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 Company's condensed consolidated interim financial statements have been prepared on a going concern basis, which presumes that the Company will continue realizing its assets and discharging its liabilities in the normal course of business for the foreseeable future. The Company has incurred significant operating losses and negative cash flows from operations since inception. To date, the Company has financed its operations through the public offering and private placement of Common Shares, units consisting of Common Shares and warrants, and convertible debt, the proceeds from research grants and research tax credits, and the exercises of warrants, rights and options. For the three-month period endedJune 30, 2022 , the Company incurred a net loss of$6.5 million and negative cash flows from operations of$7.2 million , and had an accumulated deficit of$327.5 million as atJune 30, 2022 . For the year endedMarch 31, 2022 , the Corporation incurred a net loss of$84.4 million and negative cash flows from operations of$54.3 million . Furthermore, as atJune 30, 2022 , the Company's current liabilities and expected level of expenses for the next twelve months exceed cash on hand of$6.2 million . The Company currently has no committed sources of financing available. As of the date of this Quarterly Report, the Company is required to actively manage its liquidity and expenses. The Company currently has minimal available cash balances. Payables are now in excess of available cash balances and payments of payables are not being made as the amounts become due for certain suppliers. The Company requires immediate funding in order to continue its operations. As of the date of this Quarterly Report, the cash balance is expected to be sufficient to operate the business for only the next two to three months under the current business plan. The Company requires funding in the very near term in order to continue its operations. If the Company is unable to obtain funding in the upcoming days, it may have to liquidate its assets.
These conditions cast substantial doubt about the Corporation's ability to continue as a going concern.
Going forward, the Company will seek additional financing in various forms as part of its plan to have the right funding structure in place to support its growth trajectory and path to profitability. To achieve the objectives of its business plan,Neptune plans to raise the necessary funds through additional securities offerings and the establishment of strategic alliances as well as additional research grants and research tax credits. While the Company has limited debt, all of which is subordinated, assets available for financing include real estate, accounts receivable and inventories. The ability of the Company to complete the needed financing and ultimately achieve profitable operations is dependent on a number of factors outside of the Company's control. The Company's business plan is dependent upon, amongst other things, its ability to achieve and maintain profitability, and/or continue to obtain adequate ongoing debt and/or equity financing with creditors, officers, directors and stakeholders to finance operations within and beyond the next twelve months.
While the Company has been successful in obtaining financing from public issuances, private placements, and related parties in the past, there is no certainty as to future financings.
Neptune announced onJune 8, 2022 the intended divestiture of the cannabis business, which would include the sale of the Mood Ring™ and PanHash™ brands, along with the Company'sSherbrooke, Quebec facility, in one or more transactions. The value of the facility was recently appraised at$16.6 million by a third-party appraisal company. In order to accelerate its cost savings, the Company will focus on winding up its cannabis operations pending a transaction. This planned action is intended to provide significant cost savings and help maximize operational efficiencies, which is planned to result in a 50% reduction in workforce, over 30% reduction of total payroll costs and additional cost savings from corresponding reductions in corporate overhead costs and professional fees. Finally, the exit of the Canadian cannabis business is expected to reduce the amount of financing the Company seeks and is expected to facilitate working with a broader set of financing sources. 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 byNeptune 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 . The consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the going concern basis not be valid. These adjustments could be material.
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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 and fully integrated health and wellness company with multiple brand units. With a mission to redefine health and wellness,Neptune is focused on building a broad portfolio of high quality, affordable consumer products in response to long-term secular trends and market demand for natural, plant-based, sustainable and purpose-driven lifestyle brands. The Company utilizes a highly flexible, cost efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation,Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods.Neptune has expanded its operations sinceJune 2020 into several brand units in order to better address its markets. The main brand units are the following:Nutraceuticals , Beauty & Personal Care, 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 & Bioressources 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 are 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 will be delisted from the TSX at the close of trading onAugust 15, 2022 .
OUR PROPERTIES AND OPERATIONS
Our headquarters is located in leased offices inLaval, Québec , where our general and administrative departments primarily operate. We also lease laboratory space inLaval, Quebec where testing and development of many of our products takes place. We lease offices inJupiter, Florida which will serve as theU.S. headquarters once leasehold improvements are completed which is expected to be in the second quarter of fiscal year 2023. We own a production facility inSherbrooke, Quebec where we conduct our cannabis operations including laboratory testing. OnJune 8, 2022 , we announced the planned divestiture of our cannabis business which would include the sale of our cannabis brands and theSherbrooke building in one or more transactions. We also lease a production facility inConover, North Carolina and have leased offices inVaudreuil , Province ofQuébec, Canada and leased offices inMontvale, New Jersey . All of these facilities are unoccupied. TheConover facility housed our SugarLeaf operations, and we are in the process of selling the remaining equipment and prepare the building to be returned to the lessor in the third quarter of our fiscal year 2023. TheVaudreuil offices were previously used for the Company's Biodroga business. TheMontvale offices previously served as the headquarters for Sprout. The Company is attempting to sub-lease theVaudreuil andMontvale offices. BUSINESS STRATEGYNeptune's vision is to change consumer habits through the creation and distribution of environmentally friendly, ethical and innovative consumer product goods. Our mission is to redefine health and wellness and help humanity thrive by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreak of the COVID-19 virus,Neptune has taken transformative, and successful, actions to increase its sales, distribution and reach in both the business-to-business ("B2B") and business-to-consumer ("B2C") model in the consumer-packaged goods ("CPG") market.Neptune has a dual go-to market B2B and B2C strategy focused on expanding its global distribution reach. The strategy setsNeptune 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, includingNutraceuticals , Beauty & Personal Care, andOrganic Foods & Beverages .Neptune's current brand portfolio across these verticals include Sprout®, Neptune Wellness™, Forest Remedies®, and MaxSimil®. OnJune 9, 2021 ,Neptune announced a multi-year licensing agreement between Sprout and CoComelon, the world's leading children's entertainment brand, owned and operated byMoonbug Entertainment . In addition, onJuly 27, 2021 , an initial launch was announced for Sprout products intoCanada , in Metro grocery stores in the province ofOntario .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. OnJuly 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 itsNutraceuticals 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 NutraceuticalsU.S. sales force has been expanded to maximize awareness and distribution of the capabilities and expertise in CBD formulation, prebiotics and probiotics, and proteins within this important vertical. 31
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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. We believe that we are not dependent on any single contract manufacturer and that, if necessary, our current selected contract manufacturers could be replaced with minimal disruption to our operations. We currently purchase raw materials for the manufacturing of our products from suppliers recognized for their quality and consistency. Our quality control staff requires full disclosure on the part of our suppliers and we periodically conduct on-site audits of their facilities. For strategic reasons, certain of our key raw materials are sourced from single suppliers. However, in the event that we were unable to source an ingredient from a current supplier, we believe that we could generally obtain the same ingredient or an equivalent from an alternative supplier, with minimal disruption to our operations.
