flows growth, as well as its assumptions on discount rates used to apply to the forecasted cash flows, using its best estimate of the conditions existing atSeptember 30, 2022 . Although management used its best estimate to assess the potential impact of the changes in the general economic conditions on the Company's business, management exercised significant judgment to estimate forecasted cash flows and discount rate, using assumptions which are subject to significant uncertainties. Accordingly, differences in estimates could affect whether a reporting unit is impaired and the dollar amount of that impairment, which could be material. The Company compared the carrying amount of the reporting unit to the fair value. The fair value of the Sprout reporting unit was determined to be lower than the carrying value and a$7,570,471 goodwill impairment expense was recorded in the quarter endedSeptember 30, 2022 . Due to the impairment losses recorded during the second quarter of 2023, there is no headroom between the fair value of the reporting unit and its carrying value and therefore, changes in assumptions in future periods may result in additional impairment charges. The fair value of the reporting unit was estimated using a discounted cash flow model with a WACC post-tax discount rate of 11.0% and a market multiples valuation approach. The discount rate represents the risk adjusted WACC of the reporting unit, based on publicly available information and that of comparable companies operating in similar industries. Determination of the WACC requires separate analysis of the cost of equity and debt, and considers a risk premium based on an assessment of risks related to the projected cash flows of the reporting unit.
Cash flows were projected based on past experience, actual operating results and the three-year business plan including a terminal growth rate of 3.5%.
The most significant assumptions used to estimate the fair values using a discounted cash flow model included the forecasted revenue, gross margins, net working capital investment, terminal value as well as the discount rate. These significant assumptions are classified as Level 3 in the fair value hierarchy, signifying that they are not based on observable market data. A decrease in the projected cash flow or an increase in discount rate could have resulted in a higher impairment charge. Should these projections not be realized, or the discount rate needs to be increased, an impairment loss may be needed in future periods.
•
Estimating the fair value less costs to sell of our assets held for sale.
OnJune 8, 2022 , the Company announced a planned divestiture of the Canadian cannabis business and that the Company would focus on winding up its cannabis operations pending one or more sales transactions. Following this announcement, the Company had Canadian disposal group assets that met the criteria to be classified as held for sale. As atSeptember 30, 2022 , non-current assets related to the Canadian cannabis business were presented under assets held for sale on Neptune's balance sheet. Comparative balance sheet amounts have not been reclassified. The disposal group has been measured at fair value less cost to sell and impaired to reflect the asset sale and purchase agreement (the "ASPA") signed with a third-party onOctober 16, 2022 for approximately$3.8 million ($5.15 million CAD), with expected cost to sell the Canadian cannabis disposal group asset in the amount of$0.6 million , for net assets held for sale of$3.2 million , resulting in impairment losses of nil and$15.3 million respectively for the three and nine-month periods endedDecember 31, 2022 . The transaction closed onNovember 9, 2022 .
•
Estimating the revenue from contracts with customers subject to variable consideration. Refer to note 2(c) of the consolidated financial statements for more details).
The Company's revenue-generating activities from the sale of products in the
course of ordinary activities are recognized at a point in time when control of
the products is transferred to the customer and the Company's obligations have
been fulfilled. The Company transfers control generally on shipment of the goods
or in some cases, upon reception by the customer. Revenue is measured as the
amount of consideration the Company expects to receive in exchange for the
Company's product as specified in the customer contract. Certain of the
Company's customer contracts, most notably those with the Canadian provincial
and territorial agencies, may provide the customer with a right of return. In
certain circumstances, the Company may also provide a retroactive price
adjustment to a customer. These items give rise to variable consideration, which
is recognized as a reduction of the transaction price based upon the expected
amounts of the product returns and price adjustments at the time revenue for the
corresponding product sale is recognized. The determination of the reduction of
the transaction price for variable consideration requires that the Company make
certain estimates and assumptions that affect the timing and amounts of revenue
recognized. The Company estimates this variable consideration by taking into
account factors such as historical information, current trends, forecasts,
provincial and territorial inventory levels, availability of actual results and
expectations of demand.
The Company recognizes a liability for sales refunds within other current
liabilities with a corresponding decrease in revenues. Furthermore, the Company
recognizes an asset for the value of inventory which is expected to be returned
within prepaid expenses and other assets on the consolidated balance sheets with
a corresponding reduction of cost of sale.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
•
Judgment related to revenue recognition in determining whether the Company is the principal or the agent for the arrangements with suppliers of products the Company does not manufacture. The Company may be involved with other parties, including suppliers of products, in providing goods or services to a customer when it enters into revenue transactions for the sale of products that it does not manufacture. In these instances, the Company must determine whether it is a principal in these transactions by evaluating the nature of its promise to the customer. The Company is considered to be a principal and records revenue on a gross basis if it controls a promised good before transferring that good to the customer. On the other hand, the Company records revenue as the net amount when it does not meet the criteria to be considered a principal.