Canadian Cannabis Products - Extracts and Formulations
We retrofitted our existing production facility located inSherbrooke , Province ofQuébec, Canada to comply withHealth Canada requirements under the Cannabis Act, in order to produce our cannabis extracts and formulations at our existing site. Our GMP (Good Manufacturing Practices, mandated by theNatural Health Products Directorate of Health Canada ) production facility features robust safety measures and equipment, which allows for enhanced manufacturing practices. We also operate a laboratory at our facility, which allows us to conduct research, new product development and quality control analysis in-house. As a condition for obtaining our license to produce cannabis oil under the Cannabis Act,Health Canada required multiple compliance measures to be taken, including the addition of physical barriers, visual monitoring, recording devices, intrusion detection, as well as other important controls around access to the Company's existingSherbrooke facility. OnJune 8, 2022 , the Company announced a planned divestiture of the Canadian cannabis business including the sale of our cannabis brands and theSherbrooke building in one or more transactions.
MARKETS
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 ofNeptune'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.
Beauty & Personal Care
The Company sells wellness products to the Beauty & Personal Care market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free.Neptune announced, 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 transformNeptune 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 ofNeptune'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 theNeptune /Sprout combination to result in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified withinNeptune'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. We expect to announce product availability and provide additional information about the rollout of CoComelon licensed products in the near future. 32
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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: img135228531_0.jpg]] Biodroga™.
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 customer apart from their competition.
Biodroga's core products are MaxSimil, various Omega-3 fish oils
and a line of CBD enhanced products, as well as softgel
solutions.
[[Image Removed: img135228531_1.jpg]] MaxSimil.
delivery technology that uses enzymes that mimic the natural
human digestive system to predigest omega-3 fatty acids. The
Journal of Nutrition by the Oxford University Press , recently
released the results of a clinical study that evidences
MaxSimil's superior absorption as compared with standard fish
oil supplements. MaxSimil was first introduced to the market in
2018, and is sold as a 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, Vitamin K2 and CBD.[[Image Removed: img135228531_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: img135228531_3.jpg]] 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. , includingHealth Canada , 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.
Cannabis Regulatory Framework
OnJune 8, 2022 , we announced the planned divestiture of our cannabis business including the sale of our brands as well as theSherbrooke building in one or more transactions. OnOctober 17, 2018 , the Cannabis Act (Canada ) and the Cannabis Regulations came into force inCanada , legalizing the sale of cannabis for adult recreational use. Prior to the promulgation of the Cannabis Act and the Cannabis Regulations, only the sale of cannabis for medical purposes was legal, which was regulated by the Access to Cannabis for Medical Purposes Regulations ("ACMPR") under the Controlled Drugs and Substances Act ("CDSA"). The Cannabis Act and the Cannabis Regulations replaced the CDSA and the ACMPR as the governing laws and regulations in respect of the production, processing, sale and distribution of cannabis for medical and adult recreational use. The Cannabis Regulations, among other things, set out regulations relating to the following matters: (1) licenses, permits and authorizations; (2) security clearances and physical security measures; (3) good production practices; (4) cannabis products; (5) packaging and labelling; (6) cannabis for medical purposes; (7) drugs containing cannabis; (8) combination products and devices; (9) importation and exportation for medical or scientific purposes; (10) document retention; and (11) reporting and disclosure. 34
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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 Mood Ring™, PanHash™, Sprout®, NurturMe®, Nosh!®, Neptune Wellness™, MaxSimil®, Forest Remedies®, and Ocean Remedies® are trademarks of the Company. OnJune 8, 2022 we announced the planned divestiture of our cannabis business including the sale of our Cannabis Brands, Mood Ring and PanHash, as well as theSherbrooke building in one or more transactions
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. 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 allowsNeptune to research, manufacture, formulate, distribute, and sell monoglyceride omega-3-rich ingredients in combination with cannabis and/or cannabinoid-rich or hemp derived ingredients for medical and adult use applications. The Company believes the MaxSimil® technology has the ability to enhance absorption of lipidbased and lipid soluble ingredients such as cannabinoids, essential fatty acids 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 ofJune 30, 2022 , we had 155 employees working at our business offices inLaval , at our facility inSherbrooke or remotely. Our employees possess specialized skills and knowledge in the following fields, which we believe are valuable assets of the Company. As ofJune 30, 2022 , 119 of our employees were inCanada while 36 were inthe United States . We also had 10 temporary personnel. Twenty-six of our employees were represented by a union. We consider our relations with our employees to be good and our operations have never been interrupted as the result of a labor dispute.
SEASONALITY
In addition to general economic factors, we are impacted by seasonal factors and
trends such as major cultural events and other unpredictable matters. Although
we believe the impact or seasonality on our consolidated results of operations
is minimal, our quarterly results may vary significantly in the future due to
the timing of nutraceutical contract manufacturing orders as well promotions and
ordering patterns of our other customers. We cannot provide assurance future
revenues will follow historical patterns. The market price of our common shares
may be adversely affected by these factors.
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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 two agreements for the purchase and sale of shares of our common stock and pre-funded warrants inJune 2022 andMarch 2022 . Taking into account all considerations, we believe these actions are in the best interest of the company and will benefit shareholders in the long-term. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Going Concern. Unless otherwise specified, all dollar amounts are in US dollars ("USD").
Closing of a
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 are funded in full at closing except for a nominal exercise price of$0.0035 and were exercisable commencing on the closing date. The Series A Warrants have an exercise price of$11.20 per share and are exercisable six months after the closing date, and will expire five and one half years from the date of issuance. The Series B Warrants have an exercise price of$11.20 per share and are exercisable six months after the closing date, and expire 18 months from the closing date (collectively the "March Offering"). The Pre-Funded Warrants were exercised in full 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 .
Expansion of the Existing Secured Promissory Notes
OnJuly 13, 2022 ,Neptune announced thatSprout Foods Inc. ("Sprout"), the Corporation's organic plant-based baby food and toddler snack company, has entered into an amendment of each of its existing Secured Promissory Notes to expand from$22.5 million to a maximum of$37.5 million , allowing for up to$13 million of future lending. In connection with this amendment, investment funds managed 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. The maturity date of the note facility ofFebruary 1, 2024 is consistent with the maturity date of the existing Secured Promissory Notes with MSEC andNeptune . 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 toNeptune . MSEC was issued 372,670 common shares of Neptune, of an approximate value of$0.6 million in connection with this expansion. Growth Drivers We remain enthusiastic about the growth prospects of our business, with opportunity across all three of our core verticals. We have successfully made the transition to a fully-integrated consumer packaged goods company with a diverse suite of better-for-you brands, available in some of the country's largest retail chains. At the same time, we are driving consumer relevance by pursuing the right strategic partnerships for co-branded product lines and expanding our product offerings in key wellness categories.
Major Distribution Gains
Since acquiring a majority stake in Sprout Organics 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 transformNeptune 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 expected inSeptember 2022 , 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 margins since transitioning to a CPG-focused model. We also delivered four consecutive quarter of sequential revenue growth before a decrease in the fourth quarter of the year endedMarch 31, 2022 . We expect these positive trends to continue in fiscal year 2023, however there can be no assurances that revenue growth will continue. 36
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Management's Discussion and Analysis of Financial Condition and Results of Operations
While the global market can be unstable during turbulent times, we are taking steps to ensure we remain well-positioned to execute against our stated plan: controlling our costs while pursuing high-growth opportunities. To that effect,Neptune announced 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 ofNeptune's consumer products business. With the planned divestiture of its cannabis business,Neptune is renewing its focus on the core brands - Sprout Organics and Biodroga Solutions - that align closely with future consumer trends and show a greater potential for future growth and profitability. The intended divestiture of the cannabis business would include the sale of the Mood Ring™ and PanHash™ brands, along with the Company'sSherbrooke, Quebec facility, in one or more transactions. The value of the facility was recently appraised at$21 million CAD ($16.3 million USD ) by a third-party appraisal company.Neptune has retained Stifel GMP to support the divestiture efforts, with a focus on maximizing the value toNeptune shareholders. In order to accelerate its cost savings, the Company will focus on winding up its cannabis operations pending a transaction. This planned action is intended to provide significant cost savings and help maximize operational efficiencies, resulting in a 50% reduction in workforce, over 30% reduction of total payroll costs and an estimated annual cost savings of$5.8 million CAD ($4.5 million USD ). In addition, the Company expects to see additional cost savings from corresponding reductions in corporate overhead costs and professional fees. Finally, the exit of the Canadian cannabis business may impact the amount and structure of financing the company is currently seeking. If and when we complete a transaction to exit cannabis business, it is expected to reduce the amount of financing the Company seeks, given a lower anticipated expense structure, along with anticipated cash inflows from the planned divestiture. Additionally, the divestiture is expected to facilitate working with a broader set of financing sources - including traditional banks and financial institutions that have policies restricting dealing with businesses exposed to regulated cannabis operation. There is no assurance that planned divestiture will occur on a timely basis, or at all, or that proceeds will be in line with appraisals and company expectations. 37
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Management's Discussion and Analysis of Financial Condition and Results of Operations
RECENT CORPORATE DEVELOPMENTS
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 the Company will focus on winding up its cannabis operations pending one or more sales transactions. Following this announcement, all assets and liabilities related to the Canadian cannabis business are now respectively shown under assets held for sale and liabilities directly associated with assets held for sale onNeptune's balance sheet. Further information on those assets and liabilities can be found in note 2(d) of the condensed consolidated interim financial statements for the three-month period endedJune 30, 2022 .