•
Estimating the fair value of bonus-based on market conditions (note 12(c) of the consolidated financial statements)
According to the employment agreement with the CEO, a long-term incentive of$15 million is payable if the Company's US market capitalization is at least$1 billion . The Company uses a risk-neutral Monte Carlo simulation to estimate the fair-value of this instrument and recognizes the incentive over the estimated period to reach the market capitalization. The incentive is being recognized over the estimated period to reach the market capitalization. The risk-neutral Monte-Carlo simulation uses level 3 inputs. The assumptions used in the simulation include a risk free-rate of 3.88% and a volatility of 75.09% for the nine-month period endedDecember 31, 2022 (respectively 1.52% and 66.18% for the nine-month period endedDecember 31, 2021 ). An increase or decrease in the volatility assumption significantly impacts the fair value of the long-term incentive.
•
Judgment related to the recognition period to be used in recording stock-based compensation that is based on market and non-market conditions and also for determining the fair value of the warrants (notes 8, 10 and 12 of the condensed consolidated interim financial statements) OnJuly 8, 2019 , the Company granted 100,000 non-market performance options under the Company stock option plan at an exercise price of$4.43 per share to the CEO, expiring onJuly 8, 2029 . These options vest after the attainment of non-market performance conditions within the following ten years. These non-market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revalued up to the date of approval of the amendments (grant date). These options are valued based on level 3 inputs. During the twelve-month period endedMarch 31, 2022 , changes in estimated probability of achievement of the non-market performance conditions or the expected number of years to achieve the performance conditions resulted in a recovery of stock-based compensation recognized under this plan. None of these non-market performance options have vested as atDecember 31, 2022 . Changes in these assumptions would impact the timing of which the expense is recognized. These options were not exercisable as atDecember 31, 2022 andMarch 31, 2022 . OnJune 23, 2022 , Neptune issued a total of 645,526 pre-funded warrants ("Pre-Funded Warrants"), along with 1,300,000 common shares of the Company, as part of a registered direct offering ("June 2022 Direct Offering"). Each Pre-Funded Warrant was exercisable for one Common Share. The common shares and the Pre-Funded Warrants were sold together with 1,945,526 Series C Warrants (the "Series C Warrants"), and 1,945,526 Series D Warrants (the "Series D Warrants" and collectively, the "June 2022 Common Warrants"). Each common share and Pre-Funded Warrant and the accompanyingJune 2022 Common Warrants were sold together at a combined offering price of$2.57 , for aggregate gross proceeds of$5.0 million before deducting fees and other estimated offering expenses. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of$0.0001 and are exercisable commencing on the Closing Date and will terminate when such Pre-Funded Warrants are exercised in full. The Series C Warrants and the Series D Warrants have an exercise price of$2.32 per share and can be exercised for a period of 5 years and 2 years respectively from the date of issuance. Proceeds of theJune 2022 Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. The fair value of the liability-classified warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of$4,046,836 for the Series C Warrants and$3,080,121 for the Series D Warrants. Because the fair value of the liability classified warrant exceeds the total proceeds, no consideration was allocated to the Common Shares and Pre-Funded Warrants and a loss of$2,126,955 was immediately recognized in the net loss of the period as there were no additional rights or privileges identified. Total issue costs related to this private placement of$465,211 , was recorded under finance costs. OnOctober 11, 2022 , the Company closed a registered direct offering ("October 2022 Direct Offering") of 3,208,557 of its Common Shares and warrants ("Series E Warrants") to purchase up to 6,417,114 Common Shares in the concurrent Private Placement. The combined purchase price for one Common Share and one warrant was$1.87 . The Series E Warrants have an exercise price of$1.62 per Common Share, are exercisable immediately following the date of issuance and will expire five years from the date of issuance. The Company received gross proceeds of$6,000,002 and net proceeds of$5,135,002 after deducting the placement agent fees and expenses, and the Company's offering expenses. Based on the fair value of the warrants as at the date of closing, which was determined using a Black-Scholes model, the Company recorded the full proceeds to liabilities, with an initial liability of$7,029,614 and a loss on initial recognition of$1,029,614 . Because the fair value of the liability classified warrant exceeded the total proceeds, no consideration was allocated to the Common Shares. Total issue costs related to this offering of$865,000 were recorded under finance costs.
CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING CHANGES
The accounting policies and basis of measurement applied in the condensed consolidated interim financial statements for the three and nine-month periods endedDecember 31, 2022 and 2021 are the same other than as disclosed, if any, in note 3 to the condensed consolidated interim financial statements. As a result of a significant portion of its revenues, expenses, assets and liabilities being denominated in US dollars and the increasing American scope of its operations, Neptune changed its functional currency from Canadian dollars ("CAD") toU.S. dollars ("USD"), effectiveOctober 1, 2022 . This change in functional currency has been applied prospectively from the date of the change. 27
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Management's Discussion and Analysis of Financial Condition and Results of Operations
ISSUED AND OUTSTANDING SECURITIES
The following table details the number of issued and outstanding securities as at the date of this MD&A:
Number of Securities Issued and Outstanding
Common shares 11,996,340
Share options 677,978
Deferred share units 4,308
Restricted share units 2,789
Warrants 12,197,690
Total number of securities 24,879,105
The Company's common shares are being traded on NASDAQ Capital Market under the
symbol "NEPT". Effective August 15, 2022 , the Company's common shares no longer
trade on the TSX. Each option, restricted share, restricted share unit, deferred
share unit and warrant is exercisable into one common share to be issued from
the treasury of the Company.
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