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 ofNeptune's consumer products business. With the planned divestiture of its cannabis business,Neptune is renewing its focus on the core brands - Sprout Organics and Biodroga Solutions - that align closely with future consumer trends and show a greater potential for future growth and profitability. The strategic plan is expected to lower costs and reduce global headcount by approximately 50%.
Neptune Announces New Line of CoComelon® Co-Branded Products
Neptune announced 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 ofNeptune's Jupiter, 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 ,US Tobacco 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 . 38
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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)
The following table sets out selected consolidated financial information.
Three-month periods ended
June 30, June 30,
2022 2021
$ $
Total revenues 16.272 10.079
Adjusted EBITDA1 (9.779) (12.916)
Net loss (6.504) (18.856)Net loss attributable to equity holders of the
Corporation (4.284)
(16.908)
Net loss attributable to non-controlling interest (2.220) (1.948) Basic and diluted loss per share
(1.09) (3.97)
Basic and diluted loss per share attributable
to equity holders of the Corporation (0.72)
(3.56)
Basic and diluted loss per share attributable
to non-controlling interest (0.37) (0.41)
As at As at As at
June 30, 2022 March 31, 2022 March 31, 2021
$ $ $
Total assets 97.756 104.955 186.948
Working capital2 20.981 7.071 54.718
Non-current financial liabilities 13.768 13.800 14.593
Equity attributable to equity holders of the Corporation 43.277 48.116
115.368
Equity attributable to non-controlling interest 10.502 12.722
22.178
1 The Adjusted EBITDA is a non-GAAP measure. It is not a standard measure endorsed by US GAAP requirements. A reconciliation to the Company's net loss is presented below. 2 Working capital is calculated by subtracting current liabilities from current assets. Because there is no standard method endorsed by US GAAP, the results may not be comparable to similar measurements presented by other public companies. Current assets as atJune 30, 2022 ,March 31, 2022 andMarch 31, 2021 were$51.190 ,$37.388 and$89.528 respectively, and current liabilities as atJune 30, 2022 ,March 31, 2022 andMarch 31, 2021 were$30.209 ,$30.317 and$34.809 respectively. 39
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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 GAAP measures, allows them to see the Company's
results through the eyes of Management, and to better understand its historical
and future financial performance. Neptune's method for calculating Adjusted
EBITDA may differ from that used by other corporations.
A reconciliation of net loss to Adjusted EBITDA is presented below.
ADJUSTED EBITDA
Although the concept of Adjusted EBITDA is not a financial or accounting measure defined under US GAAP and it may not be comparable to other issuers, it is widely used by companies.Neptune obtains its Adjusted EBITDA measurement by removing from net loss, net finance costs (income) and depreciation and amortization, and income tax expense (recovery). Other items such as equity classified stock-based compensation, non-employee compensation related to warrants, litigation provisions, business acquisition and integration costs, signing bonuses, severances and related costs, impairment losses on non-financial assets, write-downs of non-financial assets, revaluations of derivatives, system migration, conversion and implementation, CEO directors and officers insurance, costs related to conversion from IFRS to US GAAP and other changes in fair values are also added back. The exclusion of net finance costs (income) eliminates the impact on earnings derived from non-operational activities. The exclusion of depreciation and amortization, stock-based compensation, non-employee compensation related to warrants, litigation provisions, impairment losses, write-downs revaluations of derivatives and other changes in fair values eliminates the non-cash impact, and the exclusion of acquisition costs, integration costs, signing bonuses, severance and related costs, costs related to cybersecurity and costs related to conversion from IFRS to US GAAP present the results of the on-going business. From time to time, the Company may exclude additional items if it believes doing so would result in a more effective analysis of underlying operating performance. In Q4 2022, the Company added the costs related to the conversion from IFRS to US GAAP as an adjustment to the definition of Adjusted EBITDA. Adjusting for these items does not imply they are non-recurring. For purposes of this analysis, the Net finance costs (income) caption in the reconciliation below includes the impact of the revaluation of foreign exchange rates.
Adjusted EBITDA1 reconciliation, in millions of dollars
Three-month periods ended
June 30, June 30,
2022 2021
Net loss for the period $(6.504) $(18.856)
Add (deduct):
Depreciation and amortization 1.039 1.344
Revaluation of derivatives (9.524) (1.933)
Net finance costs 1.635 1.638
Equity classified stock-based compensation 2.706 3.080
Non-employee compensation related to warrants -
0.093
Litigation provisions (0.263)
0.116
Business acquisition and integration costs -
1.048
CEO D&O insurance (3.154)
-
Signing bonuses, severances and related costs 0.390
-
Write-down of inventories and deposits 3.080
-
Impairment loss on long-lived assets 0.816
0.530
Change in revaluation of marketable securities -
0.012
Income tax expense (recovery) - 0.012 Adjusted EBITDA1$(9.779) $(12.916)
1 The Adjusted EBITDA is not a standard measure endorsed by US GAAP requirements.
40--------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of Operations
OPERATING SEGMENTS
The Company's management structure and performance is measured based on a single segment, which is the consolidated level, as this is the level of information used in internal management reports that are reviewed by the Company's Chief Operating Decision Maker. Geographical information
Revenue is attributed to geographical locations based on the origin of customers' location.
Three-month periods ended
June 30, June 30,
2022 2021
Total Total
Revenues Revenues
Canada $5.056 $2.283
United States 10.932 7.560
Other countries 0.284 0.236
$16.272 $10.079 The Company's property plant and equipment, intangible assets and goodwill are attributed to geographical locations based on the location of the assets.
As at
June 30, 2022
Property,
plant and Intangible Assets held
equipment Goodwill assets for sale
Canada $0.309 $2.551 $2.066 $21.834
United States 1.103 19.542 18.948 -
Total $1.412 $22.093 $21.014 $21.834
As at
March 31, 2022
Property,
plant and Intangible Assets held
equipment Goodwill assets for sale
Canada $20.725 $2.626 $2.353 $-
United States 0.723 19.542 19.302 -
Total $21.448 $22.168 $21.655 $-
41--------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS ANALYSIS
Adoption of US GAAP - Comparative Period Amounts
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles 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
Consolidated revenue summary, in millions of dollars:
June 30 , Changes 2022 2021 Changes in $ Changes in %
Three-month periods ended 16.3 10.1 6.2 61%
Total consolidated revenues for the three-month period ended
When compared to the previous quarter, the consolidated revenues increased by$4.7 million or 41%, which was mainly attributable to timing of shipping of nutraceuticals products (increase of$2.5 million ) as well as increase in food and beverages products sales ($1.9 million ) partially derived from the CoComelon partnership as well as organic growth. Food and beverages revenues represented a$2.5 million increase in comparison to the three-month period endedJune 30, 2021 , resulting from organic sales growth as well as derived from the CoComelon partnership. Nutraceutical products sales increased by$1.9 million due to timing of shipping as well as sales growth. Revenues for the cannabis market increased by$1.7 million asNeptune had expanded its product portfolio in its existing markets with new cannabis products in comparison to last year. OnJune 8, 2022 , the Company announced the planned divestiture of the Canadian cannabis business and the Company will focus on winding up its cannabis operations pending one or more sales transactions. Revenues from cannabis products will decrease in the future.
Geographic Revenues
From a geographic point of view, revenues for the current quarter increased by$2.8 million or 121% inCanada , increased by$3.4 million or 45% inthe United States and increased by$0.048 million or 20% for other countries (all royalty revenues) compared to the quarter endedJune 30, 2021 . The increase of revenue inCanada for the quarter variance is mainly due to the cannabis product sales. However, the Company announced its planned divestiture of Cannabis business inJune 2022 . The increase of revenue inthe United States for the quarter variance is derived from timing of shipments and sales growth of nutraceutical products as well as food and beverages products.
Gross Profit (Loss)
Gross profit (loss) is calculated by deducting the cost of sales from total revenues. Cost of sales consists primarily of costs incurred to manufacture products, including sub-contractors, freight expenses and duties on raw materials, storage and handling costs and lab testing on raw materials, and to acquire finished goods.
Consolidated gross profit (loss) summary, in millions of dollars
June 30, Changes
2022 2021 Changes in $ Changes in %
Three-month periods ended (2.9) (2.3) (0.6) -25%
The consolidated gross profit (loss) for the three-month period ended June 30,
2022 amounted to $(2.9) million compared to $(2.3) million for the three-month
period ended June 30, 2021 , a deterioration of $0.6 million or 25%.
The gross loss net increase was mainly attributable to two factors. Stronger
product mixes from cannabis, nutraceuticals, and food and beverages products as
well as continued cost controls measures improved gross margin for the quarter,
which was offset by write-downs of inventories for cannabis products of $3.1
million , resulting in the net gross loss of $(2.9) million . The write-down of
inventories during the quarter ended June 30, 2022 is related to assets held for
sale inventories from the cannabis disposal group that are not expected to be
realized.
42--------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of Operations
Gross Margin Percentage
For the three-month periods ended
All changes in gross margins result from the changes in revenues and gross profit (loss), and are described above.
Research and Development ("R&D") Expenses
three-month period ended
For the quarter endedJune 30, 2022 , the consolidated R&D expenses net of tax credits and grants amounted to$0.2 million , compared to$0.3 million for the quarter endedJune 30, 2021 , a decrease of$0.045 million or 17% mainly due to the vesting in prior fiscal year of the warrants issued to non-employees.
Selling, General and Administrative ("SG&A") Expenses
Consolidated SG&A expenses net of subsidies for the quarter endedJune 30, 2022 amounted to$10.6 million compared to$16.0 million for the same period the prior year, a decrease of$5.5 million or 34%. The decrease is mainly explained by decreases in legal fees by approximately$1.5 million as well as decreases in integration costs of$1.0 million related to the acquisition of Sprout that occurred in the last quarter of fiscal 2021. Further decreases in SG&A expenses are due to the benefits of the strategic review and continued cost controls.
Finance costs
Net finance costs, foreign exchange and derivatives revaluations amounted to a gain of$10.0 million for the quarter endedJune 30, 2022 , compared to a gain of$0.3 million for the three-month period endedJune 30, 2021 , a change of$9.7 million for the quarter endedJune 30, 2022 . The variation for this period is mainly attributable to the revaluation of warrant liabilities as well as foreign exchange impact. The gain on revaluation of the warrants was primarily driven by the decrease in the Company's stock price.
Income taxes
For the three-month periods endedJune 30, 2022 and 2021, income tax expense (recovery) were nil. As the other entities are in carry forward loss positions, there is no impact to income taxes for the three-month period endedJune 30, 2022 . Adjusted EBITDA Consolidated Adjusted EBITDA loss decreased by$3.1 million or 24% for the quarter endedJune 30, 2022 to an Adjusted EBITDA loss of$9.8 million compared to$12.9 million for the quarter endedJune 30, 2021 . The decrease in Adjusted EBITDA loss for the quarter endedJune 30, 2022 compared to the quarter endedJune 30, 2021 was driven by the quarter's improved performance over the comparative quarter as explained in the net loss section.
Net loss
For the quarter endedJune 30, 2022 , the net loss amounted to$6.5 million compared to$18.9 million for the quarter endedJune 30, 2021 , a decrease of$12.4 million or 66%. Foreign exchange and derivatives revaluations contributed significantly to the improvement of the net loss. The Company's continuous execution of its strategic review plan by refocusing on its core businesses is additionally responsible for the lower loss. 43
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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 three-month periods ended
Three-month periods ended
June 30 , June 30,
2022 2021
Sources:Proceeds from the issuance of shares through a Direct Offering
$5.000
$-
Foreign exchange gain on cash and cash equivalents
held in foreign
currencies 0.169 0.133
5.169 0.133
Uses:
Acquisition of property, plant and equipment - 0.470
Acquisition of intangible assets -
0.074
Costs of issuance of shares 0.465
-
Withholding taxes paid pursuant to the settlement of non-treasury RSUs
- 0.979
Cash flows used in operating activities 7.198 19.270
7.663 20.793
Net cash (outflows) $(2.494) $(20.660)
Sources and Uses of Funds
For the three-month period ended June 30, 2022 , gross proceeds from a direct
offering totaling $5.0 million were raised, and the proceeds were used for
operating activities, primarily inventory procurement, salaries and professional
fees, resulting in net cash outflows of $2.5 million .
For the three-month period ended
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 Corporation, 645,526 pre-funded warrants and accompanying series of warrants to purchase up to an aggregate of 2,591,052 common shares warrants, at an offering price of$2.57 per share and accompanying warrants in a registered direct offering priced at-the-market under Nasdaq rules. Each series of warrants have an exercise price of$2.32 per share and are immediately exercisable upon issuance. One series of warrants will expire two years following the date of issuance and one series of warrants will expire five years following the date of issuance. The gross proceeds from the offering are$5 million , prior to deducting placement agent's fees and other offering expenses payable byNeptune . The pre-funded warrants were fully exercised onJune 24, 2022 for$65 . 44
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Management's Discussion and Analysis of Financial Condition and Results of Operations
CAPITAL RESOURCES Liquidity position As atJune 30, 2022 , the Company's liquidity position, consisting of cash and cash equivalents, was$6.2 million . The Company also has a short-term investment of$0.02 million .
Liquidity and Capital Resources
Cash flows and financial condition between the three-month periods ended
Summary
As at
Operating activities
During the three-month period endedJune 30, 2022 our operating activities used cash of$7.2 million compared to$19.3 million in the three-month period endedJune 30, 2021 . The main sources of decrease in cash flows used in operating activities of$13.1 million are derived from payments related to legacy Health and Wellness COVID-19 related products as well as acquisition and integration costs during the first quarter of fiscal 2022.
Investing activities
The Company's business models require low capital expenditures ("CAPEX") future
investments. For the quarter ended June 30, 2022 , $0.0 million was used for
investing activities. In the same period the prior year, $0.5 million was used
for investing activities.
Financing activities
The Company has been successful in obtaining financing from public issuances,
private placements, and related parties. The Company also previously had a term
facility for one of its subsidiaries, which was repaid in its entirety during
the last quarter of fiscal year 2021 and since then, it has not incurred
financing until the Registered Direct Offerings closed on March 14, 2022 ($8.0
million ) and June 23, 2022 ($5.0 million ). The Company has limited debt, all of
which is subordinated.
On January 28, 2022 , a shelf registration statement on Form F-3 (the "Form F-3")
was filed with the SEC , allowing the Company to issue up to $50 million in
publicly traded securities within a three-year timeframe. In connection with the
Company's loss of foreign private issuer status, the Company has withdrawn the
Form F-3. The Company has preferred shares authorized (none issued) as well
unlimited class A shares. As part of financing options, we may choose to issue
such classes of shares subject to securities laws restrictions.
The Company's current cash position will be sufficient to support its financial
needs for two to three months. Should the Company's various financing
initiatives such as potential public issuances, private placements, related
parties financings, preferred shares issuances, or debt financings not
materialize, further actions such as further cost reduction initiatives and
Company spinoffs of subsidiaries remain as viable options. These represent
short-term and long-term financing options to management. Management believes
that, absent any unexpected economic circumstances or other unknown factors,
Neptune will be able to obtain sufficient financial resources to fund its
current operations to make the investments needed to execute on the Company's
strategic plans. See the Going Concern section of this Management's Discussion
and Analysis of Financial Condition and Results of Operations.
The financial commitments and debt of the Company are limited. Furthermore,
certain liabilities, such as the warrant liabilities, are dependent on Neptune's
share price and would only become payable if they are in the money. The
warrants, if exercised, settle in common shares of the Company and therefore do
impact on the Company's cash. Indeed, warrant holders are required to pay the
cash strike price to exercise the warrant and thus the exercise of warrants
would result in a cash infusion to the Company.
Loans and borrowings
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 10.0% per annum. Interest is accrued and added to the principal amount of the loan. The principal is payable onFebruary 1, 2024 . OnJuly 13, 2022 ,Neptune announced thatSprout Foods Inc. ("Sprout"), the Corporation's organic plant-based baby food and toddler snack company, has entered into an amendment of each of its existing Secured Promissory Notes. In connection with this amendment, investment funds managed 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 andNeptune . The$13.0 million of amended Secured Promissory Notes have a 10% interest rate per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. The amended Secured Promissory Notes may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Corporation and MSEC, into common shares of the Corporation. MSEC was issued 372,670 common shares of Neptune, of an approximate value of$500,000 , in connection with this commitment. 45
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Management's Discussion and Analysis of Financial Condition and Results of Operations
Equity
Equity consists of the following items:
June 30, March 31,
2022 2022
Share capital $ 318.922 $ 317.051
Warrants 6.080 6.080
Additional paid-in capital 56.347 55.981
Accumulated other comprehensive loss (10.606) (7.814)
Deficit (327.466)
(323.182)
Total equity attributable to equity holders of the Corporation
$ 43.277 $
48.116
Total equity attributable to non-controlling interest 10.502 12.722 Total equity$ 53.779 $ 60.838 CONTRACTUAL OBLIGATIONS
The following are the contractual obligations as at
June 30,
2022
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
long-term payables $21.296 $21.296 $21.296 $- $- $-
Lease liabilities1 2.501 2.900 0.673 1.130 0.273 0.824
Loans and borrowings2 11.882 10.496 - 10.496 - -
Other liability3 0.013 15.000 - - - 15.000
$35.692 $49.692 $21.969 $11.626 $0.273 $15.824
(1) Includes interest payments to be made on lease liabilities corresponding to
discounted effect.
(2) Includes interest payments to be made on loans and borrowings.
(3) According to the employment agreement with the CEO, a long-term incentive is
payable if the Company reaches a level of market capitalization.
Liabilities related to warrants are excluded from the table above, as they are to settle in shares.
Under the terms of its financing agreements, the Company is not required to meet financial covenants.
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 will be entitled to a grant of vested RSUs with a value of approximately$0.8 million . The balance of the liability accrual to the CEO is$833,786 as atJune 30, 2022 , in trade and other payables. The revaluation of the liability amounted to a gain of$3,154,328 for the three-month period endedJune 30, 2022 and was recorded into SG&A. During the three-months endedJune 30, 2022 , settlement in RSUs was of$1,187,221 . The compensation to be settled in RSUs or if the Corporation is unable to grant such RSUs, then a combination of cash and vested RSUs with equivalent value, is not reflected in the number of RSUs outstanding above.
The Company is required to pay royalties of 1% of its revenues in semi-annual
instalments, for an unlimited period to the former CEO. A provision of
Refer also to provisions disclosed in note 7, commitments disclosed in note
15(a) and legal proceedings in note 15(b) of the condensed consolidated interim
financial statements for the three-month periods ended
The Company has no significant off-balance sheet arrangements as atJune 30, 2022 , other than those mentioned above and the commitments disclosed in note 15 of the condensed consolidated interim financial statements for the three-month periods endedJune 30, 2022 and 2021. 46
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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 ofNeptune must make estimates and judgements that affect the amounts reported in the financial statements and the notes thereto. Such estimates are based on Management's knowledge of current events and actions that the Company may take in the future.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The condensed consolidated interim financial statements are prepared in accordance with US GAAP. In preparing the condensed consolidated interim financial statements for the three-month periods endedJune 30, 2022 and 2021, Management made estimates in determining transaction amounts and statement of financial position balances. Certain policies have more importance than others. We consider them critical if their application entails a substantial degree of judgment or if they result from a choice between numerous accounting alternatives and the choice has a material impact on reported results of operation or financial position. Please refer to the annual consolidated financial statements as 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:
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Estimating the write down of inventories
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. As necessary, the Corporation records write-downs for excess, slow moving and obsolete inventory. To determine these amounts, the Corporation regularly reviews inventory quantities on hand and compares them to estimates of historical utilization, future product demand, and production requirements. Write-downs of inventories to net realizable value are recorded in cost of sales in the consolidated financial statements. In the quarter endedJune 30, 2022 and 2021, inventories have been reduced by$3.1 million and$0 million respectively, as a result of a write-down to their net realizable value, which is included in cost of sales. The write-off of inventory in the quarter endedJune 30, 2022 was related to cannabis products. The write-down of inventories during the quarter endedJune 30, 2022 is related to assets held for sale inventories that are not expected to be realized.
Net realizable value is subject to measurement uncertainty because it can be difficult to predict market demands and timing of supply due to logistics.
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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 Corporation's customers are distributors for a given territory and are privately-held, provincially owned and publicly owned companies. The profile and credit quality of the Corporation's customers vary significantly. Adverse changes in a customer's financial position could cause the Corporation to limit or discontinue conducting business with that customer, require the Corporation to assume more credit risk relating to that customer's future purchases or result in uncollectible accounts receivable from that customer. Such changes could have a material adverse effect on business, consolidated results of operations, financial condition and cash flows.
The Corporation's extension of credit to customers involves judgment and is based on an evaluation of each customer's financial condition and payment history. From time to time, the Corporation will temporarily transact with customers on a prepayment basis where circumstances warrant. The Corporation's credit controls and processes cannot eliminate credit risk.
The expected credit loss for the quarter ended
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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Estimating the recoverable amount of non-financial assets, to determine and measure impairment losses on goodwill, intangibles, and property, plant and equipment.
There were no impairment triggers identified in quarter endedJune 30, 2022 and no impairment losses on goodwill, intangibles, and property, plant and equipment recorded, except as noted in following paragraph.
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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 the Corporation will focus on winding up its cannabis operations pending one or more sales transactions. Following this announcement, the Corporation had Canadian disposal group assets that met the criteria to be classified as held for sale. As atJune 30, 2022 , all assets and liabilities related to the Canadian cannabis business are now respectively shown under assets held for sale and liabilities directly associated with assets held for sale onNeptune's balance sheet. Comparative balance sheet amounts have not been reclassified. The disposal group has been measured at fair value less cost to sell using market prices for comparative assets (level 3) and an estimate of disposal costs which resulted in an impairment loss of$815,661 for the three-month period endedJune 30, 2022 .
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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 Corporation's revenue-generating activities from the sale of products in the course of ordinary activities are recognized at a point in time when control of the products is transferred to the customer and the Corporation's obligations have been fulfilled. The Corporation transfers control generally on shipment of the goods or in some cases, upon reception by the customer. Revenue is measured as the amount of consideration the Corporation expects to receive in exchange for the Corporation's product as specified in the customer contract. Certain of the Corporation's customer contracts, most notably those with the Canadian provincial and territorial agencies, may provide the customer with a right of return. In certain circumstances, the Corporation may also provide a retroactive price adjustment to a customer. These items give rise to variable consideration, which is recognized as a reduction of the transaction price based upon the expected amounts of the product returns and price adjustments at the time revenue for the corresponding product sale is recognized. The determination of the reduction of the transaction price for variable consideration requires that the Corporation make certain estimates and assumptions that affect the timing and amounts of revenue recognized. The Corporation estimates this variable consideration by taking into account factors such as historical information, current trends, forecasts, provincial and territorial inventory levels, availability of actual results and expectations of demand. The Corporation recognizes a liability for sales refunds within other current liabilities with a corresponding decrease in revenues. Furthermore, the Corporation recognizes an asset for the value of inventory which is expected to be returned within prepaid expenses and other assets on the consolidated balance sheets with a corresponding reduction of cost of sale.
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Judgment related to revenue recognition in determining whether the Company is the principal or the agent for the arrangements with suppliers of products the Corporation does not manufacture. The Corporation may be involved with other parties, including suppliers of products, in providing goods or services to a customer when it enters into revenue transactions for the sale of products that it does not manufacture. In these instances, the Corporation must determine whether it is a principal in these transactions by evaluating the nature of its promise to the customer. The Corporation is a principal and records revenue on a gross basis if it controls a promised good before transferring that good to the customer. On the other hand, the Corporation records revenue as the net amount when it does not meet the criteria to be considered a principal.
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Estimating the fair value of bonus-based on market conditions (note 10 of the consolidated financial statements)
According to the employment agreement with the CEO, a long-term incentive of$15 million is payable if the Corporation's US market capitalization is at least$1 billion . The Corporation uses a risk-neutral Monte Carlo simulation to estimate the fair-value of this instrument and recognizes the incentive over the estimated period to reach the market capitalization. The incentive is being recognized over the estimated period to reach the market capitalization. The risk-neutral Monte-Carlo simulation uses level 3 inputs. The assumptions used in the simulation include a risk free-rate of 2.98% and a volatility of 70.32% for the quarter endedJune 30, 2022 (respectively 1.45% and 65.48% for the quarter endedJune 30, 2021 ). An increase or decrease in the volatility assumption significantly impacts the fair value of the long-term incentive.
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Judgment related to the recognition period to be used in recording stock-based compensation that is based on market and non-market conditions (notes 10 and 12 of the condensed consolidated interim financial statements) OnJuly 8, 2019 , the Corporation granted 157,143 market performance options under the Corporation stock option plan at an exercise price of$4.43 per share to the CEO, expiring onJuly 8, 2029 . The options were vest after the attainment of market performance conditions within the following ten years. The market condition was factored into the fair value. Some of these market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revaluated up to the date of approval of the amendments (grant date). OnJuly 8, 2019 , the Corporation granted 100,000 non-market performance options under the Corporation stock option plan at an exercise price of$4.43 per share to the CEO, expiring 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 atJune 30, 2022 . Changes in these assumptions would impact the timing of which the expense is recognized. These options were not exercisable as atJune 30, 2022 andMarch 31, 2022 . 48 -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations 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 Corporation, as part of a registered direct offering ("June 2022 Direct Offering"). Each Pre-Funded Warrant was exercisable for one Common Share. The common shares and the Pre-Funded Warrants were sold together with 1,945,526 Series C Warrants (the "Series C Warrants"), and 1,945,526 Series D Warrants (the "Series D Warrants") and collectively, the "June 2022 Common Warrants". Each common share and Pre-Funded Warrants and the 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.
CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING CHANGES
The accounting policies and basis of measurement applied in the condensed consolidated interim financial statements for the three-month periods endedJune 30, 2022 and 2021 are the same other than as disclosed, if any, in note 3 to the condensed consolidated interim financial statements.
ISSUED AND OUTSTANDING SECURITIES
The following table details the number of issued and outstanding securities as at the date of this MD&A:
Number of Securities
Issued and Outstanding
Common shares 7,989,800
Share options 510,526
Deferred share units 4,308
Restricted share units 18,375
Warrants 5,993,414
Total number of securities 14,516,423
The Company's common shares are being traded on on NASDAQ Capital Market under
the symbol "NEPT". Effective August 15, 2022 , the Company's common shares no
longer trade on the TSX. Each option, restricted share, restricted share unit,
deferred share unit and warrant is exercisable into one common share to be
issued from the treasury of the Company.
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